TABLE OF CONTENTS INLAND MARINE COVERAGE

CHAPTER ONE - INTRODUCTION AND DEFINITION...........................................................1HISTORY....................................................................................................................................11976 NATION-WIDE MARINE DEFINITION.........................................................................3MONOLINE INSURANCE POLICIES......................................................................................9MULTILINE POLICIES.............................................................................................................9THE ROLE OF THE INSURANCE SERVICES OFFICE.......................................................10RATES & FILED/NONFILED FORMS...................................................................................12

INLAND MARINE LOSS EXPOSURES.............................................................................12INLAND MARINE PERILS.................................................................................................13

ALL-RISKS APPROACH.........................................................................................................14NAMED PERILS APPROACH................................................................................................14

WHO IS AFFECTED WHEN PROPERTY IS LOST, DAMAGED OR DESTROYED... .15FINANCIAL CONSEQUENCES.........................................................................................16INCREASED EXPENSES....................................................................................................17LOST INCOME.....................................................................................................................18

CHAPTER TWO - TREATMENT OF INLAND MARINE LOSS EXPOSURES...............21INLAND MARINE UNDERWRITING...............................................................................21

RATES AND RATE-MAKING................................................................................................24CLASS (MANUAL) RATES................................................................................................24INDIVIDUAL RATES..........................................................................................................24JUDGEMENT RATES..........................................................................................................25

RATE-MAKING.......................................................................................................................25INLAND MARINE POLICY PROVISIONS...........................................................................26

OPEN PERILS BASIS..........................................................................................................27COVERAGE..........................................................................................................................27EXCLUSIONS......................................................................................................................28

COMMON POLICY CONDITIONS........................................................................................30A. CANCELLATION............................................................................................................30B. CHANGES.......................................................................................................................32C. EXAMINATION OF BOOKS AND RECORDS...........................................................32D. INSPECTIONS AND SURVEYS...................................................................................33E. PREMIUMS.....................................................................................................................34F. TRANSFER OF RIGHTS AND DUTIES UNDER THIS POLICY...............................34

CHAPTER THREE - COMMERCIAL INLAND MARINE CONDITIONS.......................38LOSS CONDITIONS................................................................................................................38

A. ABANDONMENT..........................................................................................................38ABANDONMENT CLAUSE...............................................................................................38B. APPRAISAL....................................................................................................................39C. DUTIES IN THE EVENT OF A LOSS...........................................................................40D. INSURANCE UNDER TWO OR MORE COVERAGES..............................................43E. LOSS PAYMENT............................................................................................................43F. OTHER INSURANCE.....................................................................................................43G. PAIR, SETS OR PARTS.................................................................................................44H. PRIVILEGE TO ADJUST WITH OWNER...................................................................44I. RECOVERIES..................................................................................................................45

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J. REINSTATEMENT OF LIMIT AFTER LOSS...............................................................45K. TRANSFER OF RIGHTS OF RECOVERY AGAINST OTHERS TO THE INSURER...............................................................................................................................................46

GENERAL CONDITIONS.......................................................................................................47A. CONCEALMENT, MISREPRESENTATION AND FRAUD.......................................47B. LEGAL ACTION AGAINST THE INSURANCE COMPANY.....................................48C. NO BENEFIT TO BAILEE.............................................................................................48D. POLICY PERIOD............................................................................................................49E. VALUATION..................................................................................................................50OTHER CONDITIONS.........................................................................................................51

CHAPTER FOUR - TRANSPORTATION RISK AND LOSS EXPOSURES......................56PROPERTY SUBJECT TO LOSS............................................................................................56PERILS THAT CAN AFFECT PROPERTY WHILE IN TRANSIT.......................................56

CONSEQUENCES OF PROPERTY-IN-TRANSIT LOSSES.............................................57PARTIES TO A LOSS..........................................................................................................58CARRIERS............................................................................................................................58

LIABILITY OF CARRIERS.....................................................................................................60LIMITATIONS ON LIABILITY..........................................................................................62BILL OF LADING................................................................................................................63BEGINNING AND ENDING OF EXPOSURES.................................................................63CLAIMS AGAINST A COMMON CARRIER....................................................................64PASSING TITLE OF PROPERTY.......................................................................................66INSURABLE INTEREST IN PROPERTY..........................................................................66THE MEASURING OF TRANSIT LOSS EXPOSURES...................................................67

CHAPTER FIVE - INSURING THE TRANSPORTATION EXPOSURES.........................71ANNUAL TRANSIT INSURANCE.........................................................................................71

NEEDS FOR THE COVERAGE..........................................................................................71PROPERTY EXCLUSIONS.................................................................................................72COVERED LOCATIONS.....................................................................................................72VALUATION OF THE PROPERTY...................................................................................73LIMITS OF INSURANCE....................................................................................................73RECOVERIES FROM COMMON CARRIERS..................................................................74PASSING OF TITLE............................................................................................................74PREMIUM PAYMENTS......................................................................................................74UNDERWRITING................................................................................................................75

MOTOR TRUCK CARGO INSURANCE...............................................................................75COVERAGES.......................................................................................................................76PROPERTY COVERED.......................................................................................................77LIMITATIONS......................................................................................................................77TIME PERIOD......................................................................................................................77COVERED LOCATIONS.....................................................................................................78SCHEDULING......................................................................................................................79LIMITS OF INSURANCE....................................................................................................79EXTENSION OF COVERAGE............................................................................................79OTHER PROVISIONS.........................................................................................................79

FILINGS FOR FEDERAL AND STATE AUTHORITIES......................................................80OWNERS FORMS....................................................................................................................81SPECIALIZED MOTOR TRUCK CARGO POLICIES..........................................................82

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HOUSEHOLD GOODS CARRIERS....................................................................................82GOVERNMENT AGENCY CONTRACTS – MILITARY TRAFFIC MANAGEMENT AGENCY ENDORSEMENT....................................................................................................83

CARLOADING COMPANIES OR FREIGHT CONSOLIDATORS..................................83UNDERWRITING................................................................................................................83RATING................................................................................................................................84

CHAPTER SIX - TRIP TRANSIT & MAIL INSURANCE...................................................87ARMORED CAR AND MESSENGER INSURANCE............................................................87MAIL COVERAGE..................................................................................................................88

COVERED PERILS..............................................................................................................89LIMITS OF INSURANCE....................................................................................................89CONDITIONS.......................................................................................................................90CANCELLATION................................................................................................................91TERRITORY.........................................................................................................................91DUTIES IN CASE OF LOSS................................................................................................91PAYMENT OF LOSS...........................................................................................................91OTHER INSURANCE..........................................................................................................91RATING................................................................................................................................91ENDORSEMENTS...............................................................................................................92

PARCEL POST INSURANCE.................................................................................................92COVERED PERILS AND PROPERTY...............................................................................92LIMITS OF INSURANCE....................................................................................................93DUPLICATION OF COVERAGE........................................................................................93PREMIUMS..........................................................................................................................94UNDERWRITING................................................................................................................94TRANSIT CASH LETTER...................................................................................................94

CHAPTER SEVEN - INSTRUMENTALITIES OF TRANSPORTATION AND COMMUNICATIONINTRODUCTION.....................................................................................................................97BRIDGES..................................................................................................................................97

BRIDGE PROPERTY DAMAGE FORMS..........................................................................98BUILDERS RISK FORM.....................................................................................................99

BRIDGE USE AND OCCUPANCY FORM..........................................................................100UNDERWRITING OF BRIDGE POLICIES......................................................................101BUILDERS RISK EXPOSURES........................................................................................102COMPLETED BRIDGES...................................................................................................103TUNNELS...........................................................................................................................103DAMS..................................................................................................................................103PIERS, WHARVES, DOCKS AND SLIPS........................................................................104PIPELINES..........................................................................................................................104POWER AND TRANSMISSION LINES...........................................................................105RAILROAD ROLLING STOCK........................................................................................105

CHAPTER EIGHT - CONTRACTORS EQUIPMENT INSURANCE...............................110PROVISIONS..........................................................................................................................111

PROPERTY COVERED.....................................................................................................111PROPERTY EXCLUSIONS...............................................................................................112COVERED PERILS............................................................................................................113EXCLUDED PERILS.........................................................................................................113

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DEDUCTIBLES..................................................................................................................114VALUATION......................................................................................................................114LIMIT OF INSURANCE....................................................................................................114COINSURANCE.................................................................................................................114COVERAGE EXTENSIONS..............................................................................................114UNDERWRITING..............................................................................................................115TYPES OF OPERATIONS.................................................................................................115PROBABLE MAXIMUM LOSS........................................................................................117INSURANCE TO VALUE..................................................................................................117BUSINESS INTERRUPTION AND EXTRA EXPENSE..................................................117RATING..............................................................................................................................118

CHAPTER NINE - BAILEE/BAILOR COVERAGES.........................................................121INTRODUCTION...................................................................................................................121COMMON EXCLUSIONS.....................................................................................................121LIABILITY OF BAILEES......................................................................................................122

DEGREE OF CARE............................................................................................................123BAILEE LIABILITY POLICY...............................................................................................125

LAUNDRIES AND DRY CLEANERS INSURANCE......................................................125BAILEES ALL-RISKS POLICIES.....................................................................................127

FURRIERS’ CUSTOMERS POLICY....................................................................................128MISCELLANEOUS BAILEE FORMS..................................................................................131

WAREHOUSEMEN’S LEGAL LIABILITY.....................................................................131PRESSING OR TAILOR SHOPS.......................................................................................132REPAIR SHOPS..................................................................................................................132DEPARTMENT STORES & FURNITURE STORES.......................................................133CONSIGNMENT STORES................................................................................................133AUCTIONEERS..................................................................................................................133COLD STORAGE LOCKERS............................................................................................133SELF-STORAGE UNITS...................................................................................................133AUTO REPAIR...................................................................................................................133OTHER BAILEE COVERAGES........................................................................................134

BAILOR COVERAGES.........................................................................................................135GARMENT CONTRACTORS’ FLOATER.......................................................................135GARMENT CONTRACTORS ALL-RISKS FLOATER...................................................140PATTERN AND DIE FLOATER.......................................................................................140

CHAPTER TEN - COVERING BOTH REAL AND PERSONAL PROPERTY...............144BUILDERS RISK POLICIES & INSTALLATION FLOATERS..........................................144

PROPERTY COVERED.....................................................................................................145COVERAGE PERIOD........................................................................................................146LIMITS OF INSURANCE..................................................................................................147EXTENSIONS OF COVERAGE........................................................................................147VALUATION BASIS.........................................................................................................147UNDERWRITING..............................................................................................................148DIFFERENCE IN CONDITIONS COVERAGE................................................................149PROPERTY AND PERILS COVERED.............................................................................149LIMITS................................................................................................................................150DEDUCTIBLES..................................................................................................................150VALUATION OF PROPERTY..........................................................................................151

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OTHER INSURANCE........................................................................................................151UNDERWRITING..............................................................................................................151

CHAPTER ELEVEN - DEALERS POLICIES......................................................................154JEWELERS BLOCK...............................................................................................................155

PROPERTY COVERED.....................................................................................................155PROPERTY EXCLUDED..................................................................................................156GOOD IN TRANSIT...........................................................................................................156EXCLUDED CAUSES OF LOSS, THEFT, ETC...............................................................156OPTIONS AND EXTENSIONS.........................................................................................157DEDUCTIBLES..................................................................................................................157SPECIAL PROVISIONS.....................................................................................................157

CAMERA AND MUSICAL INSTRUMENT DEALERS......................................................158PROPERTY COVERED.....................................................................................................158LIMITS OF INSURANCE..................................................................................................159

EQUIPMENT DEALERS.......................................................................................................159PROPERTY COVERED.....................................................................................................159LIMITS OF INSURANCE..................................................................................................160

FINE ARTS DEALERS..........................................................................................................160STAMP AND COIN DEALERS.............................................................................................161FURRIER’S BLOCK..............................................................................................................161FLOOR PLAN.........................................................................................................................163

VALUATION......................................................................................................................163CHAPTER TWELVE - OTHER COMMERCIAL COVERAGES.....................................167

ACCOUNTS RECEIVABLE..................................................................................................167DETERMINATION OF RECEIVABLES..........................................................................168COINSURANCE.................................................................................................................169PROTECTION OF RECORDS...........................................................................................169

VALUABLE PAPERS AND RECORDS...............................................................................170PROPERTY NOT COVERED............................................................................................170COLLAPSE.........................................................................................................................170COVERED PERILS............................................................................................................170ADDITIONAL CONDITIONS...........................................................................................171LIBRARIES ENDORSEMENT..........................................................................................171

PHYSICIANS AND SURGEONS EQUIPMENT..................................................................171COVERED PROPERTY.....................................................................................................171EXCLUSIONS....................................................................................................................172COVERAGE EXTENSION................................................................................................172VALUATION......................................................................................................................172COINSURANCE.................................................................................................................173PROTECTIVE SAFEGUARDS..........................................................................................173UNDERWRITING..............................................................................................................173

SIGNS......................................................................................................................................173FILM....................................................................................................................................174PROPERTY NOT COVERED............................................................................................174EXCLUSIONS....................................................................................................................175VALUATION......................................................................................................................175

THEATRICAL PROPERTY...................................................................................................175COVERED PROPERTY.....................................................................................................176

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LIVESTOCK...........................................................................................................................176DETERMINING AMOUNT OF INSURANCE ON LIVESTOCK...................................176COVERED PERILS............................................................................................................177EXCLUSIONS....................................................................................................................177

MOBILE AGRICULTURAL EQUIPMENT..........................................................................178COVERED PROPERTY.....................................................................................................179EXCLUSIONS....................................................................................................................179

RADIUM FLOATER..............................................................................................................179COMMERCIAL ARTICLES COVERAGE FORM...............................................................180

COVERED PROPERTY.....................................................................................................180UNDERWRITING..............................................................................................................180

CHAPTER THIRTEEN - MISCELLANEOUS NONFILED COMMERCIAL COVERAGES............................................................................................................................183

SALESMEN’S SAMPLES......................................................................................................183COVERED PERILS............................................................................................................183

LIVE ANIMAL FLOATERS..................................................................................................184HORSES..............................................................................................................................185VETERINARIAN COVERAGE.........................................................................................186POULTRY...........................................................................................................................186ANIMALS RAISED FOR FUR..........................................................................................187ANIMAL LIFE INSURANCE............................................................................................187

INSTALLMENT SALES AND LEASED PROPERTY.........................................................187INSTALLMENT SALES....................................................................................................188LEASED PROPERTY.........................................................................................................189

WOOL GROWERS.................................................................................................................189TANKS AND CONTENTS OF TANKS................................................................................190

TANKS................................................................................................................................190CONTENTS OF TANKS....................................................................................................190

ELECTRONIC DATA PROCESSING POLICIES................................................................191COVERAGE........................................................................................................................191EXTRA EXPENSE AND BUSINESS INTERRUPTION..................................................192BUSINESS INTERRUPTION............................................................................................192

CHAPTER FOURTEEN - PERSONAL ARTICLES & WATERCRAFT..........................197THE PERSONAL ARTICLES FLOATER.............................................................................198PERSONAL PROPERTY FLOATER....................................................................................200

PERSONAL PROPERTY COVERED...............................................................................201NEWLY ACQUIRED PROPERTY....................................................................................201PROPERTY NOT COVERED............................................................................................201EXCLUSIONS....................................................................................................................202

PERSONAL EFFECTS FLOATER........................................................................................202COVERAGE OF PERSONAL EFFECTS..........................................................................203PROPERTY NOT COVERED............................................................................................203COVERAGE........................................................................................................................203OTHER EXCLUSIONS......................................................................................................203LIMITATIONS ON CERTAIN PERSONAL EFFECTS...................................................204

SCHEDULED PERSONAL PROPERTY ENDORSEMENT................................................204ENDORSEMENT................................................................................................................204HAZARDS OF SCHEDULING PERSONAL PROPERTY..............................................205

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COMPARISON OF THE PERSONAL EFFECTS FLOATER AND THE HOME OWNERS POLICY.............................................................................................................206

WATERCRAFT INSURANCE..............................................................................................207INTRODUCTION...............................................................................................................207HULL AND TRAILER LOSS EXPOSURES....................................................................208THE HOMEOWNERS POLICY AND PHYSICAL DAMAGE COVERAGE.................208PHYSICAL DAMAGE COVERAGE UNDER THE PERSONAL AUTO POLICY........208LIABILITY LOSS EXPOSURES.......................................................................................209OUT-BOARD MOTOR AND BOAT INSURANCE.........................................................209

PERSONAL YACHT INSURANCE......................................................................................212HULL INSURANCE:..........................................................................................................212UNINSURED BOATERS COVERAGE............................................................................213

ETHICAL ISSUES.................................................................................................................216THE APPLICATION PROCESS –PROPERTY AND CASUALTY.....................................216

FIELD UNDERWRITING..................................................................................................217COMPANY UNDERWRITING AND RATING...............................................................218SELLING TO NEEDS........................................................................................................219

PROPERTY AND CASUALTY INSURANCE COVERAGE..............................................220PROPERTY – CASUALTY INSURANCE MARKETING SYSTEMS................................220INDEPENDENT AGENCY SYSTEMS.................................................................................220

EXCLUSIVE AGENTS......................................................................................................221DIRECT WRITERS............................................................................................................221ROLE OF INSURANCE IN SOCIETY..............................................................................221

DECEPTIVE ADVERTISING MATERIAL..........................................................................222DECEPTIVE SALES PRESENTATIONS............................................................................223RECENT SCANDALS............................................................................................................225REPLACEMENT....................................................................................................................225PRODUCT MISREPRESENTATION....................................................................................225IMPROPER LICENSING.......................................................................................................226FRAUD....................................................................................................................................226NO NEEDS SELLING............................................................................................................226REDLINING............................................................................................................................226QUESTIONS OF UNISEX RATING FOR AUTO INSURANCE........................................227BUSINESS DILEMMA: IS IGNORANCE A VIABLE EXCUSE?.....................................227PROFESSIONAL OBLIGATIONS........................................................................................228Summary..................................................................................................................................229

BIBLIOGRAPHY......................................................................................................................230

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INLAND MARINE COVERAGE

CHAPTER ONE - INTRODUCTION AND DEFINITIONCHAPTER ONE - INTRODUCTION AND DEFINITION

HISTORY

During the period of time when civilization moved from an agrarian society to an industrial society, goods and methods of production of the population became more concentrated. With this concentration, the possibilities of losses increased due to situations beyond the control of the owners; primarily by fire, wind and water. While farmers have always suffered such losses, they compensated for part of the cost by helping each other in time of need. The “barn - raising” of rural America was well documented as part of history, particularly in situations where property was destroyed because of fire.

As the industrial society expanded, protection against losses was very conservative, originally covering only losses by fire. Policies were written by hand covering each situation differently. As more and more businesses required this protection, more standardized wording became available, and with financial institutions investing in commercial ventures, insurance had to be provided to protect the investors interests. This further pushed the burgeoning insurance industry to standardize coverage’s and policy provisions.

Marine Insurance is considered as one of the oldest (if not the oldest) types of insurance, as ships and their cargoes were protected against losses at sea by consortiums of wealthy persons who “underwrote” the protection by signing “under” the contract and noting their share of the risk. London shipowners and “capitalists” gathered at Lloyd’s Coffee House where pools would be set up covering the possible loss of ship cargoes during transport between India and the New World, and England. From this early beginning several hundred years ago, Marine Insurance has progressed to the Lloyd’s of London of today, and several large Marine insurance companies. Throughout the years certain words used in the contracts became standardized and recognized by law as having specific meanings. To this day, many Marine policies contain language that may seem archaic, such as referring to risks as “perils”, but is used because of the legal interpretations that has evolved.

While the word “Marine” implies “wet” coverages, it has been expanded to where it now can cover all types of perils and risks when cargoes are shipped on land, sea or in the air. The name, “Marine Insurance” today implies coverage of cargoes and materials on the high seas, which was the original function and is still a major type of insurance.

Inland Marine implies movement on land, but inland waterways are considered as “land” for this purpose. Basically, Inland Marine insurance covers moveable property – with the exceptions of motor vehicles and airplanes which have their own insurance that is designed for the peculiarities of the inherent risks of motor vehicles and airplanes.

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Other forms of insurance has changed so that it is easier to understand by the consumer, and most of the antiquated language is no longer present.

Both fire and Marine insurance companies cover certain risks, such as fire and windstorm damage, and both casualty and Marine insurance policies can cover theft. So, obviously, there is some overlapping. But today many large companies can have departments providing coverage to various risks, and any conflict would just be between two departments.

Originally Marine insurance was written only by companies specializing in “wet”, or Marine coverages and because of laws at that time, there was very little regulation of Marine insurance companies, therefore they could (and did) write insurance for risks that weren’t “wet” risks at all. Further, they were not subject to the same regulations as fire and casualty insurance companies, so they could (and did) write insurance that really did not have anything to do with the movement of property or cargo. Since they had little regulation, they could write coverages that fire and casualty companies normally wrote, and at provisions and premiums that were not available to these fire and casualty companies.

As one can imagine, there were screams that echoed in the hallowed halls of the state insurance departments, particularly in the New York Insurance Department. So in 1932, there was a ruling issued by this department that clearly defined the powers of Marine insurance companies. The following year, the National Convention of Insurance Commissioners (predecessor to the National Association of Insurance Commissioners, the NAIC) issued a rule that is now known as the Nation-Wide Marine Definition.

The “Definition” states the types of exposures classified under Marine, Inland Marine or Transportation Insurance by placing them in the following categories:

Imports Exports Domestic Shipments (Goods in transit) Communication Vehicles (tunnels, bridges, piers and power transmission lines) Personal Property Floaters (stamp collections, coin collections, fine arts, paintings,

musical instruments, silverware and furs. Commercial Property Floaters (accounts receivable, valuable papers, valuable records,

and physicians’ and surgeon’s instruments).

The Definition also made use of the following differences in condition: Electronic Data Property in Bailee’s custody Property for sale by a dealer (e.g., musical instruments, cameras, fine arts & jewelry)

This Definition is now the definitive clarification of the powers granted to both Marine and Inland Marine insurance companies.

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This Marine Definition is so important to students of Inland Marine, that the student must be familiar with its terms. The following Marine Definition is in use in the majority of the states, but Texas has its own definitions. An earlier version (1953) may still be in use in a very small number of states.

1976 NATION-WIDE MARINE DEFINITION

The purpose of this instrument is to describe the kinds of risks and coverages which may be classified or identified under State Insurance Laws as Marine, Inland Marine or Transportation insurance, but does not include all of the kinds of risks and coverages which may be written, classified or identified under Marine, Inland Marine or Transportation insuring powers, nor shall it be construed to mean that the kinds of risks and coverages are solely Marine, Inland Marine or Transportation insurance in all instances.

This instrument shall not be construed to restrict or limit in any way the exercise of any insuring powers granted under charters and license whether used separately, in combination or otherwise.

1. Marine and/or Transportation policies may cover under the following conditions:

A. Imports

Imports may be covered wherever the property may be and without restriction as to time, provided the coverage of the issuing companies includes hazards of transportation.An import, as a proper subject of Marine or Transportation insurance, shall be deemed to maintain its character as such, so long as the property remains segregated in such a way that it can be identified and has not become incorporated and mixed with the general mass of property in the United States, and shall be deemed to have been completed when such property has been:

(a) sold and delivered by the importer, factor or consignee; or(b) removed from place of storage and placed on sale as part of importer's stock in trade at

a point of sale-distribution; or(e) delivered for manufacture, processing or change in form to premises of the importer or

of another used for any purposes.

B. Exports

Exports may be covered wherever the property may be without restriction as to time, provided the coverage of the issuing companies includes hazards of transportation.An export, as a proper subject of Marine or Transportation insurance, shall be deemed to acquire its character as such when designated or while being prepared for export and retain

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that character unless diverted for domestic trade, and when so diverted, the provisions of this Ruling respecting domestic shipments shall apply, provided, however, that this provision shall not apply to long established methods of insuring certain commodities, e.g., cotton.

C. Domestic Shipments

1. Domestic shipments on consignment, [provided the coverage of the issuing companies includes hazards of transportation] for sale or distribution, exhibit, or trial, or approval or auction, while in transit, while in the custody of others and while being returned, provided that in no event shall the policy cover on premises owned, leased or operated by the consignor.

2. Domestic shipments not on consignment, provided the coverage of the issuing companies includes hazards of transportation, beginning and ending within the United States, provided that such shipments shall not be covered at manufacturing premises nor after arrival at premises owned, leased or operated by Assured or purchaser.

D. Bridges, Tunnels and Other Instrumentalities of Transportation and Communication (excluding buildings, their improvements and betterments, furniture and furnishings, fixed contents and supplies held in storage).

The foregoing includes:

1. Bridges, tunnels, other similar instrumentalities, including auxiliary facilities and equipment attendant thereto.

2. Piers, wharves, docks, slips, dry docks and marine railways.

3. Pipelines, including on-line propulsion, regulating and other equipment appurtenant to such pipelines, but excluding all property at manufacturing, producing, refining, converting, treating or conditioning plants.

4. Power transmission and Telephone and Telegraph lines, excluding all property at generating, converting or transforming stations, substations and exchanges.

5. Radio and Television Communication Equipment in use as such including towers and antennae with auxiliary equipment, and appurtenant electrical operating and control apparatus.

6. Outdoor cranes, loading bridges and similar equipment used to load, unload and transport.

E. Personal Property Floater Risks covering individuals and/or generally1. Personal Effects Floater Policies.

2. The Personal Property Floater.4

3. Government Service Floaters.

4. Personal Fur Floaters.

5. Personal Jewelry Floaters.

6. Wedding Presents Floaters for not exceeding 90 (ninety) days after the day of the wedding.

7. Silverware Floaters.

8. Fine Arts Floaters covering paintings, etchings, pictures, tapestries, art glass windows, and other bonafide works of art of rarity, historical value or artistic merit.

9. Stamp and Coin Floaters.

10. Musical Instrument Floaters. Radios, televisions, record players and combinations thereof are not deemed musical instruments.

11. Mobile Articles, Machinery and Equipment Floaters (excluding motor vehicles designed for highway use and auto homes, trailers and semi-trailers except when hauled by tractors not designed for highway use) covering identified property of a mobile or floating nature pertaining to or usual to a household. Such policies shall not cover furniture and fixtures not customarily used away from premises where such property is usually kept.

12. Installment Sales and Leased Property Policies covering property pertaining to a household and sold under conditional contract of sale, partial payment contract or installment sales contract or leased, but excluding motor vehicles designed for highway use. Such policies must cover in transit but shall not extend beyond the termination of the seller's or lessor's interest.

13. Live Animal Floaters.

F. Commercial Property Floater Risks covering property pertaining to a business, profession or occupation.

1. Radium Floaters.

2. Physicians' and Surgeons' Instrument Floaters. Such policies may include coverage of such furniture fixtures and tenant Assured's interest in such improvements and betterments of buildings as are located in that portion of the premises occupied by the assured in the practice of his profession.

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3. Pattern and Die Floaters.

4. Theatrical Floaters, excluding buildings and their improvements and betterments, and furniture and fixtures that do not travel about with theatrical troupes.

5. Film Floaters, including builders' risk during the production and coverage on completed negatives and positives and sound records.

6. Salesmen's Samples Floaters.

7. Exhibition Policies on property while on exhibition and in transit to or from such exhibitions.

8. Live Animal Floaters.

9. Builders' Risks and/or Installation Risks covering interest of owner, seller or contractor, against loss or damage to machinery, equipment, building materials or supplies, being used with and during the course of installation, testing, building, renovating or repairing. Such policies may cover at points or places where work is being performed, while in transit and during temporary storage or deposit, of property designated for and awaiting specific installation, building, renovating or repairing.

Such coverage shall be limited to Builders' Risks or Installation Risks where Perils in addition to Fire and Extended Coverage are to be insured.

If written for account of owner, the coverage shall cease upon completion and acceptance thereof; or if written for account of a seller or contractor the coverage shall terminate when the interest of the seller or contractor ceases.

10. Mobile Articles, Machinery and Equipment Floaters (excluding motor vehicles designed for highway use and auto homes, trailers and semi-trailers except when hauled by tractors not designed for highway use and snow plows constructed exclusively for highway use), covering identified property of a mobile or floating nature, not on sale or consignment, or in course of manufacture, which has come into custody or control of parties who intend to use such property for the purpose for which it was manufactured or created . Such policies shall not cover furniture and fixtures not customarily used away from premises where such property is usually kept.

11.Property in transit to or from and in custody of bailees (not owned, controlled or operated by the bailor). Such policies shall not cover bailee's property at his premises.

12. Installment Sales and Leased Property. Policies covering property sold under conditional contract of sale, partial payment contract, installment sales contract, or leased but excluding motor vehicles designed for highway use. Such policies must cover, in transit but shall not

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extend beyond the termination of the seller's or lessor's interest. This section is not intended to include machinery and equipment under certain "leaseback" contracts.

13. Garment Contractors Floaters.

14. Furriers’ or Fur Storers Customer's Policies (i.e., policies under which certificates or receipts are issued by furriers or fur storers) covering specified articles the property of customers.

15. Accounts Receivable Policies, Valuable Papers and Records Policies.

16. Floor Plan Policies, covering property for sale while in possession of dealers under a Floor Plan or any similar plan under which the dealer borrows money from a bank or lending institution with which to pay the manufacturer, provided:

1. Such merchandise is specifically identifiable as encumbered to the bank or lending institution.

2. The dealer's right to sell or otherwise dispose of such merchandise is conditioned upon its being released from encumbrance by the bank or lending institution.

3. That such policies cover in transit and do not extend beyond the termination of the dealer's interest.

Provided that such policies shall not cover automobiles or motor vehicles; merchandise for which the dealer's collateral is the stock or inventory as distinguished from merchandise specifically identifiable as encumbered to the lending institution.

17. Sign and Street Clock Policies, including neon signs, automatic or mechanical signs, street clocks, while in use as such.

18. Fine Arts Policies covering paintings, etchings, pictures, tapestries, art glass windows, and other bonafide works of art of rarity, historical value or artistic merit, for account of museums, galleries, universities, businesses, municipalities and other similar interests.

19. Policies covering personal property which, when sold to the ultimate purchaser, may be covered specifically, by the owner, under Inland Marine Policies including:(a) Musical Instrument Dealers Policies, covering property consisting principally of

musical instruments and their accessories. Radios, televisions, record players and combinations thereof are not deemed musical instruments.

(b) Camera Dealers Policies, covering property consisting principally of cameras and their accessories.

(c) Furrier's Dealers Policies, covering property consisting principally of furs and fur garments.

(d) Equipment Dealers Policies, covering mobile equipment consisting of binders, reapers, tractors, harvesters, harrows, tedders and other similar agricultural equipment and accessories therefor; construction equipment consisting of bulldozers, road scrapers,

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tractors, compressors, pneumatic tools and similar equipment and accessories therefor; but excluding motor vehicles designed for highway use.

(e) Stamp and Coin Dealers covering property of philatelic and numismatic nature.(f) Jewelers' Block Policies.(g) Fine Arts Dealers

Such policies may include coverage of money in locked safes or vaults on the Assured's premises. Such policies also may include coverage of furniture, fixtures, tools, machinery, patterns, molds, dies and tenant insureds interest in improvements of buildings.

20. Wool Growers Floaters.

21. Domestic Bulk Liquids Policies, covering tanks and domestic bulk liquids stored therein.

22. Difference in Conditions Coverage excluding fire and extended coverage perils.

23. Electronic Data Processing Policies.

II. Unless otherwise permitted, nothing in the foregoing shall be construed to permit Marine or Transportation Policies to Cover:

A. Storage of Assured's merchandise, except as hereinbefore provided.

B. Merchandise in course of manufacture, the property of and on the premises of the manufacturer.

C. Furniture and fixtures and improvements and betterments to buildings.

D. Monies and/or securities in safes, vaults, safety deposit vaults, bank or Assured's premises, except while in the course of transportation.

During this period of time, protection from fire perils was available as was protection against windstorm, hail, water damage, and other such risks later. These coverages became known as “property insurance.”

Soon legal recourse against someone wronged by another was considered an insurable situation, and the idea of protection against liability grew into what is now called “casualty” or “liability” insurance. Many insurers became “Property and Casualty Insurers.” Others preferred to continue to cover only one type of peril, such as fire insurance, and these companies became known as “monoline” companies, and policies that cover only one type of peril, became known as monoline policies.

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The distinguishing factor of Marine and Inland Marine insurance is that the subject of the insurance (property insured) is moveable – hence its name of FLOATER. The floater policy will cover the property no matter where it may be. Fire insurance, on the other hand, usually covers property at a fixed location.

MONOLINE INSURANCE POLICIES

With the complexities of modern life and modern commerce, many commercial enterprises were faced with an increasing number of situations that were determined to be insurable. Also, the number of types of commercial businesses also increased, each type with its own peculiarities and situations that are unique to their business. With the increase in insurance situations, the number of insurance policies needed to cover each contingency increased dramatically, to the point where many customers had many policies. The problems with this approach soon became apparent.

The sheer number of such policies became overwhelming, with a variety of coverage’s provided by a variety of insurers, frequently represented by a variety of insurance brokers.

With so many policies, it was inevitable that there would be duplication of some coverage’s, and with no coverage provided for other risks.

Legally, it became reminiscent of the biblical scholars who debated for years as to how many angels can dance on the head of a pin, i.e. since there was little standardization of wording, legal interpretations were abundant. Many consumers paid for years to protect themselves and their businesses against certain risks of doing business, only to find that the wording of the policy did not provide the coverage they thought they had purchased.

MULTILINE POLICIESIt soon became apparent that the only solution was to “package” policies. Therefore, the

“multiline” policy was born, which is several of the risks previously insured under separate policies, now packaged into one policy. This has several advantages:

To the Insured:

There are fewer policies to purchase and maintain.

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The chance of delay in loss settlement due to disputes of different insurers, is substantially reduced.

The insured benefits from reduced administrative expense.

To the insurance company:

The administrative expense is lessened because it costs less to underwrite and issue one policy instead of several.

Package policies help insurers avoid adverse selection by spreading the risk among various insureds and among the various risks covered under the package policy.

Packaging is also advantageous for the insurance agent as it facilitates selling a policy to cover the insured’s entire account, and many packages are more easily sold and rated, so the agent can quickly and efficiently provide quotes.

Today, the Commercial Package Policy (CPP) consists of various coverages, assembled as modules, as shown in the following illustration. As indicated, Inland Marine may, or may not, be part of a CPP. When part of a CPP, there are certain provisions that are the same among all of the coverages. On the other hand, the various coverages could still be written in most cases, on a monoline basis.

THE ROLE OF THE INSURANCE SERVICES OFFICE

Insurance is a statistic - driven business. The premiums to be charged for any insurance coverage must be based upon statistics derived from actual experience, either of the insurance company itself, or from an industry average. And statistics can only be meaningful if there is enough experience to provide a broad base upon which to forecast future losses and expenses.

COMMERCIALPACKAGE

POLICY

COMMERCIALPROPERTY

COMMERCIALLIABILITY

CRIMECOVERAGE

COMMERCIALAUTO INLAND

MARINEBOILER &MACHINERY

PLUSNUMEROUS

OPTIONS

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If each insurer attempted to collect sufficient statistics to provide adequate premiums, the expenses would be excessively high, and the reliability of the statistics could be questioned, as it would probably not be based upon an adequate base. However, if companies banded together and shared their experience, the expenses would be drastically reduced for each company.

Therefore, most companies use the services of the Insurance Services Office (ISO) which is a statistic - gathering organization located in New York. While it initially was involved in providing advisory rates to its subscriber members, it has since withdrawn from providing rates, and now provides policy forms and endorsements and manual rules for its members. It should be noted that subscriber members are free to use whatever policy forms and rates they choose, but the information provided by the ISO is considered as “Standard” wording for the purposes of this text.

The American Association of Insurance Services, a competing firm, provides similar services to approximately 400 regional insurers.

The ISO rewrote all of the standardized commercial forms into more easily understood language

The differences between the monoline and the multiline policy forms were eliminated, with the welcome result that one set of forms can be used for one coverage or many. Much more flexibility was obtained as the customer no longer had to accept the standard coverage’s, but could construct a policy using the forms that they specifically needed.

In 1986 the ISO rewrote the Commercial Inland Marine policies as part of the policy simplification process. The format allows an Inland Marine coverage part to be used independently (Monoline) or as a Multi-line policy if needed, as discussed above.

When the Inland Marine Form is complete, it consists of

Declarations Inland Marine Coverage form(s) –(one or more) Common Policy Conditions pages Policy Conditions applicable to the Commercial Inland Marine Coverage form Endorsement(s) – if needed

The Insurance Service Office divides the Commercial Inland Marine coverages into twelve classes, as follows:

1. Accounts Receivable2. Camera & Musical Instruments Dealers3. Commercial Articles4. Equipment Dealers5. Film

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6. Floor Plan7. Jewelers Block8. Mail9. Physicians And Surgeons10. Signs11. Theatrical Property 12. Valuable Papers

RATES & FILED/NONFILED FORMS

All Inland Marine business can be written as one of two categories: (1) filed, (2) nonfiled.

(Sometimes they are referred to as “controlled” and “noncontrolled.”)

Filed forms are simply those forms that have been filed in the states with the insurance department(s). These forms and rates must be approved by the state insurance department(s) before the insurance company can write the form in that state(s). As a general rule, filed forms and rates are used for risks where there are a large number of insureds with similar exposures. Examples might be jewelry, coin collections, etc.

Determining whether a particular form is exempt under state laws from filing can be a little confusing at times. Some states take a very strong approach and issue bulletins showing which classes of business must be filed. Other states take the approach that “Inland Marine risks which by general custom of the business are not written according to manual rates or rating plans” need not be filed. The final determination is really a matter of experience of the insurance company and its underwriters as they become acquainted with the requirements of the various states. Under the latter approach, the key is whether the forms, rules and rates for a particular form has been filed by one of the two rating organizations, the Insurance Service Offices (ISO) or the American Association of Insurance Services (AAIS). If they do not make a filing for a particular class of business, it can be assumed that it is a nonfiled class.

As far as the underwriter is concerned, when reviewing a particular class of business, there is a lot more flexibility in the underwriting of nonfiled business. The underwriter, therefore, is free to determine the policy provisions that will apply and the rates to fit the specific situation. More than 50% of all Inland Marine business is written on a nonfiled basis.

With filed business, there is not the flexibility and underwriters can depart from the published rates and provisions (deviate) in some cases by making some modifications at their discretion, such as changing territory, etc. Otherwise, no changes can be made unless it has the written approval of the insured and is filed with the particular insurance department.

Insurers do not have to use a rating organization, indeed it is the duty of the insurance company to make filings and rates. The rating organizations make these filings on behalf of

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many insurers, but all insurers do not do this and will file their own, independent, filings. An independent filing may be used if the insurer feels it is to their advantage to do so.

INLAND MARINE LOSS EXPOSURES

A loss exposure is simply the possibility of a financial loss. Principles of Risk Management and Exposure, volume one, state that “Every ‘loss exposure’ has 3 elements:

1. the item that is subject to the loss,2. the “perils” or forces that may cause the loss, and3. the potential financial impact of the loss”.

CONSUMER APPLICATIONBryson Mfg. Co. manufactures gasoline-powered bicycles. It ships its bicycles by truck. It

faces a loss exposure because (1) the bicycles are subject to loss by theft or damage while being shipped, (2) losses may occur by theft, windstorm (turning the truck over) or even earthquake, which would (3) cause financial harm to Bryson as they would have to replace the cargo.

Since the operator of the truck is not an employee of Bryson, if the bicycles were destroyed in an accident, which was caused by the negligence of the operator, the operator would become legally responsible to Bryson for the cost of replacing or repairing the bicycles.

An unusual element of Inland Marine insurance is that often times it involves a property, the loss of which can impact more than one party, as in the Consumer Application above.

INLAND MARINE PERILS

Definition: A “Peril” is a cause of a loss.

It is of the utmost importance to understand which perils are covered and which are excluded in an Inland Marine policy. Of course, this will depend upon what the needs of the insured are and what the insurance company will accept. It must also be “commercially feasible” to insure the risk. For instance, it would not be commercially feasible to insure war or nuclear reaction perils.

CONSUMER APPLICATIONBrent owns a large jewelry store located in a mall that has deteriorated over the past few

years and has many vacancies now. The clientele of this shopping center is mostly lower income, and there has been more than usual number and severity of crimes committed in this area. Brent has owned the store for 4 years and has filed 2 small claims against his previous insurance company. Before Brent opened the jewelry store, he had been in prison for two years because of activities surrounding his owning of a pawn shop. In this situation, assuming that adequate safety measures have been in place in the store and safety lapses involving the previous two claims have been rectified, the underwriter would still probably not insure this risk for moral reasons. The underwriter will look hard at the loss record and loss control practices, which could

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be, at best, marginal in this case. The underwriter would have to feel that in a deteriorating market, and with the apparent lack of morality (leading to his arrest previously), the exposure would be too great. Since it is jewelry, the form probably has filed rates in that state, so he would not be able to increase the rates to cover the anticipated exposure anyway.

There are two basic methods of expressing which perils in Inland Marine insurance are covered: (1) All-risks or (2) Named Perils (or Specified Perils) approach

ALL-RISKS APPROACH

This is much more commonly used in Inland Marine insurance that Named Perils. It does not specifically name the perils to be covered, but uses an exclusionary approach, i.e., it states which causes of loss are NOT covered. This is accomplished by using various exclusions. The term, “All-Risks” is now not used as often, as originally it meant that the insurer would pay all losses covered “by all risks of direct physical loss or damage.”

An important practical effect of this approach is that the burden of proof is on the insurance company in case of a loss. This means that if the insurance company cannot prove that the loss is specifically excluded under the policy, the insurer must pay.

NAMED PERILS APPROACH

Conversely, if the Named Perils approach is used, only those perils specifically named in the policy are covered. As an example, the following Named Perils would be insured against direct loss or damage by:

1. fire,2. windstorm, 3. explosion, 4. hail, 5. riot including riot attending a strike,6. civil commotion,7. vehicles not owned or operated by the insured,8. aircraft,9. smoke,10. accident to conveyance, and11. burglary.

However, just because a peril is a Named Perils in a policy, does not mean that it will be covered carte blanche. One example often quoted is “burglary.” Most policies define burglary

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as “taking of property, etc… from inside, leaving marks of forcible entry or exit.” If there were no signs of forcible entry or exit, the policy would not cover the loss by burglary.

With the Named Perils approach, the burden of proof of loss is on the insured, and if the insured cannot make such proof of loss, then the insurer does not pay.

While not being used as often as the All-Risks coverage, the Named Perils approach is used quite often for certain types of Inland Marine business.

PROXIMATE CAUSE

Mention must be made here of the doctrine of proximate cause, as it should be understood in order to determine what would be considered as a “covered peril.” Proximate cause is best described in the definition of a “direct loss.”

The Direct Loss is a property loss in which the insured peril is the proximate cause (an unbroken chain of events) of the damage or destruction.

A covered peril is the proximate cause if it is the cause that initiates an unbroken chain of events contributing to the loss.

CONSUMER APPLICATIONPerry Produce Transport Co. Has a large refrigeration unit in their warehouse, which they

normally use to store, produce as it arrives from the field, and then is removed when a full truckload is received; and it is transported to various markets.

A severe windstorm hit a powerline 5 miles away from which Perry received the electricity to run the refrigeration unit. The produce spoiled, but the insurance company was required to pay.

Similar court cases have ruled that any such spoilage would be deemed to be a covered loss proximately caused by windstorm, a covered peril under the policy.

There have been numerous law suits involving this doctrine, and there will probably be more in the future. Even though a lengthy discussion of this could prove entertaining, it really is outside of the purpose of this text. One other point, however:

An insured loss must not only involve a covered cause; a covered cause must also be the proximate cause of the loss.

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WHO IS AFFECTED WHEN PROPERTY IS LOST, DAMAGED OR DESTROYED.

One might think that the person affected would always be the owner. But in Inland Marine insurance, others that may be affected could be

others who use the property, common carriers and bailees (whose responsibilities are similar) or those who lend money to the owners of the property.

PROPERTY OWNERSIf some property has a value to the owner, and it is lost, damaged or destroyed, then the owner obviously occurs a financial loss because the property will have to be replaced or repaired.

COMMON CARRIERS AND BAILEESA “Bailee” is a person to whom property is entrusted, or, stating it in another way, an individual who has temporary rightful possession of another’s property. Dry cleaners come immediately to mind, but a bailee could also be a trucking company or a repair shop or garage, etc. Bailees and common carriers can become liable for loss or damage to property in their care, custody or control.

USES OF PROPERTYThose who use property of another can face exposures with respect to that property. For instance, one who leases or rents property may be liable for damage to that property while under their care or usage. An interesting situation arises when a tenant rents a building and before they move in, they remodel or add rooms, etc., to the building. These additions are called “improvements or betterments” and become property of the building owner. If the additions are destroyed, the tenant still has a legal responsibility to replace or repair the improvements or betterments.

LENDERSIf a person borrows money from a lender to purchase property, the lender still maintains certain conditional rights to that property, such as the right to repossess the property in the person does not repay the loan. These are called “secured” loans, and the lender is a “secured lender”, and the creditor is a “secured creditor.” If the money is used to purchase a home or a building, then the lender is a “mortgagee” and the borrower is a “mortgagor.”

In effect, both parties can be the victims of a loss. Frequently a lender may protect its interest by requiring that the borrower provide an insurance policy that names the lender as the “loss payee.” Sometimes a policy will have an endorsement, a “loss payable endorsement”, that specifically states that in case of a loss, the lender will be paid to the extent of its interest in the property.

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Sometimes the lender purchases its own insurance on the property. Installment sales policies and floor plan policies are both types of policies that can be issued to insure the lenders interests.

FINANCIAL CONSEQUENCES

Continuing with the discussion of losses and the effects on individuals, the loss of property will have undesirable financial consequences in most cases, and the impact may occur as a loss, which may:

reduce the property value cause an increase in the owner’s – or other’s – expenses, or reduce the owner’s – or other’s – income.

REDUCTION OF VALUEObviously an insured loss will reduce the value of the property, but the actual amount can be

calculated in different ways.

If the property can be repaired or restored, a measure in reduction in value is the cost of repair or restoration.

Property that must be completely replaced has no remaining worth (unless as “junk” or salvage).

If property is lost, stolen, or just disappears, the value to the owner is reduced as if it had been completely destroyed with no salvage value.

If repaired property is worth less than it would be worth if it had not been damaged, then the owner not only faces the cost of repair or restoration, but also the reduction in the value because of the fact that it has changed condition.

An article of property may have a number of different of different values, depending upon the method by which the value is determined. In Inland Marine insurance, the most common measures of value are

actual cash value, invoice cost, or agreed value.These will all be discussed later in this text.

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INCREASED EXPENSESWhen property is damaged, not only will the owner suffer a loss in value, they must also

suffer the costs and expenses of repair or acquiring a temporary substitute, or even, in some cases, maintaining the property in useable condition.

CONSUMER APPLICATION Radio Station WKXZ had its main satellite dish and antenna both destroyed during a storm

and the computer system was severely damaged by the storm also. A “rock and roll” music-only station in the next town was going to cease operation, so they allowed WKXZ to use their facilities until their own were restored. The insurance company paid for the temporary lease of facilities until WKXZ was able to return to their own building and resume broadcasting.

LOST INCOMEFrequently, the property insured under an Inland Marine policy is used to generate income,

so if the property is damaged or lost, income will be lost and may remain gone until the property is replaced, restored or repaired.

This area can be most difficult in projecting the business income that could be lost. Things such as the future level of activity must be taken into consideration, and then all different kinds of situations – “worse scenarios” – must be explored. The only practical way to do this would be to determine what the business presently makes and the expenses it normally occurs, and then compare it to what would happen in case of a property loss. The comparison between the two gives the potential loss of income to the business.

NOTE: In this text a wide variety of “forms” of Inland Marine insurance will be discussed. In many cases, there will be identical or very similar provisions, conditions, or exclusions. If all policies were to be discussed in detail, this text would be in several volumes. Therefore, “common” provisions will be usually referred to as such, without accompanying detail.

However, in order to better understand a particular form and how is varies from, or is almost similar to, other forms, it may be necessary to be repetitious. Also, if it is necessary to access a form later for reference purposes, it will not be necessary to go back to other forms in order to understand the form be referenced.

STUDY QUESTIONS

1. Basically, Inland Marine insurance covers _____________ property, excepting motor vehicles and airplanes.A. permanentB. Real C. moveableD. commercial

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2. The Nation-Wide Marine DefinitionA. states the types of exposures classified under Marine, Inland Marine, or

Transportation Insurance by placing them into categories.B. lists the types of exposures that may be insured by Marine insurance.C. defines the differences between Marine insurance and Casualty insurance.D. categorizes various liability exposures.

3. The kinds of risks and coverages listed in the Nation-Wide Marine Definition A. shall be construed to mean that they are solely Marine, Inland Marine, or

Transportation insurance only.B. restricts or limits the exercise of any insuring powers granted under

charters and license.C. includes all of the kinds of risks and coverage insurable under Marine and

Inland Marine insurance.D. does not include all the kinds of risks and coverages which may be

written, classified or identified under Marine, Inland Marine or Transportation insurance.

4. Which of the following is NOT an advantage of a Multiline policy?A. There are fewer policies to purchase and maintain.B. Each risk category has its own policy.C. The chance of delay is settling losses is reduced,D. The insured benefits from reduced administrative expenses.

5. The Insurance Service Office (ISO) isA. a branch of the State Insurance Departments.B. a rating bureau.C. a statistic gathering organization.D. part of the Federal Housing and Human Development Agency.

6. All Inland Marine business can be written as either ________ or _________.A. Marine or Inland Marine.B. filed or nonfiled.C. Inland Marine or Transportation insurance.D. Bailee or Bailor.

7. A “Peril” isA. a cause of a loss.B. a possibility of a loss.C. uncertainty of financial loss.D. a man-made danger.

8. The two basic methods of expressing which perils are covered in an Inland Marine policy, are

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A. Marine and Transportation.B. Blanket and Unscheduled.C. All-risks and Named Perils.D. Limitations and Exclusions.

9. A covered peril is the ____________ if it is the cause that initiates an unbroken chain of events contributing to the loss.A. direct lossB. approximate lossC. proximate causeD. symbiotic cause

10. In Inland Marine insurance, the most common measures of value do not includeA. actual cash value.B. auctioneered value.C. invoice cost.D. agreed value.

ANSWERS TO STUDY QUESTIONS

1C 2A 3D 4B 5C 6B 7A 8C 9C 10B

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CHAPTER TWO - TREATMENT OF INLAND MARINE LOSSCHAPTER TWO - TREATMENT OF INLAND MARINE LOSS EXPOSURESEXPOSURES

Generally speaking, Inland Marine losses can be “treated” by avoidance, loss control, retention, transfer other than insurance, and insurance.

All of the above “treatments” are properly the purview of Rick Management, Safety Management, etc., except for “insurance.” Therefore, since insurance is the topic under discussion, the other treatments of loss will not be studied in this text. Instead, Underwriting will be next addressed.

INLAND MARINE UNDERWRITING

Underwriting is the process of examining, accepting or rejecting insurance risks, and classifying those selected, in order to charge the proper premium for each.

Underwriting in Inland Marine it means deciding which risks are acceptable, on what basis and terms, and the premiums to be charged. The purpose of underwriting is to spread the risks among a pool of insureds in a manner that is equitable for the insureds and profitable for the insurer. The Inland Marine underwriter does not stop there; however, as they also monitor the decisions that they have made.

Inland Marine underwriters are typically specialists in certain areas, although with smaller companies they are “jack-of-all-trades” and their technical knowledge of so many types of businesses and operations grows throughout their years of experience, to where they can best be described as “phenomenal.” Underwriters must continually keep up to date with a very wide variety of business policies, procedures, practices, and most importantly, risks. Rather than attempt to list the areas in which they must be knowledgeable – which actually covers several manuals – just reviewing the coverages, conditions, exclusions, etc., of the Inland Marine forms used in this text, will give a good indication of the vast knowledge they must have. Also, as it will be apparent, there are so many types of Inland Marine coverages necessary and new ones appear every day, that it would take volumes to keep up with them.

Underwriters, as technicians in many disciplines, frequently use words that mean different things to them, than to others. For instance, “risk” generally means an exposure to something that could possibly occur which would result if a financial loss. But to an underwriter, it could be a “good risk”, or a “marginal risk.” Underwriters also use the word “hazard” to mean

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anything that can increase the probably frequency of a loss, or how severe the loss can be. Even peril and hazard are used interchangeably at times by underwriters.

An underwriter actually has several functions. To start with, their job is to satisfy what is wanted &/or needed by the customers, and to do so at a profit. An Inland Marine underwriter must be extremely flexible just to accomplish this function because of all of the myriad of uses of Inland Marine insurance.

Of course the coverage must always be at the right price, meaning a price affordable by the customers, and still sufficient to maintain a profit margin for the insurance company. With the prices of some things fluctuating greatly, and new risks to be insured popping up continually, this is very difficult to do.

All underwriters have certain selection standards dictated by management of the insurance company, and to make sure that these standard are applied properly so that the company can get a deserved profit. “Adverse selection” often rears its ugly head in underwriting – this is when there is a demand for insurance by those who are almost guaranteed to have a loss. As an example, celebrities are targets for jewelry theft – they wear more of it than others, the jewelry they wear is more expensive, and being celebrities, their personal affairs are more in the limelight. This is stretching it a little, but assume that the only people who want insurance coverage against theft or jewelry were celebrities, then this would be “adverse selection.” Another, more compelling example, would be if women who are pregnant and without health insurance maternity benefits, could get maternity benefits as soon as they discovered they were pregnant. Adverse selection, no doubt.

In life and health insurance, pricing is performed by actuaries. In Inland Marine insurance, actuaries are not used that much for pricing. Pricing is determined by “rates” and rates are determined by rating organizations generally. Underwriters have the responsibility of applying these rates properly, and also in determining the rates to be used. Rates are generally expressed as a dollar amount per dollar amount of coverage (rates of $3.00 per $1,000 of exposure, for instance). It is also up to the underwriter to determine if the “standard” rates or “average” rates are adequate for the risk.

With these responsibilities, it is obvious that the underwriters must always maintain professionalism, especially since they also “service” much of the business they underwrite. Inland Marine insurance, in particular, has many, many situations that can arise and risks that need to be insured and that change continually, so the interface between the underwriters and the customers can often be on a continuing basis.

To simplify the underwriters “job”, it is decision. These decisions fall into one of 3 categories:

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(1) ACCEPT WITHOUT ALTERATIONThis is particular prevalent when the policy is a renewal, but it applies as the first step in

accepting new business also. If the business can be accepted as applied for, the underwriters job has just been made a lot easier. With some types of risk, it can happen often, with other risks, hardly ever.

(2) ACCEPT SUBJECT TO MODIFICATIONAssuming that the risk cannot be accepted as applied for, frequently modifications can be

made so that it is acceptable. There is a rule in underwriting, that the more complex the application, the more changes that can be made. Some of the more obvious changes are:

Hazard Reduction. Security guards, smoke/fire/theft alarms, better packaging materials, chain-link fences with limited access, etc., etc., are all examples of hazard reduction.

Modify the Rate. This can obviously be one method, but remember that many rates are filed. In some situations, there can be “consent to rate” laws, which means that if the insurer wants to charge different rates, they may do so if it is approved by the insured. For nonfiled rates, rates are based on averages and are entirely negotiable.

Modify the Coverage. A change in coverage can make a formerly unacceptable risk acceptable. For instance, if a risk has a history of small losses, an increase in the deductible can make it acceptable to the company. Changing from an All-Risks policy to a Named Perils policy can make an application acceptable. The amount of modification will depend upon whether the form is filed or nonfiled. With a filed form, the modifications would be quite limited.

Modify Retention. This is an internal (within the insurance company) option that does not directly affect the customer. The underwriter may suggest retaining a small amount within the insurance company, and reinsuring the excess with another reinsurer or insurance company. On many nonfiled cases, this is typical. In some cases the insurer may not have experience, or large enough block of a particular type of business, to retain much if any of the risk. A reinsurance company with more of a spread of risk or more experience can get the policy issued.

(3) REJECT. If all else fails, then the only alternative is to reject the business. It is always in the mind of the underwriter that they are in business to accept business, and it is expensive to turn it down as there are underwriting and issue expenses – not to mention rapport with the agents – which have already cost money and which will not be recovered with a rejection.

CONSUMER APPLICATION

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French Furriers are opening a furrier shop on a busy main thoroughfare of a larger city. When applying for a Furriers’ Floater policy, the inspection revealed that although the store was on a brightly lit, heavily traveled street during the day, there were some burglar or theft hazards that concerned the underwriter. The premium that he had to quote seemed excessive to French Furriers, and they wanted to reduce the premium.

The underwriter quoted a lower premium, provided:1. the existing skylights had to be protected by the alarm system, either by using light beams

or small wires crisscrossing the space under the skylights, (Continued on next page)2. the back door leading to the alley must be reinforced with steel, so that a vehicle could not

crash through the door,3. there must be lights affixed with motion detectors in the alley, so in case of any movement

in the alley at night, it will be brightly illuminated,4. the existing alarm system must be changed so a central station system, with periodic

security patrols when the store is closed.In addition, the insurer would also seek reinsurance and the store would agree to comply with

any reasonable suggestions or recommendations made by the reinsurer.

RATES AND RATE-MAKING

The two terms that always show up when pricing of a policy is discussed, is “rate” and “rate-making,” As explained earlier, a rate is the price per exposure unit, charged by the insurer for insurance coverage. Rate-making is the process of determining the rates. There are 3 basic types of rates:

1. class (manual) rates,2. individual rates, and 3. judgement rates.

CLASS (MANUAL) RATESThese are rates that are applied to all members of a group (don’t confuse with “group”

insurance). They are developed by grouping together many insureds who have similar characteristics into a single “class”. By their very nature, they have a tendency to reflect average costs, such as average losses, average loss expenses, etc. Class rates are for, as an example, jewelry coverage. These rates can vary also by geographical location, such as different rates for the same exposure in different states.

INDIVIDUAL RATES

Individual rates are essentially Manual rates adjusted or modified to meet the particular criteria of the risk involved. If the class rates pertain to a certain risk category, then those that have less risk within that category could pay less premium, and conversely, those with more risk could pay more premium (higher rate).

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One example often used to illustrate this is to consider a brick building within a specified fire protection zone. If the building were a residence, then one class of rates would apply. However, assume that it is for business use, then the rate would start at the class rate, but then would be adjusted either up or down, depending upon occupancy, protection, exposure, and any existing hazards, either from within or adjacent buildings.

Another usage is based upon the fact that it is more expensive to handle a monthly reporting policy on goods in transit, than it would be to issue an annual policy for a maximum limit that would probably not generate any administrative cost or premium until the end of the policy year.

JUDGEMENT RATES

There are three different situations where judgement rating will apply. First, there are certain risks for which there are no rates available to deviate from or to modify. Therefore, the underwriter must search for all available statistical information and estimate the possible and probably frequency and severity of loss. This information is then compared to situations as close as possible as the risk being underwritten.

Secondly, an underwriter can determine unusual situations involving a risk for which there are rates. A warehouse with new, state-of-the-art security devices could lower the premium. Conversely, a warehouse that meets all of the underwriting criteria for the rates, but adjacent buildings have more-than-usual losses within a recent time period, could indicate that the rates might be inadequate.

Thirdly is where new coverage is being developed and there is little, if any, pertinent statistical date available to establish the initial rates. This would apply if there were a new type of insurance on the market, such as involving technological advances. Physician’s and Surgeon’s Equipment Form coverage is another example where new and expensive diagnostic equipment is insured.

Judgement rating must be used when there is no or little published information or statistical information regarding the risk. This is where experience, training and knowledge of the underwriter comes into play, along with an awareness of competition in the market.

RATE-MAKING

Many types of filed rates are derived from some sort of scientific data, particularly in those classes of risk there are a large number of exposure units, and there are detailed records on the losses and loss adjustment expenses. The rates derived in these situations, are called “pure premium” rates which can then be adjusted for inflation, overhead expenses, and differences in exposures and expenses.

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Risks which are primarily located at a particular location and where the building and occupancy constitute the principal hazards, frequently are rated using the fire contents rates, and then “loaded” to reflect other perils to be insured.

Risks, which involve property, and particularly those that are usually in transit, are judgement rated. To make it more difficult, the underwriter has to take into consideration the individuals and businesses that may have custody or control of the property insured, and underwrite them as well.

INLAND MARINE POLICY PROVISIONS

Many Inland Marine insurance policies are nonfiled, however the forms described here are considered as the industry standards. Therefore, many of the nonfiled forms closely resemble the industry standards, particularly when a nonfiled coverages are added to a filed form, such as to a Commercial Package Policy that otherwise uses filed forms.

In some cases, the nonfiled forms are original, one-of-a-kind, that have little resemblance to any filed forms. Some of these will be discussed by addressing the different approaches that insurance companies may take when creating the nonfiled forms. The actual provisions will be discussed later in this text.

An ISO Commercial Inland Marine Coverage Part actually consists of four separate and distinct documents:

1. Coverage Forms (may be more than one) that contain the provisions that specifically apply to the property being insured by that particular form.

2. A Declarations Page, as with all insurance, it shows the insurance limits, the premium, deductible, and other important information pertaining to the Coverage Form.

3. Commercial Inland Marine Conditions Form which contains the provisions that generally apply to all Inland Marine insurance forms.

4. Endorsements that are added to the Coverage Part which amends or changes the policy provisions so that it is acceptable to both the insured and the insurance company.

If an Inland Marine policy is to be a Monoline policy – defined as a policy that only covers Inland Marine coverage – there are two other documents involved:

1. Common Policy Declarations which show the insured’s name, address, effective and expiration dates of the policy, a description of the business insured, the premium, and a list of all of the coverage parts that are included in the policy. This Declaration may be combined with the Declarations of the particular Coverage Form.

2. Common Policy Conditions Form, which conditions relate to the cancellation, changes or payment of premium, that affects any type of coverage, (Inland Marine or any other type).

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As described earlier, if the Inland Marine coverage is to be part of a Commercial Package Policy, then the above documents are combined with other additional coverage parts.

OPEN PERILS BASIS

While it may appear that this is going to be terribly confusing, with all of the various coverages, it is not necessary so. The plans are all written on an Open Perils basis. This means that all physical damage to the property insured is covered, unless specifically excluded. Three of these are on a “reporting basis”

COVERAGE

The Coverage section contains at least 4 major provisions, generally titled “Covered Property,” “Property Not Covered,” “Covered Causes Of Loss,” and “Additional Coverage –Collapse.”

Covered Property, and Property Not Covered are different between policy forms as the policies and forms are designed to cover different areas and to different classes of property. The two parts state what is covered and what is not.

Covered Causes of Loss usually is defined in the policy as “Risks of direct physical loss to covered property except for those causes of ‘loss’ listed in the exclusions.” This statement is what makes a true “All-Risks” policy. When the word “loss” is used, it is defined as accidental loss or damage. The words direct and physical are used often in the ISO forms and are construed to (a) exclude loss of income from the business stopping or shutting-down, and (b) any extra expense that may be incurred by the insured due to the damage or destruction of the covered property. Note, however, that these coverages (called “time element” coverages) can be provided through certain nonfiled Inland Marine coverage forms, or through other commercial property forms.

Commercial Inland Marine forms will exclude collapse, except as provided in the Additional Coverage – Collapse part of the coverage form. This means that a loss because of a collapse or partial collapse of a building, will be covered only if the collapse is due to a cause of loss that is stated in this provision. These losses are: fire, lightning, windstorm, hail, explosion, smoke, aircraft, vehicles, riot, civil commotion, vandalism, breakage of glass, falling objects, weight of snow-ice-or sleet, water damage; hidden decay, hidden insect or vermin damage, weight of people of personal property, weight of rain that collects on a roof, and use of defective materials or methods in construction, remodeling or renovation.

The reason that this provision is set up the way that it is because of a legal doctrine adopted by several states, the doctrine of Concurrent Causation.

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Concurrent Causation is a loss caused by two or more perils.

A certain amount of controversy exists when one of the perils is insured and the other peril is excluded from coverage. Some courts are beginning to find that even if only one of the perils is insured against, the policy providing the coverage for that peril must pay the damages. Because of this, many insurers became concerned that some losses that was caused by a peril that was excluded in the policy, might become covered if the result was not specifically covered. As an example, earthquake could be excluded and collapse was not excluded, therefore if a building collapsed as the result of the earthquake, would coverage be afforded? This “Additional Feature – Collapse” is designed to eliminate this possibility because it states that collapse is covered only if it results from one of the listed perils.

There are also Coverage Extensions and Coverage Options; the extensions provides coverage for exposures that would not ordinarily be covered by the form. The options merely indicates that certain coverage is available but the coverage is at the option of the insured, and usually they are available only upon the payment of an extra premium.

EXCLUSIONS

In Inland Marine insurance, the Exclusions play as important a part of defining what is covered by a particular policy or form, as does the “Coverages” section.

The Covered causes of loss provision states that the insurance applies to risks of direct physical loss except for the cause of loss listed in the exclusions.

Since there are a multitude of policies and forms available to provide coverage for innumerable exposures, the exclusions will vary from one form to another. It will be noted in describing various forms in this text how some forms cover a peril, and others do not. However, there are a number of common exclusions in the standard ISO Inland Marine forms. They need to be described in this section so that they do not have to be repeated throughout the text. Similar exclusions will be found in nonfiled forms also.

Named Perils types of forms provide a distinct approach in this matter. The exclusions in a Named Perils policy usually indicate what aspects or parts of a (named) peril that the insurer does not want to insure.

The exclusions in an ISO Commercial Inland Marine policy can be broken down into three categories.

1. The first category of exclusions are those of earthquake, governmental action, nuclear hazard, war & military action, and water. Governmental action, nuclear hazard and war/military action, exclusions are always found in the ISO Inland Marine forms, while water and earthquake are found only in a few forms. These exclusions can be discussed

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in great detail, however the various forms will specify the definitions of these exclusions and their applicability to the particular peril covered. There is one thing in common with the exclusions in this category, and that is that in every case there could be catastrophic consequences.

It should also be noted that the exclusions in this category are prefaced in the form by stating that the insurer will not pay for any loss caused directly or indirectly by any of the “causes of loss listed below”, and is excluded “regardless of any other cause or event that contributes concurrently or in any sequence to the loss.” This is another application of the concurrent causation doctrine discussed above, which eliminates coverage for any loss involving these exclusions, even though a peril that is not specifically excluded contributed to the loss.

2. Another category of exclusions are prefaced by wording such as “We will not pay for loss caused by or resulting from any of the following…” These losses are not subject to the concurrent causation language, and vary greatly from form to form. While these exclusions are far to numerous to list, there are three exclusions that are found in nearly every type of ISO form that should be discussed here.

(1) The first is called the “false pretense” exclusion and is used also in commercial property All-Risks policies, commercial crime policies and other commercial coverages. It excludes loss by “Voluntary parting with any property by you or anyone entrusted with the property if induced to do so by any fraudulent scheme, trick, device or false pretense.” If this seems to be exclusion against a swindle by a con-man, then that is exactly what it is. The insurer excludes these losses because they can be avoided if due diligence is exercised.

CONSUMER APPLICATIONBlatt’s Jewelry had a large “Estate” sale where jewelry items previously owned by a

nationally known very wealthy heiress were being sold. These items were laid out in glass cases and on tables in their store. A well-dressed lady was looking at a diamond bracelet and discussing with a salesperson, at the same time a well-dressed gentleman was admiring a large diamond and ruby brooch. The man was obviously interested in the brooch, but acted like he could not make up his mind and finally convinced the salesperson that he had to take the brooch out into the light to check the rubies to make sure they were the color that he wanted. The salesperson felt that if he stood just outside the door, he could watch him from the window. Just as the man went outside the door, the lady looking at the bracelet caught the high heel of her shoe on the carpet, and fell to the floor, grabbing for the table when she fell and the table joined her on the floor. All of the employees rushed to her aid and when she got back on her feet, she assured them that she was all right. At that point the salesperson working with the man noticed that he and the brooch were gone. When the employees all ran to the front of the store to try to see where the man went, the lady picked up her handbag that had fallen to the floor also, and left. A short while later, it was noticed that the diamond bracelet was gone also.

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The brooch would not have been covered under an Inland Marine policy with the False Pretense exclusion, as it was “voluntary” parting of the property. However, the bracelet was stolen and would be covered, as the bracelet was not parted with voluntarily.

(2) Another exclusion of this type found in most Inland Marine policies applies to any loss caused by or resulting from “unauthorized instructions to transfer property to any person or to any place.” A good example of this would be computer hacker who “hacks” into a computer system and instructs the system to transfer goods to a location where it will be recovered by the hacker.

(3) The third type of exclusion found in most Inland Marine policies eliminates any coverage because of delay, loss of use, loss of market, or any consequential loss.

3. The third category of exclusions states that the insurance company will not pay for any loss that results for any of the excluded causes, but if a loss by a covered cause results from the excluded cause of loss, the resulting loss will be paid. This is rather like the second category reversed. In other words, if an exclusion will not allow coverage for loss due to materials used in repair or construction, and if a fire broke out because the materials used in the electrical wiring of the building under construction, then damages due to the fire (provided the fire is a covered cause) would be paid.

COMMON POLICY CONDITIONS

“Conditions” are the actions that the insured must take, or continue to take, for the insurance policy to remain in force and the insurance company to process a claim.

For example, the insured must pay the premium when due, notify the insurer as soon as possible in case of an accident, and cooperate with the company in defense of the insured in case of a liability suit.

The Common Policy Conditions that are present in all Inland Marine Policies, under the ISO form are lettered A through F. (Note: The ISO Form will be used throughout this text. The American Association of Insurance Services text may be available from them if desired. Generally speaking, however, the filed forms are approved by various State Insurance Departments, and while the wording may vary in some respects, the coverages offered should be very similar, if not exactly the same.)

A. CANCELLATION

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BY THE INSUREDThe “First Named Insured” as shown in the Declarations, has the right to cancel the policy by

mailing or delivering in some other fashion, written notice of cancellation. Note the “First Named Insured” terminology. On the Declaration Page, the name of the insured is listed. It is certainly a possibility that there can be more than one insured, so all of the insureds are listed. But what would happen if there should be a disagreement for example partners not agreeing on a claim amount offered by the insurer. By making the first person named as an insured as the responsible party, the insurer can remain aloof of any internal friction – as they should always be in those situations.

Regardless of the relationship between the first named insured and those named after, only the first named insured has the right to cancel the policy by notifying the insurance company.

Conversely, if the policy is cancelled by the insurance company as indicated below, the return of premium due (if there is any) would be made only to the first named insured.

BY THE COMPANYAs expected, the provisions for cancellation by the company are more detailed. There are

two reasons for an insurance company to cancel the policy: Non-payment of premium, or any other reason.

If the policy is cancelled by the company for non-payment of premium, the company must provide to the First Named Insured (FNI) written notice at least ten (10) days before canceling.

If the policy is cancelled for any other reason, other than non-payment of premium, the company must provide the FNI with written notice at least thirty (30) days before canceling.

The notice of cancellation must be sent to the last known address of the FNI, either by mail or some other means, and will state the effective date of the cancellation, i.e., when the policy ceases to exist. If the notice has been mailed, the proof of mailing (receipt) will be sufficient to prove that the notice was mailed.

The company will send to the FNI any premium refund due. The form stipulates that if the insurer cancels, the refund will be pro-rata (unearned premium). However, if the insured cancels, then the company may use a system that refunds less than the pro-rata amount. The cancellation will be effective whether a return of premium offer has been made or not.

CONSUMER APPLICATIONBill and Ben are partners in a local trucking company. In addition to the insurance on the

vehicles, they also carry Inland Marine coverage on the cargoes that they transport. They have the Inland Marine coverage with Passive Insurance Co., and even though they are 50/50 partners in the business, Bill is listed first as his last name is before Ben’s in the alphabet. Bill also does the accounting for the company and pays the insurance bills.

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Bill pays the insurance on an annual basis. Six months after the effective date of the insurance, Ben’s girlfriend’s brother who is an insurance agent for another insurer, tells Ben that he is paying too much money for his insurance. Ben passes this on to Bill, who checks it out and discovers that there is very little difference in premium, and Passive is one of the largest insurers, while the other company is a new and relatively small company.

Because of pressure from his girl friend, Ben sends a letter to Passive canceling the insurance. However, since Ben is not the First Named Insured, the insurer refuses to accept the letter. Ben is furious, so in order to keep peace in the business, Bill agrees to cancel, anticipating that they will receive a refund of around 50% of the premium paid as the policy had been in force only 6 months.

However, the insurance company pointed out that they use another, much less liberal, formula for premium refund when the insured cancelled early. The reason they gave was that they have had the expense of issuing and inspections and agents commissions. Therefore, Bill and Ben agreed that since there was a considerable difference in their refund, they would stay with the company until renewal, at least. In the meantime, Bill hopes that Ben either gets a new girlfriend, or her brother finds a new job.

B. CHANGES

Inland Marine insurance, in particular, is susceptible to a great many changes during the policy period. Cargo trucks may haul different cargoes with different values, to various places, and even by various means. A jewelry store can have an inventory that fluctuates – for instance at Christmas the inventory can increase in anticipation of sales. The value of equipment and the type of equipment used by doctors and surgeons, can vary considerably, depending upon specialty of the doctor (and what if he changes specialty).

Inland Marine insurance must be able to be changed rapidly, but the insurance company still has to maintain good business practices. Therefore, if there are any changes to be made, again they must be made by the FNI, but only with the consent of the insurer. Any changes so requested can be accomplished only if the company issues an Endorsement covering what has been requested. Thereafter, it becomes part of the policy. These Endorsements can be completed rapidly. Binders whereby the insurance company accepts the coverage even before the Endorsement can be completed at the Home Office can be issued rapidly, and in some cases, the Endorsements can be faxed the same day.

C. EXAMINATION OF BOOKS AND RECORDS

While it would be obvious to any insured that the insurance company has the right to examine the books and records of the insured, many insureds do not realize that they can do so as long as three years after the policy has expired. The inspection of books and records is always necessary to confirm and verify the information upon which the premiums are based. But what

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is the necessity of looking at the books and records of a former insured three years after the policy has expired? There can be many reasons, see the Consumer Application below.

CONSUMER APPLICATIONMusicman Company sells and repairs musical instruments, specializing in band instruments.

Musicman had a Camera & Musical Instrument Dealers Coverage Form with Reputable Insurance. Two and a half years ago, they had someone break into the store at night and break many expensive musical instruments into unrecognizable piles of brass and other metal. The police believed that it was a neighborhood gang as the storeowner had always refused to pay protection money to the local gangs. A claim of $346,000 was paid to Musicman to cover the cost of the instruments lost to vandalism. Musicman thought that they should have received more, so they cancelled the policy with Reputable.

Recently, the local police department discovered that drugs were being shipped inside of certain instruments, and they also discovered that the illegal activities had been going on for at least 4 or 5 years, with the full cooperation and knowledge of the storeowner.

Reputable can (and should) review the books and records of the store, and from that, should be able to determine what their liability should be, which will probably be “zero” as “Contraband of property in the course of illegal transportation or trade” is excluded.

D. INSPECTIONS AND SURVEYS

The insurance company retains the right to make inspections and surveys at any time. The purpose of this, of course, is to always allow the insurance company to make sure that there has been no substantial change in the situation as originally represented to the insurer, and that the information upon which the premiums are based, have not changed. The insurance company is under no obligation to provide the insured with results of any such inspection or survey; however, they may do so if they – the insurer – determines that they want to furnish such results. The insurance company may also make suggestions and recommendations as a result of the inspection or survey. It must always be remembered that the insurance company is under no obligation to provide this information.

Any inspections or surveys performed by the insurance company are done so only for the purpose of establishing or verifying premiums and/or to make sure that the risk is insurable under the provisions of the Inland Marine policy form. They make it abundantly clear in this provision, that they (the insurer) are NOT performing safety inspections.

Most businesses with employees or performing certain types of business, are subject to Occupational Safety and Health Administration (OSHA) laws and regulations, and are either required to have periodic safety inspections, or have such safety inspections as a matter of good business. It will not suffice to show that the Inland Marine insurance company performed an inspection and that should satisfy OSHA or other regulatory legal requirements.

Since many insurers will use an outside inspection company to perform these functions, this provision covers such service companies also.

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CONSUMER APPLICATIONBill’s Transport Company has an Inland Marine policy with Transports Insurance covering

cargo that they may carry in the course of their business. They also carry Workers Compensation with Commerce Insurance. They have had to file three Workers Compensation claims within the past 6 months, all of which occurred at the loading docks. Commerce recommended changes in the loading procedures to alleviate the problem, and now insists that there be a safety inspection performed every 3 months to ensure that the changes were working.

Bill’s Transport contracted with a large construction company, so their limits under their Inland Marine policy would need to be increased. Transports Insurance contracts with RDE Inspection Co. to inspect the company and to obtain necessary information so that the new risk can be property evaluated and premiums determined. RDE also performs safety inspections for some firms, and during the inspection for Transports, the inspector pointed out a broken ramp as a safety problem, but only did so as a matter of interest as it would not, specifically, effect the Inland Marine policy or premiums. The inspector made it clear that it was not part of the Transports inspection to point this out, but just thought that Bill’s should be aware of it for future use.

Bill’s Transport did not get a safety inspection for a period of 5 months. Commerce Insurance threatened to cancel the insurance because they had not performed a safety inspection within the required period of time. Bill’s office manager informed Commerce that they had an inspection performed by RDE during this period of time, and even pointed out the possible safety problem discovered by the inspector.

Didn’t work. As a matter of course, Commerce checked with RDE and discovered the purpose of the inspection. They also checked with Transports Insurance as to the purpose of the inspection. The Inland Marine policy states very specifically that the inspection was not done for safety purposes. Bill’s had to have a full safety inspection provided immediately in order to keep their insurance in force.

E. PREMIUMS

This condition just verifies the situation of the First Named Insured in respect to premiums, i.e., the First Named Insured is responsible for the payment of all premiums, and in case of any return of premiums, and they will be paid to the First Named Insured.

F. TRANSFER OF RIGHTS AND DUTIES UNDER THIS POLICY.

Any rights or duties of the insured(s) cannot be transferred without the written express and explicit consent of the insurance company, unless an individual named insured dies.

If an individual named insured dies, then the rights and duties under the insurance policy will be transferred to the legal representative of the deceased insured, but only to the extent that the representative is acting within the scope of the duties as representative. If a legal representative

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needs to be appointed, until such time that the appointment is made, any person having “proper” (legal) temporary custody of the property, can act as the deceased insured, but only to extent that it has a direct bearing on the property.

CONSUMERS APPLICATIONFarmers Equipment Company is a farm equipment dealer owned by Henry and Bob as equal

partners. They have an Inland Marine policy, with Equipment Dealers Coverage Form, covering the equipment that they sell, mostly mobile agricultural equipment, such as combines, tractors, etc. Henry is First Named Insured under the policy. Henry has a heart attack and dies.

Bob has not been named as a “legal representative”, but their attorney tells them that he has legal temporary custody until he can be appointed as legal representative. However, the attorney wants to thoroughly research any tax implications before Bob is appointed representative, which could be as long as a month. In the meantime, Bob can continue the business, as under the partnership agreement, Henry’s shares in the business reverts to Bob if Henry dies first (or vice-versa).

Bob is approached by a local friend who offers him a dealership in Rio Trucks. These trucks are used by a lot of the farmers to haul grain and livestock, and Bob believes that becoming a truck dealer would fit in nicely with the farm equipment sales. With the tools and equipment already in place in the company, which has been used for repair, and remodeling farm equipment, they could “custom-make” the truck beds for specific use by the farmers. (Cont. on next page)

Bob buys two of the trucks to be used as demonstrators. One of the trucks is driven to a rice farm and parked near a levee to be used the following day as a demonstration to the farmer how the truck could be used to take the rice to market. During the night, a bad rainstorm upriver from the farm, causes a levee to rupture, flooding the area where the truck is parked. The truck was totally submerged, and it took 4 days before it could be pulled out of the water and mud. The damage to the truck was substantial, and Bob makes a claim to his Inland Marine insurer.

Since Bob was not appointed the legal representative, he acted outside of the scope of duties as he changed the thrust of the business. (Also, the Equipment Dealers Coverage Form excludes trucks and also such water damage). While he had temporary custody of the property, the truck was not the property of the company when Henry was alive. Therefore, there is no coverage here.

STUDY QUESTIONS

1. The Inland Marine underwriters are somewhat unique in insurance, as theyA. are all engineers.B. monitor the decisions that they have made.C. only determine the premium to be charged.D. made decisions as to what is acceptable and on what basis, but have no

input into pricing.

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2. There are three basic types of rates for Inland Marine insurance, but it does NOT include

A. class rates.B. confiscatory rates.C. individual rates.D. judgement rates.

3. An ISO Commercial Inland Marine Coverage Part actually consists ofA. 4 documents: Coverage Forms, Declarations Page, Commercial Inland

Marine Conditions Form and Endorsements.B. 4 provisions: Covered Property, Property Not Covered, Covered Causes

of Loss and Additional Coverage-Collapse.C. a Title Page, a Declarations Page, a Coverage Page and Exclusions.D. a single document outlining what is to be covered, how it is covered and

exclusions.

4. The Covered Causes of Loss provision of an Inland Marine policyA. states that only those causes of loss specifically outlined in Declarations,

are covered.B. states that the insurance applies to risks of direct physical loss except for

the cause of loss listed in the exclusions.C. states that the insurance applies to risks of direct physical loss which

supercede all exclusions listed hereafter.D. is used only for Transportation policies.

5. Who has the right to cancel an Inland Marine insurance policy?A. the first named insured (and the insurance company under certain

conditions).B. any of the named insureds.C. the insurance agent and the first named insured,D. the insurance company and notification of the insured is not necessary.

6. If an insurer makes an inspection of an insured, A. they must have written approval of each inspection and perform the

inspection for safety purposes.B. they are under no obligation to provide the results of the inspection to the

insured.C. they must make all results of any inspection or survey available to the

insured.D. this will satisfy the requirements of the OSHA.

7. If a named insured dies, the rights and duties under the insurance policiesA. cannot be transferred, so the policy will be cancelled and unearned

premiums refunded.

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B. will be transferred to the legal representative of the deceased, who will have unconditional full authority to those rights and duties.

C. will be transferred to the heirs as named as Beneficiaries in the insurance policy.

D. will be transferred to the legal representative of the deceased, but only to the extent that the representative is acting within the scope of the duties as representative.

8. Bruce Industries was insured by Muskogee Insurance. They filed a claim for property damage caused by a covered peril, and the claim was paid. The next month they cancelled their insurance with Muskogee and placed it with another insurer. Muskogee discovered some pertinent information after the policy was cancelled, that could have a direct bearing on the claim that had been paid to Bruce.A. There is nothing Muskogee can do as Bruce is no longer an insured of theirs.B. Muskogee can examine the books of Bruce for as long as five years after the policy

expired.C. Muskogee cannot inspect the books of Bruce without Bruce’s consent, but if they do

not give their consent, then Muskogee can sue for the return of the entire claim amount.

D. Muskogee can inspect the books of Bruce for as long as three years after the policy expired.

9. Since circumstances surrounding risks covered by Inland Marine policies, frequently change quite rapidly,A. the policy must be written so that there can be no changes during the policy year.B. any changes must be made by the First Named Insured ,and becomes effective when

the agent receives the information.C. any changes must be made by the First Named Insured, and becomes effective when

the insurance company issues an Endorsement covering what has been requested.D. it sometimes takes several weeks to receive an Endorsement from the insurer, with

the least amount of time involved usually is around 3 weeks.

10. The only reason(s) an insurance company will cancel a policy is (are)A. non-payment of premium, and any other reason.B. fraud, withholding of pertinent information, underwriting review results.C. non-payment of premium only.D. at the direction of the Department of Insurance.

ANSWERS TO STUDY QUESTIONS

1B 2B 3A 4B 5A 6B 7D 8D 10A

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CHAPTER THREE - COMMERCIAL INLAND MARINECHAPTER THREE - COMMERCIAL INLAND MARINE CONDITIONSCONDITIONS

As indicated earlier, the preceding “Common Policy Conditions” applies to Commercial policies of the various types. But for Inland Marine policies, the Conditions are different, as the insuring form would be different according to the type of insurance. The conditions as described below, are in addition to the Common Policy Conditions, and they are also in addition to Conditions used in the particular Commercial Inland Marine Forms.

There are two “Conditions”, the Loss Conditions that apply only in respect to losses; and the General Conditions, that apply to conditions other than those related to losses.

LOSS CONDITIONS

A. ABANDONMENT

The Condition states that there can be no abandonment of any property to the insurance company. The “Abandonment Clause” is of significant importance in Inland Marine and Marine insurance, and should be discussed in more detail at this point.

ABANDONMENT CLAUSE

The Abandonment Clause in Marine insurance is a clause giving an insured the right to abandon lost or damaged property and still claim full settlement from an insurer (subject to certain restrictions). Two types of losses are typically provided for under abandonment clauses:

1. ACTUAL TOTAL LOSSThis pertains to property so badly damaged that it is not repairable or unrecoverable; causes

include, fire, sinking, windstorm damage and mysterious disappearance. For example, until the 1980s, the Titanic, which sank off Newfoundland in 1912, was deemed to be unrecoverable and the Commercial Union Insurance Company had paid its owners for their loss due to sinking. Owners of ships that had mysteriously disappeared in the Bermuda Triangle have been able to collect insurance.

CONSUMER APPLICATIONRobert had a 35 foot “cigarette” boat with 4 engines, one of the fastest production boats

available. Robert lived in Tampa and he liked to take the boat to Miami or Key West, where he would berth the boat while he participated in the night life of the cities. (Continued on next page)

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One morning when he returned to the boat for the return trip from Miami, he discovered the boat was gone. He reported it to the police who told him that with a boat like that, it had probably been taken by a drug smuggler. A week later, the Coast Guard reported spotting the boat taking on cargo from an old tanker known to be used by drug dealers. When the Coast Guard approached the boat, Robert’s boat left and the Coast Guard could not keep up with it.

Robert filed a claim for the loss of the boat, claiming abandonment. The claim was paid, as there have been ample precedence to justify abandonment.

Disappearance of pleasure craft due to drug pirates has resulted in indemnification of owners through insurance proceeds.

2. CONSTRUCTIVE TOTAL LOSSThis pertains to property so badly damaged that the cost of its rehabilitation would be more

than its restored value. For example, a ship and/or its cargo is damaged to such a degree that the cost of repair would exceed its restored value. The insured can abandon the property if (a) repair costs are greater than 50% of the value of the property after it has been repaired, and (b) the insurance company agrees to the insured’s intent to abandon.

It is apparent that Abandonment applies generally to Marine insurance, however since the Inland Marine Conditions specifically excludes it from loss, this definition helps to understand the Condition.

B. APPRAISAL

In order to determine the actual amount of the loss, it is necessary to “Appraise” the loss. Since there are at least two parties involved – the insurer and the insured – there will often be disagreement as to the value of the property or the amount of the loss. Rather than having to submit it to a court to settle the differences, which can be expensive and time-consuming, the following system is part of the insurance agreement:

Either the insured or the insurer, must make a written demand for an appraisal. An appraisal is not automatic – the insurer can always send a check for the damages and the insured accept it, for instance. At that point, each party will select a “competent and impartial” appraiser. These appraisers will then appoint an “umpire.” If the parties cannot agree on the settlement, or what if they can’t even agree on the umpire? If this happens, then the umpire is appointed by the judge of a court having jurisdiction.

Each appraiser, independently and separately, will determine the value of the property and the value of the loss. If they can agree on the value of the property or loss, then that is the amount that the insurance company is obligated to accept. If they cannot agree, which frequently happens, then it is submitted to the umpire. If the umpire agrees with one or the other of the appraisers, then that decision is binding.

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Each party (the insured and insurer) will pay the appraiser they appointed for their services, and they will bear the other expenses of the appraisal and umpire equally. Note that this is a little different than many mediation provisions in other insurance contracts, as frequently they will state that the “losing” party will have to pay for the expenses of the umpire, and sometimes, even for all of the expenses of both appraisers and the umpire.

NOTE: The insurance company still retains its right to deny the claim.

CONSUMER APPLICATIONCitiservice Signs is insured under the Signs Form of their Inland Marine policy. While

installing a sign for the Interpol Pizza Parlor, they had finished the job, but before they could completely remove their scaffolding, a bus accidentally sideswiped their truck parked next to the scaffolding, causing the scaffold to collapse, breaking the erected sign on the way to the ground.

Citiservice filed a claim with their Inland Marine insurer, Substantial Insurance. However, Substantial made an offer to just pay for the broken sign, and not for damage to the vehicle or the scaffolding, or for the removal of the sign and a new one erected, which the insured felt was necessary. Citiservice appointed Leland White, the owner of another well-established sign company, as its appraiser. Substantial Insurance appointed Charles Brown, their local attorney, as appraiser. Together, they agreed to appoint Sam Brown, an attorney, CPA and retired FBI agent as umpire.

Upon conclusion of the appraisals, Brown agreed with White that the insurer should pay for the loss in the amount of $45,000, which included a new sign and labor to remove the old sign and erect the new sign.

However, Substantial decided to deny the claim because their Signs Coverage Form clearly does not cover breakage, which occurs during installation, repairing or dismantling. Of course, Citiservice maintains that the sign had been erected, and just the scaffolding was being removed, etc. (Also, Substantial maintains that the city should bear the cost because it was one of their busses that hit the truck, etc., etc. )

C. DUTIES IN THE EVENT OF A LOSS

In case of a loss, there are certain duties that the insured must perform, as in all insurance policies. Some of these duties are very obvious, but since a loss may involve millions of dollars and may hinge upon accurate reporting of the loss, and also since some of these duties involve a specific and time-consuming effort on the part of the insured, these stipulations are necessary.

The police must be notified if any laws have been broken. Many times an insurer will take no action whatsoever unless a police report has been filed in those circumstances where laws are broken &/or the police should be involved.

The form stipulates that a “prompt” notice of the loss including a description of the property involved, must be filed with the insurer. Obviously the insurer has to set up claims reserves and

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take proper action provided the property affected by the loss was covered under the policy by the insurance company.

The insurer also needs to know how, when and where the loss occurred, and needs to know it as “soon as possible.” The time for notification of a loss varies by types of insurance, and varies from 20 days for health insurance policies, 10 days for windstorm damage, and hail insurance damage within 48 hours. Since the Inland Marine policy covers such a wide variety of situations, the general Conditions only specifies “as soon as possible.”

The property covered under the policy, the subject of the “loss”, must be protected from further damage. This often is not fully understood by the insured, who will leave the loss unprotected “until the claims people show up.” By not taking protective action, further damage can be suffered. Also, if it is possible, the damaged property should be set aside and arranged so that a claims examiner can easily make their examination of loss. The insured is obligated to keep a record of any expenses incurred to protect the property, as it will be taken into consideration in the settlement of the claim. Note that it says, “taken into consideration” and does not specifically say that they will pay for the expenses.

CONSUMER APPLICATIONYe Olde Gem Shoppe (Gem) has a Jewelers Block Coverage Form Inland Marine policy with

Substantial Insurance. They have special limits for property in Show Windows, as they are noted for their gem display. It has been their practice to leave the gem display in the window at night as the street is brightly lit, and they have “special” hurricane-strength glass in the window, plus they have a folding grille over the window and they have a security system.

One night thieves broke the locks on the grille, broke the glass, and the jewelry that they could not reach, they reached in with hammers and destroyed. They escaped before the security company could arrive or notify the police.

The next morning, Gem contacted Substantial and informed them of the loss. They filed a report with the Police Department. Gem told them that they had to protect the jewelry that had been in the window and had not been stolen.

Sensing a good publicity situation, Gem brought in a glass replacement company on a special, emergency basis, who installed a superior type of glass – much better than the one replaced. The jewelry that had been damaged was prominently displayed in the window and drew crowds all day. They hired a special protective service to have full time, armed security personnel on duty 24 hours a day. They had a special sign made advertising the damaged jewelry as a special “as is” price.

When the loss was settled, the insurer felt that Gem had gone overboard on expenses to protect the jewelry, and refused to pay for several items, such as the 24-hour guard, the special sign and the installation of special glass. They considered these as excessive expenses.

The insured must not make any statement that will assume any obligation or admit to any liability, to which the insurance company may be liable, unless they have the consent of the insurance company.

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CONSUMER APPLICATIONThe Musicale, a musical instrument sales and repair store, had a Camera and Musical

Instrument Dealers Coverage Form with Substantial Insurance. Johnson brought in a viola that had belonged to his grandfather who had played with the Vienna Orchestra years ago, for an appraisal. Musicale gave it an estimated value of $75,000, but indicated that if Johnson wanted to sell it, it should be refurbished. Johnson agreed to allow Musicale to refurbish the viola, which Musicale did at a cost of $3500. Johnson then agreed to allow Musicale to display the viola and if it were sold, Musicale would get a 20% fee, instead of the refurbishing fee. The viola was displayed at the front of the store, so that when a customer entered, the viola in a locked glass case was the first thing they saw.

Late one afternoon, a young person entered the store, smashed the glass case in an obvious attempt to steal the viola. The viola was fastened with a thin cable, not readily apparent, to the base, so when the thief could not get the instrument, he smashed the viola with his hammer and then fled.

After calling police and making a police report, and then reporting it verbally to Substantial Insurance, they contacted Johnson who came to the store to view the damage. The viola was totally destroyed.

Since they had agreed that it would be sold for $125,000, Johnson wanted $100,000 (80% of $125,000). The owner of Musicale was very upset, and made the statement that he felt that if he had not put the viola in such a prominent position, this would never have occurred. He continued to blame himself for the “fragile” case in which it was placed, etc.

Substantial was very upset when they interviewed Johnson and he told them what the owner had said. The assumption of this risk, even in part, was a direct violation of the policy. Substantial could deny the claim, or if they wished, pay all of the claim, or adjust the claim to reflect the loss of fee to Musicale. The attorneys for Musicale and Substantial could run up big fees in a situation like this.

The insurance company must be allowed to inspect the property and any records proving a loss. This may seem like a “of course” statement, but it can be imagined that some businesses might not want the insurance company to be “sticking their nose into their business.” Some businesses simply do not want anybody, regardless of whom it might be, looking into their books for any reason, as they are nervous that the IRS might come calling.

The insurance company goes one step further and rightfully so. They have the right to question the insured under oath, and further, this can be done at any time that is reasonable, as long as the questions pertain to the insurance or the claim. This includes any books and records of the company, and any answers given by the insured must be signed by the insured. While this may seem severe, it must be remembered that thousand and even millions, of dollars can be involved and the insured is the only one that really understands the entire situation. When a claim is filed, the insurance company in effect, takes the place of the insured. However, they cannot know as much as the insured unless the insured cooperates fully, and is willing to make statements that can be relied upon for any legal matter.

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In the same vein, the insured must submit to the insurance company, a signed and sworn statement containing the information that the insurance company will request regarding the claim or loss, and it must be done within 60 days after the insurance company requests it. Sixty days is fully reasonable for the greatest majority of losses, and if for some legitimate reason, it cannot be accomplished within 60 days, an insurer would be hard pressed to deny a reasonable extension. The insurer will furnish any claims forms or papers to be completed.

And, the insured is required to cooperate with the insurance company in the investigation or settlement of the claim. Makes sense, as a claim is actually a request by an insured for indemnification by an insurance company for a loss incurred from an insured peril. Therefore, it just makes sense for an insured to cooperate. Besides, if he doesn’t, he may not be indemnified…

D. INSURANCE UNDER TWO OR MORE COVERAGES

When an insurance policy is actually “constructed” of more than one “form”, with each form having its own requirements, coverages and conditions, on occasion there is bound to be duplication of coverage within the policy. Therefore, if a situation is a loss under one part of the policy, and is also a loss under another part, the insurance company will only be responsible for one “loss.” Another one of those “makes sense” provisions.

E. LOSS PAYMENT

The insurance company agrees that they will pay any claim or loss which is covered under this Coverage Part, within 30 days after one of the following events:

The insurance company and the insured have come to a mutual understanding, There has been an entry of a final judgement, or There has been the filing of an appraisal award.

The insurance company will not be liable for any part of a loss that has been paid for or replaced or “made good” by others. This is also addressed in the Condition below.

F. OTHER INSURANCE

Warning – Warning! The duplication of coverage provision under an Inland Marine policy is as strict and more so, as with any other type of coverage. In effect, it says that if an insured has another policy covering the same loss as under the Inland Marine policy, the insurer will pay only the excess over what the insured should have received from the other company. Not too bad, so far. However,

the insurer will pay only the excess whether the insured can collect from the other insurance company or not.

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Note: This “excess” basis applies to all Inland Marine forms except for the Mail Form. Also note: Some texts state that all of the commercial Inland Marine forms (except Mail Form) respond on an excess basis if other insurance is in force on the damaged property. “Excess” insurance is defined as coverage over and above any valid and collectible insurance, which seems contradictory to the statement made in the standard policy form, as indicated above. This problem has been overcome by an agreement by the insurance industry with the result that generally they agree to share the loss according to some published guidelines.

G. PAIR, SETS OR PARTS

Some losses are to only a portion of the total object, such as one earring, 2 or 3 dishes from a full set of valuable china, or even a “part”, such as part of the scenery in a theatrical production. Therefore, they are treated as two situations:

1. The insurer may repair or replace any part to restore the pair or set to what its value was before the loss occurred, or

2. pay the difference between the value of the pair or set before and after the loss.

In case of “parts”, the insurance company will only pay for the value of the lost or damaged part.

CONSUMER REPORTThe Gayety Theatre is a Dinner Theater and is covered under a Theatrical Property Coverage

Form. For their major production, they had scenery built and painted in Hollywood at considerable cost. One part of their scenery portrays a Swiss Alps Mountain scene, and they have a standing offer from an art collector to purchase all of the scenery when they finish with the production using it, for $500,000. However, it must include the Swiss Alps scene, which he felt was worth $200,000.

During a production on a summer afternoon, the Swiss Alps scenery was not on stage but was stored in the rear of the theatre temporarily until the third act. A violent rain and hailstorm occurred, causing water to come through the ceilings and ruin the Swiss Alps scenery. A claim was made under their coverage.

The Theatre made a claim for $500,000, as they stated they could not perform their production without the Swiss Alps scene, and since they had been offered $500,000 for the scenery, they felt that amount was what they should receive.

Under the provisions of their policy, however, they will be offered only the value of the Swiss Alps scene.

H. PRIVILEGE TO ADJUST WITH OWNER

In those situations where a loss involves property of others in the care of the insured, the insurance company reserves the right to settle directly with the owners of the property. If the insurance company does settle with the owner, the receipt of the settlement will satisfy any claims the insured has against the insurance company.

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In a preceding Consumer Application, the viola that was smashed was the property of another person other than the insured. The insurance company could settle directly with the owner of the viola. (In the preceding situation, where the insured made certain damaging statements accepting part of the blame, the insurance could, if they so desired, settle directly with the owner, leaving nothing for the insured since he had accepted some responsibility.)

An important provision (condition) is that if the insured is sued by the owner of property entrusted to the care of the insured, the insurance company may provide a defense for any legal proceedings brought against the insured. This defense will be paid for by the insurance company, and the cost of the defense will not impact the applicable Limit of Insurance on that policy.

I. RECOVERIES

Sometimes, some of the property included in the loss, can be salvaged, or in case of a theft, for instance, can be recovered. If the insurance company has paid the claim, but some of the “lost” property has been recovered, in effect it belongs to the insurance company. Recoveries from a salvage company when property is damaged, for instance, is resold. This is different than in other forms of insurance – for instance under auto insurance, frequently the policy will allow any recovery to offset the insured’s deductible. Under the Inland Marine policies, the insured receives no benefits at all until the insurer has been reimbursed in full.

J. REINSTATEMENT OF LIMIT AFTER LOSS

When an insured item insured for a certain amount ($10,000 for example) sustains damages of 50% ($5,000), the question frequently arises, “Does the item now have coverage of $5,000 remaining, or $10,000? Policies differ as how this is handled, but using the ISO “Condition”, the limit is not reduced by payment of any claim, except if there is a TOTAL loss of a scheduled item, then that item would no longer be insured and any premiums pertaining to that particular item, will be reimbursed to the insured. (They should not be paying premiums for a coverage that is not available). However, if the item is restored or repaired, and is again worth the original amount ($10,000 in this case), then the Limit of Insurance goes back to $10,000.

CONSUMER APPLICATIONNatural, Inc., is a logging company whose equipment is insured under a Contractors

Equipment Insurance Company and the insured equipment is scheduled, which includes a loader with a value of $45,000 and insured for $45,000. A wildfire in the woods damages the loader but it leaves it in a repairable condition. The cost to repair the loader will be $12,000. When the loader is repaired and back in service, the full value of the loader - $45,000 – will be restored.

If the loader had been damaged in removing it from the woods before repair, then in case of a total loss the amount paid would have been the $12,000 plus the damages from moving the loader.

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If the loader had been totally destroyed, then any advance premiums paid for coverage on the loader, would be returned to Natural.

If the loader is replaced with another loader, then the new loader would be scheduled onto the policy, probably for the amount that Natural paid for the loader. It could be more or less than $45,000.

K. TRANSFER OF RIGHTS OF RECOVERY AGAINST OTHERS TO THE INSURER

If an insured has made a claim, paid by the insurer, and then the insured is able to recover part or all of the damages from another person, the rights to recover that amount is transferred to the insurance company. This transfer of recovery rights is known as “Subrogation” and is common in many insurance policies. For future reference, a definition of Subrogation is in order here.

Subrogation is the circumstance where an insurance company takes the place of the insured in bringing a liability suit against a third party who caused injury to the insured.

There is a little more to it than that, however. The insured MUST take all actions in such cases to make sure that recovery is accomplished. It is not far-fetched to think that some insureds just don’t want the “hassle” of having to try to get some of the money back from another party after having received damages from their insurance company. Also, if the insured should be so foolhardy (or other words) to sign a statement releasing the other person from liability, then the insurance company has the right to refuse to pay the claim, or to recover the amount if the claim has already been paid.

CONSUMER APPLICATIONIn the previous Consumer Application where a bus hit the truck belonging to the sign

company – assume that the bus was a private bus owned by the brother-in-law of the owner of the sign company (the insured). The brother-in-law appealed vigorously to the insured to make the situation “go away” as an insurance claim would ruin the bus company as they already had quite a few insurance claims. Legally, if the Inland Marine insurer paid the claim, they could subrogate (assume the rights of the insured) and make a claim for reimbursement from the bus company’s insurer.

The insured, feeling pressure from his wife, figures that since he already has his money, then there is no reason to make good old Ralph (his brother-in-law) pay, so he writes a statement releasing Ralph (and his insurance company) from any liability, as the truck shouldn’t have been sticking that far out in the street anyway.

Guess who is probably going to have to foot the entire bill of replacing the sign, out of his own pocket! Does anyone believe that Ralph will step up to the plate and pay his fair share?

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GENERAL CONDITIONS

A. CONCEALMENT, MISREPRESENTATION AND FRAUD

The coverage part is void if the insured is involved in fraud, in any situation regarding the property or the coverage of it, or if the insured intentionally conceals or misrepresents a material fact regarding the covered part, covered property, or the insured’s interest in the covered property.

Interestingly, Marine and Inland Marine insurance treat concealment, misrepresentation or fraud differently. Since Marine insurance can, and frequently does, cover a ship or cargo that is out at sea, any concealment, misrepresentation or fraud voids the policy ab initio (from the beginning). However, with Inland Marine insurance, the insurer has an opportunity to inspect the proposed insured’s carriers, cargoes and/or operations and any other area of interest.

The Condition says “if the insured intentionally conceals or misrepresents a material fact.” A “material” fact is one that is so important that if the insurance company had known about it, it would never have issued the insurance, paid a claim, or even determined the premium.

Practically, it is difficult to void coverage under an Inland Marine policy, unless the fraud perpetuated is material to the loss. It is unusual for coverage to be voided because of concealment or misrepresentation that was immaterial to the loss also.

CONSUMER APPLICATIONBruce moves to Fargo, North Dakota and opens a camera store. He applies for Inland Marine

coverage under the Camera and Musical Instrument Dealers Coverage Form. On the application, questions about previous business experience and personal information was required. Prior to moving to Fargo, Bruce had been in prison in Georgia for forgery for 2 years, as he had been forging government bonds. Bruce did not mention this on the application, but listed the company where he had worked (and forged), as they were, obviously, now out of business. The application was received and the policy issued.

After being in business for a year, burglars broke into his store and stole some of his most expensive digital cameras. When the police report was made and was sent by the policy directly

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to the insurer at the request of the insurance company, mention was made of the prior incarceration of Bruce.

The insurance company was not thrilled with having an ex-forger as a client, especially with a camera shop. However, since the past history was immaterial to the loss (the police cleared Bruce from any complicity), the insurance company would be compelled to pay the claim.

B. LEGAL ACTION AGAINST THE INSURANCE COMPANY

The insured may not take any legal action against the insurance company unless there has been full compliance with all of the terms in this coverage part. Also, any such action must be taken within two years after the insured has knowledge of the “loss.”

CONSUMER APPLICATIONBruce (see above) filed a claim for $26,750; the sales price of the cameras that were stolen.

However, his insurer, Substantial Insurance, offered him only $21,500, which was approximately the price that he had paid for the cameras from the wholesaler and manufacturers.

Bruce had agreed to an appraisal, with the result that the umpire declared that the $21,500 was sufficient. Bruce’s appraiser was adamant that Bruce should receive the higher amount. Bruce complied with all provisions of the agreement, notifying the insurance company immediately after loss, notifying the police, protecting other cameras that were not stolen, etc. Therefore, Bruce filed a lawsuit against Substantial insurance for the difference plus attorney’s fees, and it was filed within 6 months of the date of the loss.

In this case, a court would decide what the proper amount of the loss was, and whether Bruce has fully complied with the policy conditions.

C. NO BENEFIT TO BAILEE

A “Bailee” is someone who has possession of another’s property, and in case of a loss or damage, is responsible for the property. The purpose of the clause, that states that no person or organization who has custody of the property (except for the insured, of course) will benefit from the insurance policy, is to preserve the right to subrogation.

Bailees’ contracts and Bills of Lading, which are used by carriers, may have a provision that states that the Bailee or carrier shall have the full rights of any insurance, in effect relieving the Bailee of liability for damage to the property. This would appear to be in conflict with this clause in the Conditions. Actually, the provision in the Bills of Lading or contracts of Bailees, means that if the insured collects a loss payment from an insurance company, then the Bailee does not have to pay the claim. But the Inland Marine policy provides that if the Bailee is relieved from its obligation of paying for a loss because of the insurance, then the insurance company does not pay anything.

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This provision helps to preserve the right of the insurance company to pay a loss to the insured, and then collect it from the carrier. But, to make things more complicated; this is not necessarily true in all cases. Therefore, if this situation arises and there are some doubts as to how it should be handled, the insurance will frequently pay the insured by using a loan receipt. In effect, the insurance company lends the loss amount to its insured, but with the condition that the loan will be repaid only if the loss is recovered from the carrier or the Bailee. Then the insurance company sues the carrier or Bailee in the name of the insured. If the suit is successful and the insured is able to collect from the Bailee or carrier, then the loan is used to repay the insurance company. Conversely, if the insured is not successful in the suit, then the insured has no obligation to repay the insurance company. This really proves that “there is more than one way to skin a cat.”

CONSUMER APPLICATION Oily Machines, a distributor of various types of specialty industrial equipment, frequently

uses the Bertram Machinery Shop to repair industrial equipment that had been returned to Oily for repair. Oily has a Bailor policy because since they have to be responsible to their customers, they need this protection in case Bertram does not pay a claim quickly if they damage the equipment, or if they refuse to pay. Bertram has a Bailee policy covering equipment that it is repairing.

Sure enough, Oily sends a large valve-reducer machine to Bertram for repair, which included welding. Bertram’s welder used an acetylene welder instead of an electrical arc welder that the manufacturer suggested for repairs of that type, with the result that the flame of the acetylene caused further damage to the valve-reducer.

Oily makes a claim against Bertram who refuses to pay on the grounds that Oily should have make them aware of the welding hazard. In the meantime, the customer of Oily needs the valve-reducer as he is losing money every day it is not operable.

In this case, Oily’s Bailor policy could pay Oily the amount of the claim, which Oily could then pay to his customer. The insurer could also issue a loan receipt for the amount of the claim to Oily. Therefore, when Oily’s insurer uses its right of subrogation in suing Bertram’s insurer, and if it is successful and Bertram’s insurer pays the claim directly to Oily, then Oily will have to return the money to its insurer. On the other hand, if Oily’s insurer is not successful, Oily will not have to pay any money back to the insurer.

D. POLICY PERIOD

While the policy forms states briefly that losses are covering during the policy period as shown in the Declarations, it is a little more complicated than that.

The policy inforce date and expiration date is contained on the Declaration page. Some Inland Marine policies only cover a specific event at a particular time, and usually of limited duration. Examples would be the shipment of a particular cargo, or the installation of certain equipment. Then there is some Inland Marine policies that provide coverage until the policies are cancelled and have no specified expiration date. Most policies, however, are good for one year.

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Note that this rather simplistic condition covers losses that commence during the policy period. It is not necessary that the entire loss occur before the end of the policy period. Conversely, if a loss occurs prior to the inception (inforce) date, it is not covered under the insurance.

CONSUMER APPLICATION Arthur’s Drayage Service is insured under an Inland Marine policy, covering, among other

things, cargo that is delivered on short hauls locally. This policy expires on December 31 at midnight. Arthur’s had a cargo in a truck to be delivered January 2 (the day after New Years) and the truck was sitting in the truck yard behind a chain link fence. A fire broke out in the cargo of the truck, believed to be caused by as New Years Eve reveler, probably throwing a lit cigarette into the cargo, or possibly being ignited by fireworks. In any event, it smoldered until the afternoon of January 1st, when a passing police car noticed the smoke arising from the truck. The cargo was nearly all destroyed because of the fire.

The insurance policy expired at midnight on December 31st. However, the policy would still cover the fire, as it was started – according to the fire marshal – prior to midnight.

E. VALUATION

The ISO form states that the value of property will be the least of 1. The actual cash value,2. The cost of the reasonably restoring the property to its condition immediately before the

loss, or , 3. The cost of replacing that property with substantially identical property.

Generally, insurance companies will determine the actual cash value of an item as the replacement cost of the item or of a similar (like) kind of item and quality, less depreciation on the damaged (or lost) item.

CONSUMER APPLICATIONA combine (used on farms) was purchased for $250,000 by an insured (under Equipment

Dealers Form) 2 years ago and newer models are now on the market. In case of a loss of the combine, if it was determined that it depreciated 10% per year, then the claim paid would be $200,000.

When the property insured is new, actual cash value is considered the same as replacement cost, as there usually is not depreciation on unsold merchandise. Expensive items, such as the combine above, are an exception to this. But because of this, Inland Marine is seldom written on a “formal” replacement cost basis.

As other forms are studied, note that some of them will change or amend the “Actual Cash Value” provision, depending upon what is covered. As an example, the Jewelers Block Form

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states that the coverage will be the lowest amount that appears on the inventory/stock books/ other stock papers/ or lists that existed at the time of loss – provided, of course, if that figure is less than the Actual Cash Value or repair/replacement value of the property. The reason that this type of language is used in Jewelers Block Forms is that jewelry can go up (or down) in value more dramatically and more often than other kinds of merchandise, as it depends entirely upon market conditions. The same, to differing degrees, can be found in mail, film and accounts receivable forms as they have there own evaluation peculiarities.

In some cases in Inland Marine policies, certain classes of property must be valued at time of contract, particularly those that are difficult (or in many cases, impossible) to replace. Examples could be paintings or manuscripts. By declaring a value up front, it eliminates valuation problems if claims occur later. If the items increase in value substantially during the policy period, then the insurer must be notified and arrangements made to come to an agreement as to the new valuation.

One other thing in this vein – according to the Inland Marine division of the ISO Manual, which is different than that found in the policies, there might be a valuation based on another basis agreeable to the insurance company and the insured. One excellent example of this is where property being transported is valued at the invoice cost, as that would be a lot easier to determine than trying to establish an Actual Cash Value valuation amount.

The last statement in this Condition states that in case of a loss, the value of the property will be determined as of the time of loss. Of course, this does not apply to those situations where the value of the property is determined when the policy is issued.

CONSUMER APPLICATIONDon has a computer sales and repair store and buys out a rather large computer and EDP

equipment sales company, the EDPWarehouse, located about 1,000 miles away. The price paid for EDP was agreed upon by mutual agreement between Don and the former owners of EDP. A lot of it had to be “guess-work” as many of the data processing items have suffered from drastic depreciation, whereas others have either kept their value, or are presently selling for more than what EDP paid for them.

Don contacts Orange Transport to move the material to his store. The value of the property is called into question for insurance purposes. The insurer of Orange agrees to accept the invoice cost, or what Don paid for the equipment, as it would be very difficult in trying to determine an actual cash value.

OTHER CONDITIONS

DEDUCTIBLEMost of the ISO commercial Inland Marine policies carry a mandatory minimum deductible.

The deductible is applied before any claims are paid. In essence the deductible is subtracted from the amount of the loss before the limit of insurance is applied. In some cases, the full

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amount of the insurance will be paid if the amount of the loss exceeds the applicable limit of insurance.

CONSUMER APPLICATION Dr. Johnson has diagnostic machinery insured under a Surgeons Equipment policy for

$250,000, with a $1,000 deductible. The machinery is lost in a fire and the amount of the loss was determined to be $275,000. Since subtracting the deductible from the loss amount would leave $265,000, which is in excess of the Limit of Insurance, the insurance would pay the $250,000.

COINSURANCE

Coinsurance and Deductible often become confused by insureds. Coinsurance is a method that insurance companies use to encourage insureds to purchase the full value of the property insured, or to at least a stipulated percentage.

The provision is found in many ISO coverage forms. A typical provision would state that “All covered property, (except property in transit) must be insured for at least 80% of its total value at the time of loss,” otherwise the insurer will pay “only the proportion of the loss that the Limit of Insurance (shown in the Declarations for all covered property at all covered locations) bears to 80% of the total value of all property (at all locations) at the time of the loss.”

Some insurers may require that the total amount of the covered property be insured, in effect at “100%” coinsurance. Some policies will include the value of all owned and rented property; therefore it must be taken into consideration in determining the limits of insurance.

CONSUMER APPLICATIONJoe’s Photography has two stores and has insured the equipment and stock in both stores for

$200,000. The policy has an 80% coinsurance clause. A fire in one of the stores causes loss and damage of $90,000. At time of loss adjustment it is determined that the total value of equipment and stock in both stores is $300,000. Since Joe did not have 80% of the total value covered (80% of $300,000 = $240,000), the insurer would pay $200,000/$240,000, or 83% of the $90,000 loss, - Joe would receive a check for $77,190.

Because of the many, many items and situations that can be (and are) covered by Inland Marine policies, there must be certain contradictions. However, at the conclusion of this text, it should be apparent that the present forms, as complicated as they seem to be, are obviously the result of much hard work and detail.

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STUDY QUESTIONS

1. Common Policy Conditions for Inland Marine insurance include “General” Conditions.A. General Conditions are those conditions other than “Loss Conditions.”B. General Conditions contain provisions for Abandonment, and Appraisal.C. General Conditions refer to methods and amounts of premium payments.D. General Conditions are those conditions that affect how losses are paid.

2. The following actions that must be taken by an insured in case of loss under and Inland Marine policy, do NOT include:A. The policy must be notified if any laws are broken.B. A prompt notice of the loss must be made to the insurer.C. The insurance company may question the insured in detail, but may not question the

insured under oath or require access to books and records.D. The insurer may inspect the property and records that prove the loss.

3. In case of a loss, which is covered by two insurers, one insurer refuses the pay for the loss, the other insurer agrees to pay for the loss.

A. Both insurers will pay 50% of the loss.B. The insurer that agrees to pay for the loss will pay 100% of the loss.C. The insurer that agrees to pay for the loss will pay the excess over what the other insurer

should pay, even though the other insurer does not pay.D. Neither insurance will provide payment for a loss.

4. Ballywag Inc. files an Inland Marine claim for $15,000 for loss to a scheduled item that has a limit of insurance of $25,000. If it is determined that the loss is a total loss and cannot be replaced or repaired

A. The insurer will pay Ballywag $15,000.B. The insurer will deny liability completely.C. The $15,000 will be paid and any unearned premium on the scheduled item will be

returned to Ballywag. When the item is replaced, new insurance will be issued for the new scheduled amount or limit of insurance.

D. Ballywag will receive $25,000, and the policy will be kept open until the item is replaced, at which time its limit of insurance will not exceed $25,000.

5. When an insurance company takes the place of the insured and sues a third party which caused the liability, this is called

A. Replacement.B. Subrogation.C. Excess Insurance.D. Waiver of Liability.

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6. The insured deliberately misrepresented the contents of a cargo. What would be the difference if the cargo was shipped by common carrier or by a ship at sea?

A. The Marine insurance cannot be cancelled until the ship has reached a port.B. The Inland Marine company has an opportunity to inspect the cargo and other affiliated

area as it is not easy to cancel or void Inland Marine insurance. The Maine insurer would cancel ab initio, e.g. void the policy from the beginning.

C. There is no difference, they both would cancel when the cargo reached its designation.D. Both insurers would void the policies regardless of what any investigation may find.

7. Under Inland Marine insurance, one important provision is that no person or organization who has custody of the insured property will benefit from the insurance policy. Why is this?

A. It keeps the insured from selling an insured item and replacing it with a cheaper item, in the meantime keeping the valuation of the more expensive item.

B. It is to keep unlicensed agents from selling Inland Marine insurance.C. It preserves the right to subrogation.D. It makes it necessary for the Bailor to obtain insurance, therefore increasing the sales

of insurance by the insurance company and agent.

8. Which is the best method of determining value for insurance purposes for paintings or other works of art?

A. Cash value valuation.B. Agreed valuation at time of contract.C. Replacement Value.D. Cost of restoration.

9. A shipment of jewelry is being transported by a common carrier and insured. What will the value of the jewelry be in case of a loss?

A. The sales value of the jewelry when it was shipped from the jewelry manufacturer to the retail store.

B. The lowest amount that appears on the jewelry store’s inventory at the time of the loss, or the actual cash value at time of loss, whichever is less.

C. The actual cash value of the jewelry when it was shipped.D. What the estimated value would be if the jewelry were auctioned.

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10. Brenly’s Construction Co. has an insured piece of expensive road-building equipment destroyed by a covered peril. Brenly’s has loss of income coverage. The loss occurred two days prior to the expiration date of their Inland Marine policy with National Insurance. This policy was replaced by a similar policy with the same provision, but written by Industrial Insurance. Who would cover the loss of income?

A. National Insurance would cover the loss of income until the equipment has been replaced or restored and the income stream resumes, under the provisions of that policy.

B. National Insurance would pay up to the time of expiration, and then Industrial would continue the loss of income payments. They would also participate in the replacement

of the machinery on a pro-rata basis.C. If National Insurance is not renewed, there will be no payments for loss of income

from either company as this coverage is settled when the income stream continues, and National did not have the coverage at that time for loss of income, and Industrial has a pre-existing condition clause, so they are not liable.

D. National Insurance would pay the loss of income benefits, but Industrial would pay 50% of each payment unit (day, week, month) until the income stream is resumed.

ANSWERS TO STUDY QUESTIONS

1A 2C 3C 4C 5B 6B 8B 9B 10A

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CHAPTER FOUR - TRANSPORTATION RISK AND LOSSCHAPTER FOUR - TRANSPORTATION RISK AND LOSS EXPOSURESEXPOSURES

The very origin of Inland Marine insurance involved insuring property while being transported on land. This has changed so that now it covers the transportation of property on land, in the air, by railroad or even inland waterway. It remains a large and very important part of Inland Marine insurance.

Because it is so important to understanding Inland Marine insurance, the transportation loss exposures will also be discussed in this chapter to include methods to control loss other than insurance. The specifics of the insurance used to handle these risks and loss exposures will be treated in the next chapter.

PROPERTY SUBJECT TO LOSS

Property is usually divided into real property and personal property, with the major difference being that of portability. Real estate cannot be moved, personal property can. To continue in generalities, only land, large buildings and other large structures cannot be moved. To make a list of property that can be moved, and can therefore be insured under an Inland Marine policy, would take several pages, but importantly would include

money and securities, furniture, equipment, all types of inventory items, supplies, clothing, machinery, data processing equipment, valuable papers, fine arts, jewelry and etc., etc.

PERILS THAT CAN AFFECT PROPERTY WHILE IN TRANSIT

The same things (perils) that can happen to fixed property can also happen to property while it is being moved, plus other perils relating only to the moving process.

Fire can occur to property while fixed, or while moving and in transit, and while it is being stored in a warehouse. The conveyances can be subject to such perils as being overturned, demolished or otherwise damaged by a variety of causes. Windstorm can cause damage to goods in transit, and actually to the conveyance itself. While being transported, property can suffer

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damage by aircraft damage, vehicle damage, riot, civil commotion, explosion, smoke, vandalism, etc., etc.

While property is being moved from one area to another, it is highly subject to crime loss. While it is common knowledge that particular cargo is susceptible more than others – such as televisions, computers, cigarettes, etc. – even such things as a truckload of steel has been hijacked. Normally, thieves are more interested in items that are easily marketed and are in small units. The exposure for theft or hijacking is much easier when the property is on the move, as security is very difficult.

While there is a chance of flood, it usually is more remote as railroads and highways are usually warned sufficiently in advance of rising waters, so that the flooded areas can be avoided. But in nearly all flood pictures in the newspapers or on television, there seems to be at least one large semi-truck sitting in water almost over the cab.

Earthquakes are also remote causes of loss, but when trucks are parked in an earthquake area, there will be considerable losses. Again, pictures of earthquake damage seem to show a lot of trucks wrecked when overhead highways collapse.

The collision and upset perils are particularly prominent when cargo is in transit. Trucks run into each other, trains derail, trains run into trucks, airplanes can crash, etc.

The perils of “misdelivery” and “nondelivery” are exposures to property in transit. If property is not delivered to the right party, or simply is not delivered to anyone, then the shipper, the carrier, or the consignee has a loss staring them in the face.

Then there are a multitude of other perils, such as wear and tear, loss of refrigeration, excessive heat or cold, etc., that can be caused by poor judgement, an act of God, or simply poor wrapping.

CONSEQUENCES OF PROPERTY-IN-TRANSIT LOSSES

As discussed earlier, loss of property or damage to it can reduce the property value, increase the expenses, and reduce the income of the owner or other party. The most usual consequence of losses to property in transit is reduction in value. Recently, the picture of a very large semi-truck that had overturned with a load of pickles, made most of the news programs. There was a huge reduction in value of pickles that were distributed all over the highway and immediate areas.

In many situations, the losses of property in transit does not result from increase in expenses or loss of income. Most property that is essential to the owner’s business can either be replaced or repaired. However, if the loss is of property that is “one-of-a-kind” or custom-made, then there could be substantial losses in income. If the owner had to rent equipment in order to stay in business, then expenses could be quite high.

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PARTIES TO A LOSS

Usually in case of a transportation loss, there are two parties involved, (1) the shipper (also known as consignor) or receiver (consignee), and (2) the carrier. The contract terms or terms of the sale will dictate when the custody and responsibility of the cargo transfers from one party to another, usually from the shipper to the receiver. Regardless, the carrier will have some legal responsibility for any loss or damage to the shipment while in the carrier’s custody.

If the carrier does not actually own the property, there are assumptions that the carrier is fully responsible for the cargo while it is in their custody, or to put is another way, all loss exposures have been transferred to the carrier. However, if the carrier is insolvent, establishing responsibility will do little good. Besides, it often is very difficult to determine exactly when responsibility is transferred to the carrier.

During this discussion of exposures, it is important to remember that there can be different exposures for the shipper, the carrier, the consignee (and the owner, if the owner is not the shipper, carrier or consignee).

CARRIERS

In this context, a Carrier is a person or organization that has custody of property that they are transporting from one location to another. The most important methods of moving property are by railroad, trucks, waterways, pipelines and aircraft (few people who are not conversant with Inland Marine insurance realize that pipelines is a method of moving property), and each of the methods have their own particular and peculiar exposures. Aircraft transportation is the most expensive, third in dependability, (we’re talking cargo, not passengers), and is the least fuel efficient. The same study shows that pipelines are ranked the highest on losses, and railroads are the lowest. Pipelines are the most dependable, and waterways are the least dependable.

To properly classify carriers, they can be common carriers, contract carriers, exempt carriers and private carriers. Carriers operate under the Interstate Commerce Act (ICA), the program that regulates interstate commerce, and applies to those carriers that cross state lines. Those that do not cross state lines are called “Intrastate” carriers.

There is a major problem in determining as to who falls under the ICA as many shippers, carriers, and even insurance companies become involved in short trips in and around areas that border state lines. Therefore, the law provides for “exempt zones.” Certain commodities are also exempt from ICA control – originally designed to protect farmers taking produce to market. Therefore, certain products of fishing and agriculture are exempt.

COMMON CARRIERIn English Common Law, there were certain activities that were considered to be operating in

the public’s interest and were called “common calling.” These included common carriers, 59

innkeepers, surgeons, schoolmasters, etc. Today, all of the “common” callings have lost their special status, except for common carriers. A common carrier is a transportation firm that must carry customer’s goods if the customer is willing to pay. A common carrier may choose to restrict its activities within certain spheres or areas of operation, for instance only certain types of goods (milk carriers, refrigeration trucks, etc.), or to certain type of shipments. There cannot be any discrimination within the category served by the carrier, however. Of course, when a cargo is illegal or contain explosives or corrosive material, or items are not safely packaged, or can contaminate other cargo, then the carrier can refuse to haul it. The carrier can refuse to carry material if the carrier does not have equipment available or there is no room on the vehicle.

Generally, railroads have few restrictions as to what they will carry, trucking lines can be more restrictive, and pipelines are very restrictive as to what they carry.

The common carriers in nearly all cases, operate under authority granted by the Interstate Commerce Commission (ICC) and under state bodies, known as Public Utility Commission or similar name. They specify what cargoes can be carried and under what conditions. A carrier only has to show its ability to provide the advertised services.

CONTRACT CARRIERSContract carriers do not have to have authorized routes and are relatively free to carry cargo

for anybody between any points, and under individually negotiated contracts. In other words, the Common Carrier is able to offer its service to the general public, whereas the contract carrier operates under special and individual contracts. While Common Carriers are issued a “certificate of public convenience or necessity,” Contract Carriers are issued a “permit.”

Railroads used to be almost entirely common carriers, however they frequently now operate as a contract carrier. A large portion of motor truck operations are performed by contract. Scheduled airlines are common carriers, but can also operate as contract carriers by carrying passengers on charter trips (such as sports teams), or special loads under contract.

PRIVATE CARRIERSA Private Carrier is one that carries its own goods for which it is the lessee or bailee. When

cargo is carried by its owner on a truck owned by the owner, there is no chance of recovery for damage from a carrier. Private carriers are allowed to operate as contract carriers on back haul (bringing back a contract load when the truck has made its delivery).

SPECIALTY CARRIERSThere are other carriers categorized as “specialty” carriers, such as Household Carriers,

which operate under the Household Goods Transportation Act of 1980, and are limited to the carrying of household goods. Household goods are defined very broadly, including the contents of stores, museums, hospitals, etc.

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Everyone has seen a huge truck on the freeway carrying a bridge support or piece of steel and/or concrete, the purpose of which is difficult to determine. They operate under the rules of the Heavy Specialized Carriers Conference.

INDIRECT CARRIERS“Indirect Carriers” are defined as carriers to the public by purchasing transportation services

from direct carriers. They make their living on the difference between the rates in small and large shipments. There are three types of indirect carriers:

1. Freight Forwarder – a person or organization that assembles and consolidates shipments, who assume responsibility for transporting shipments from the place of receipt to the destination, and they use a carrier subject to the ICC. Surface freight forwarders are most active in rail and truck services. They take small loads, consolidate them into larger loads, and them ship them by the larger load, piggyback or container loads.

2. Consolidators – is an agent of the shipper and as the title indicates, it consolidates shipments to take advantage of the bulk rates.

3. Shippers Associations – are similar to freight forwarders, but are non-profit and are formed to reduce the costs of shipments to their members.

Different types of carriers can consolidate their services, such as the rail-truck combinations, known as “piggybacking.” This service is offered only by railroads. Trucks-Air is another example of a mixing of carriers, where air cargo is collected by truck, or delivered from airport by a truck owned by the airlines, etc.

LIABILITY OF CARRIERS

The liability of a carrier comes from common law which establishes the principle that a firm making a business of carrying persons or property for consideration, is responsible for their safe delivery. This is not, however, carte blanche liability, as the responsibility can be affected by such things as the bill of lading, and that fact that any exposure to liability of a common carrier exists only while the property is in the control or custody of the carrier. A common carrier cannot control some situations, and therefore there are well established limitations.

A common carrier cannot be responsible for “acts of God”, such as floods, hurricanes, tornadoes and severe storms. Of course, if the carrier was aware of such possibilities and/or had advance warning, then they would be responsible for losses thereof.

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CONSUMER APPLICATIONFarmer’s Transport is a trucking company that collects grain from farmers, and stores it on a

temporary basis in a truck yard in Iowa near the Mississippi river, until such time that there is enough to load into railroad cars for shipment to processing plants. During an early thaw, Farmer’s Transport elected to park their truck trailers full of grain in the truck yard, as they were expecting some vacant railroad cars to be made available within a day or two. Water had been rising in the Mississippi and flooding in many areas, but the yard manager had not paid any attention to the flood forecasts as he thought it would not flood the yard for at least a week.

Overnight, the Mississippi overran the banks, flooding the yard and destroying the grain in the trucks. The farmers demanded payment for the grain but Farmer’s insisted it was an Act of God. However, the court later ruled, following several precedents, that since the trucking company had adequate warning which they ignored, and since they took no action to protect the cargoes, they were responsible for the damage.

While often referred to as “Acts of the Public Enemy”, in reality this refers to an exception where the “public enemy” is another country at war with the United States (assuming the carrier is domiciled in the U.S.) A common carrier does not fall under this exception when a loss occurs as the result of a criminal act. Acts of a terrorist group is still not firmly decided.

Another limitation is the “Exercise of Public Authority,” which is the result of a governmental action or act of a government representative, such as a quarantine. If the quarantined cargo was confiscated, the common carrier would not be at fault.

If a shipper is negligent in packing or shipping some property that obviously would be damaged during transit, then the common carrier cannot be held responsible.

When “Inherent Vice” is present in a property, the common carrier cannot be held responsible. This is the type of property that tends to make the property destroy itself, such as the weathering of tires.

CONSUMER APPLICATIONCattle rancher, Prunty, was taking a herd of about 150 cattle to market. In order to get to the

stockyards in the next town, it was necessary to herd them along a railroad track for about a mile. While the cattle were moving along the railroad track, a train belonging to the Texas and Prairie Railway approached the area where the cattle were, and the engineer sounded the train whistle about 3 times, so as to frighten any cattle off the railroad if they decided to cross in front of the train, and also to warn the cowboys herding the cattle that the train was approaching.

Unfortunately, the train whistle had the reverse effect and the whistle caused the cattle to stampede, resulting in several cattle being severely injured and had to be butchered on the spot as they could not move as a result of their injuries. Prunty took the railroad to court, claiming that it the injuries to the cattle were caused by the railroad. However, the court ruled that this constituted “inherent vice” as it was the nature of cattle to stampede under these situations.(Paraphrasing Texas & P. Railway v. Prunty, 233 S.W. 625 (Tex. Civ. App. 1921).

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Even with these exceptions, it is rare that a common carrier can escape liability from loss or damage, even from one of these above-mentioned exemptions.

LIMITATIONS ON LIABILITY

Even when the common carrier has liability for a loss or damage, there are certain limitations that can apply. This particularly applies when a specified value is stated in the contract. This is also quite true when the common carrier has a different schedule of charges according to the declared values of the items transported. Usually this can be a dollar limitation, such as the usual case of household goods. There is another limitation when the position of the common carrier is reduced to that of bailee, which has more limited liabilities. This would apply in cases such as where the carrier delivers goods to a terminal in the receiver’s locality and the receiver has been so notified. If the receiver does not pick up the property within a reasonable period of time, the liability of the common carrier will be reduced to that of the bailee. (The liability of the bailee will be discussed later in this text).

CONSUMER APPLICATIONBenton Tools shipped a truckload of its mechanical equipment to various retail locations in

and around Oklahoma City, by White Carriers, a common carrier. White delivered the property to a warehouse in Oklahoma City, which operated as a distribution center for Benton Tools. Benton was to contract with Al’s, a local drayage service, to pick up the equipment and deliver them to the various retail outlets in and around Oklahoma City. Delivery to the warehouse was made on Tuesday the 20th. Al’s was very busy with local clients, so the equipment languished in the warehouse for 3 weeks, at which time a rupture in a local gas line caused a fire, which in turn caused damage to the stored equipment.

Benton immediately makes a claim against White Carriers, as they were responsible, almost to the point of “insuring” the goods. However, White Carriers maintained that since the goods stayed in the warehouse for so long after Al’s had been notified, and White was not negligent in storing the equipment or in causing the losses, therefore White was required to use only the care an ordinarily prudent person would exercise under those circumstances. Al’s, the warehouse owner, and Benton will have to untangle the responsibility.

If, for instance, White had stored the material in the warehouse on a Friday, notified Al’s immediately, but Al’s didn’t pick up the goods until Monday, if this was determined to be a “reasonable” length of time (which it would in all likelihood be), then White could be responsible.

Often a shipper will load and seal a railroad car, and the carrier has no chance to check the load, so the carrier will have no liability for the weight, load or count. The Bill of Lading will usually be stamped “shippers weight, load and count.”

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BILL OF LADING

The Bill of Lading when issued by a common carrier, is actually a receipt from the carrier for the goods being transported. Bills of Lading are extremely important is determining liability for transported goods as it also serves as the contract between the shipper and the carrier that sets forth the obligations and responsibilities of both parties.

There are several types of Bills of Lading. On a Released Bill of Lading, the carrier is released from liability above a certain specified amount, whereas a Straight Bill of Lading does not include any limitation on the value that is to be paid by the carrier in case of a loss. An Order Bill of Lading is a Straight Bill of Lading with some limitations and is also used as a method of shipping on a Cash On Delivery (COD) basis. In a COD situation, where the common carriers do not want to take the responsibility for handling the money, the money is usually handled through banking channels.

A Through Bill of Lading covers shipments by more than one transportation company, with a fixed charge for the entire transporting. Actually, it is either a Straight or an Order Bill of Lading, that is marked “Through.” Under this type of Bill of Lading, a carrier who pays a claim has the right to sue the responsible carrier in the event it does not reimburse the paying carrier, and it can also collect attorney’s fees. The shipper can file a claim against either carrier. This does not apply to intrastate or unregulated shipments.

BEGINNING AND ENDING OF EXPOSURES

A common carrier’s exposure to a loss begins when the goods have been delivered to the carrier, and accepted by the carrier and ends when the property has been delivered to the consignee.

The delivery of goods to the carrier is usually clearly established, particularly in the case of packaged shipments. However, in the case of carload shipments from a railroad siding, usually a bill of lading by the carrier upon notice that the car is ready, ordinarily constitutes acknowledgement of delivery to the carrier.

Delivery by the carrier is usually in the form of a receipt signed by the consignee at delivery. When the consignee has to pick up the property at the carrier’s freight depot, the carrier’s liability as a carrier continues for 48 hours, and after that time, the liability of the carrier is that of a bailee.

When cars are delivered to a private or semiprivate sidetrack, delivery by the carrier is accomplished when the railroad car is placed on the sidetrack at a reasonable hour. There is no 48 hour requirement.

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CLAIMS AGAINST A COMMON CARRIER

The claims section of a typical bill of lading is rather explicit and detailed. Common carriers generally enforce the claims section of the bill of lading very strictly. The consignee must note any shortages or damages upon receipt of the goods. Also, it must be recognized that the position of the carrier and the claimant are adverse and the common carrier will attempt by all legal means to reduce or eliminate its liability.

When a common carrier does become liable for loss or damage, it is required to pay the full amount of the loss for which it is obligated. The amount of the loss is usually determined as the market value of the lost or damaged property, assuming that it arrived in good condition at its destination. Expenses connected with filing a claim cannot be claimed. It is unusual for a consignee to collect damages from a common carrier for the loss of use of the property if the property is lost or damaged in transit even thought the common carrier is liable for the loss of the property itself. If the property is partially damaged and is repairable, the consignee may accept the property, have it repaired, and then make claim with the carrier for the actual loss. The consignee could dispose of the property and make a claim with the carrier for the full value of the actual loss.

When property is totally damaged, the consignee can refuse to accept delivery but then make a claim for the full value of the property. The carrier could then dispose of it as the carrier sees fit. However, if the carrier does not exercise that right, the consignee can dispose of the property in the best way that would benefit the carrier, such as selling it for salvage and any money received would be subtracted from the claim.

There are different liability requirements of the various types of carriers. At this point, it should be observed that the mode of transportation and the liability of the carriers are very important in underwriting considerations. The exposure can be measured by the mode of transportation, and the liability of the carrier is very important because of the possibility of subrogation.

Both rail carriers and motor carriers have basically the same liability under their bills of lading. They can limit their liability without prior approval of the ICC. The “piggybacking” of cargo can involve more than one bill of lading. The carrier making the delivery to the railroad can issue the bill of lading, or the railroad can issue the bill of lading, or the carrier that is picking up the load at destination can issue the bill of lading. Rail and truck service provided by railroads in piggyback situations is exempt from ICC regulation, but only if the motor carrier is a subsidiary of the railroad.

The liability of domestic water carriers is quite limited as in addition to the usual limitations, they are exempt from losses due to perils of the water, errors in navigation, rescue efforts, and fire.

Domestic Air carriers are confusing at this time. Originally they limited their liability according to common law and were relieved of liability unless they could be proven to be

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negligent. There was a modest limitation per pound (maximum $50 per shipment). But in 1977, the Civil Aeronautics Board changed the liability of the domestic air carriers to one similar to the surface carriers, the limitation per pound was raised and a shipper could declare a higher valuation (but which they had to pay for). But then, the CAB decided to allow the airlines to use either the original rules, or the new ones, with the result that there is little uniformity at the present time.

International Air Carriers operate under different rules and an air carrier is not liable for loss if it took all necessary steps to avoid the loss, or if the loss was caused by pilot error. The burden of proof is on the carrier.

Household carriers operate under the “Uniform Household Goods Bill of Lading and Freight Bill” which states that the carrier is liable for physical loss or damage from any external cause, and except for loss caused by or resulting from

1. an act, omission, or order of the shipper;2. insects, moth, vermin and ordinary wear and tear;3. defect of inherent vice, including atmospheric conditions such as temperature or humidity

changes;4. war; and5. acts of God, when the shipment is released to $.60 per pound per article.

There has been more recent legislation and now some carriers are able to offer replacement cost on articles lost or damaged while in their custody.

Freight forwarders file their own tariffs, but are subject to ICC rules, which cover shipments from point of origin to destination. Consolidators do not assume liability for loss to goods in transit, even if they have arranged for the transportation.

Contract carriers have a basic liability for negligence in the handling of the cargo. While generally it is against public policy for anyone to contract away the person’s entire liability for negligence, the liability can be affected by provisions of the contract.

CONSUMER APPLICATIONTwinkle Industries, manufacturers and distributors of crystal products, opened a new

warehouse in Atlanta and contracted with Orange Transport to move their crystal products from their manufacturing plant to the warehouse. Orange Transport was very concerned about liability for breakage of the crystal products, as some of them were very fragile.

Twinkle proposed and Orange agreed, that Twinkle would be solely responsible for packaging the products so that they could absorb an impact equal to moving at 35 miles an hour and coming to an instantaneous stop. Orange would not be responsible for breakage even if the crystal was dropped while loading or unloading.

Even if an employee of Orange tipped over a dolly loaded with the crystal, there would be no liability. However, if the driver for Orange was driving under the influence of alcohol (as an example), then Orange would be liable for any damage to the cargo.

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PASSING TITLE OF PROPERTY

Since shipments are very frequently times made to transport property from a seller to a buyer, it becomes very important to determine when title to the property passes. For Inland Marine underwriting purposes, the general rule is that whoever holds the title to the property, bears the risk of loss while the property is in transit.

Sales of property are governed primarily by the Uniform Commercial Code, which permits the buyer and seller to stipulate by agreement when the title will pass. If there is no such “stipulation”, then the title will pass when delivery has been made by the seller to the buyer, and where and when the actual physical delivery is made depends upon the wording of the contract.

In most commercial sales of property, the buyer and seller agree when title passes according to customary shipping terms.

F.O.B. Point of Shipment (F.O.B. means “Free on Board”) is a shipment method whereby the seller assumes the responsibility for any loss or damage until the property is in the possession of the carrier and a bill of lading with no exceptions, has been issued. After that, the buyer assumes the responsibility

F.O.B. Destination obligates the seller to transport the property to the stated destination and offer proper delivery upon arrival. The seller assumes the responsibility for loss or damages until proper delivery has been made. There are many variations of F.O.B. terms.

F.A.S. Vessel (Named Port) means “Free Along Side”, and the seller must transport the property to the (Named Port) and place it alongside the vessel, and is responsible for the property until it has been so placed.

C.I.F., or “Cost, Insurance and Freight”, is used for overseas shipments. The seller is responsible to (1) arrange for transportation, (2) pay the shipping charges, (3) arrange and pay for the insurance, and (4) mail the shipping documents to the buyer. The risk of loss passes to the buyer when the goods have been fully loaded into the vessel or delivered to the custody of the ocean carrier. There is also C&F, which the same except that seller does not have to arrange and pay for the insurance.

INSURABLE INTEREST IN PROPERTY

Theoretically, the party that holds title to the property involved in a sale, has the risk of loss or damage to the property. However, under certain situations the seller can be exposed to loss after title has passed to a buyer, and a buyer could be exposed to loss before title has passed from the seller to the buyer. As an example, a manufacturing firm could order special machined parts

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from a machine shop. If the parts are destroyed in transit before title has passed to the buyer, the buyer could suffer loss of business income while the parts are being remanufactured.

There are other rules under the Uniform Commercial Code which stipulate when the seller has an insurable interest in goods and when the buyer has an insurable interest. Basically, the seller has the insurable interest in damage to the goods as long as the seller has title to the goods in accordance with an agreement between the buyer and the seller.

The seller maintains an insurable interest in the goods while the seller has a security interest in them, even after title to the goods has been transferred to the buyer.

The buyer has an insurable interest in the goods as soon as the goods have been identified – meaning when the contract has been fulfilled and the goods in question are accepted as meeting the provisions of the contract. The “identification” requirement can mean that the buyer has identified the goods under contract before the actual title to the goods is transferred. Therefore, it is possible (and quite common) for both the buyer and the seller to have insurable interests at the same time in the same property.

Since the buyer has no insurable interest in the property until the property has been identified, the buyer’s insurance interest is the full value of the goods – whether the buyer holds title to the property or not. As far as the seller is concerned, the seller’s insurable interest depends upon the point in the transaction at which the goods are damaged.

Interestingly, since the seller and the buyer may have insurable interests at the same time, the sum of both interests may exceed their full value.

THE MEASURING OF TRANSIT LOSS EXPOSURES

The severity of a loss of property while in transit varies considerably, as it will always depend upon the kind of property that is being transported. There is quite a difference between a truck load of pickles, for instance, than that of a diamond merchant who may transport hundreds of thousands of dollars in a small package. In order to measure the loss exposure; many factors should be considered, including

type of property, value of the property, the radius of the operations (how far will the property have to travel), the condition of the vehicle/equipment carrying the property, the experience and expertise of the drivers, the geographical and weather conditions on the route, the record of the carrier the crime rate in the areas in which the property must pass.

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There are many other factors that may apply, as there are so many types of property that is shipped and to numerous locations. But the severity and the frequency (how often) of transporting the property must be studied if the risk is to be measured correctly.

In addition to the determination of what exposures there are, there must then be control measures to keep the loss amount and frequency under control. There are many ways to help reduce these losses, but the four most prominent are:

1. to determine how susceptible the property is to damage or to loss;2. how effective is the packaging going to be to help prevent losses;3. selection of the means of shipment, what routes will be used and when will the shipments

occur; and4. what is the system that is used for security so as to control dishonesty and carelessness of

the shippers and consignees.

There are certain things that cannot be changed and must be accepted as part of the risk, such as the fact that jewelry will always be attractive to thieves, cast iron is more susceptible to breakage than steel but could probably not substitute, etc. After determining that certain items or features create loss exposure, in some cases this loss exposure can be reduced without affecting the cargo. For instance, packing some articles in stronger material, or shipping certain goods in a near-finished condition where the goods can be finished after shipped.

Usually brittle objects can be shipped without chance of breakage if the packaging is adequate. Also, it may be better to ship articles such as jewelry, in packages that do not identify the contents to help avoid theft. Large, valuable items can sometimes be disassembled and sent in different packages (or on different trucks, for instance) which help to reduce the possibility of theft. The transportation industry has had great success in using containers for large shipments, to reduce theft or damage, both on land and on water.

The routing of the property can be used to help prevent losses. An air shipment can eliminate the problem of hijacking to a large extent. Some goods are better shipped by rail than by truck. Also, the routing and the timing can affect loss rates as some areas have higher theft statistics than others. Then there is always the history and experience of the carriers - some are just safer than others because of better equipment, better security, more experienced drivers, etc.

It should not come as a shock to know that a large portion of losses while in transit come from miscounts, either deliberate or accidental, shipments going to the wrong place and sometimes the rejection of shipments by the consignees for not-legitimate or unreasonable reasons. Many of these problems are a result of human errors and tendencies. About the only thing that can be done in most cases, is to exercise very strict and detailed control during the entire process – check and double-check.

Not all carriers purchase Transportation insurance, as in those situations where the operations are so large that they can handle their own claims. This would be the case with a large railroad, large truck lines and major airlines. Of course some smaller firms, such as owner-operator truck lines, may not carry insurance, as they cannot afford it. Therefore the shipper should always

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check on the financial ability of the trucking company to pay losses, or check on the status of insurance before shipping the property.

STUDY QUESTIONS

1. For Inland Marine purposes (and most other purposes), property is divided into Real property and personal property. The principal difference between the two isA. cost.B. availability.C. ageD. portability.

2. The most usual consequence of loss to property in transit (while being moved) isA. reduction in value.B. valuation is higher.C. difficulty to replace.D. total loss nearly every time there is a loss.

3. A Carrier that does not have authorized routes and can usually haul cargo for anybody between any points, is usuallyA. a Private Carrier.B. a Contract Carrier.C. a Specialty Carrier.D. a Common Carrier.

4. Carriers who assemble and consolidate shipments, and make their money in the difference between shipping costs of small cargoes and large cargoes, isA. a Common Carrier.B. a Specialty Carrier.C. an Indirect Carrier.D. a Contract Carrier.

5. “Acts of God”, “Acts of Public Enemy”, and “Exercise of Public Authority” are examples of A. the Covered Perils provision of an Inland Marine Policy.B. situations that limit the liability of Carriers.C. descriptions of definitions of fire losses.D. liability limitations of an Inland Marine policy that will not stand up in court.

6. A Bill of Lading issued by a common carrier, is actually A. a receipt from the carrier for the goods being transported.B. instructions on how the load must be packaged and packed in the vehicle.C. a bill for the services of a Common Carrier.D. the inventory of the cargo from the shipper to the receiver of the cargo.

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7. In case of a loss while property is being transported by a common carrier, the consigneeA. may collect actual damages and also for loss of use of property in most cases.B. may not accept the shipment until the carrier has an opportunity to repair or replace the

damaged property.C. may accept the property, have it repaired and then make claim with the carrier for the

actual loss; of dispose of the property and make claim against the carrier for the full value of the actual loss.

D. must go into arbitration in order to determine the amount of the loss.

8. The shipping terms “F.O.B. Point of Shipment”, “F.O.B. Destination”, “F.A.S. Vessel”, and “C.I.F.” are used to determineA. the method of payment of the cost of shipping.B. who assumes the responsibility of the good being shipped, and when it is assumed.C. the method of shipment of goods and property.D. the type of carrier used in the shipment.

9. In determining the insurable interest in goods, basically the seller has insurable interestA. when the goods have been identified, the contract fulfilled and the goods accepted.B. only if the buyer does not have an insurable interest.C. when the seller has title to the goods or while having a security interest in the goods,

even after the goods have been transferred to the buyer.D. only during the time that the goods have been insured in the seller’s name.

10. A large portion of losses while in transit come fromA. miscounts, shipments going to the wrong place or rejection by consignees for “not-

legitimate” reasons.B. explosions.C. overturning of transporting vehicles.D. fraud.

ANSWERS TO STUDY QUESTIONS

1D 2A 3B 4C 5B 6A 7C 8B 9C 10A

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CHAPTER FIVE - INSURING THE TRANSPORTATIONCHAPTER FIVE - INSURING THE TRANSPORTATION EXPOSURESEXPOSURES

The exposures of transportation are discussed in the preceding chapter, and in this chapter various methods of insuring these exposures will be discussed. This type of insurance can be divided into two types:

1. insuring the shipper’s interest in the property while it is being transported, and2. insuring the carrier’s liability for the loss to the property being transported.

The types of insurance discussed in this chapter will be (first) annual transit policies which cover all shipments during the policy period which is generally one year (hence the name). Trip Transit policies, by contrast, will only insure property for a specified trip only.

Motor Truck Cargo insurance is discussed, which covers a carrier’s liability for damage to the cargo while being transported by the carrier; to cover damage to cargo being transported on the owner’s trucks; or both in some cases. Similar policies can be written to cover losses while property is in transit by air, rail or water carriers.

Other coverages discussed will be the money and securities insurance that covers these items when being transported by a property owner, or even for an armored car that transports such property of other persons. In the same vein, mail insurance that covers items being sent by mail, will also be discussed.

ANNUAL TRANSIT INSURANCE

NEEDS FOR THE COVERAGE

Many times a shipper assumes that the risk of property loss has been fully transferred to the carrier when the carrier takes custody of the property. This may not always be effective in protecting the cargo from loss for several reasons. It takes time and money to collect from a carrier, even if the carrier is financially able to pay the claims (which may not be the case). There may be a limit on carrier liability as there may be a dollar limitation on the shipment. Besides, carriers are not liable for all causes of loss – acts of God and acts of the public enemy, for instance.

Therefore, a shipper may decide that it wise to transfer the exposure to an insurance company by buying annual transit insurance.

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COVERAGES

Annual transit insurance is a nonfiled class of business and standard policy forms are not possible because of the wide variety of merchandise shipped and the many methods of shipping. Therefore, the rates and policy provisions are those agreed upon by all parties.

Annual Transit insurance may be written on an “All-Risks basis” or for “Named Perils.” If it is written on an All-Risks basis, there are certain perils that might be excluded, such as

insects, vermin, inherent vice, or contamination; war or nuclear damage; rough handling, breakage, marring, scratching, chipping, denting, bending or chafing; leakage of liquids; shrinkage, evaporation or loss of weight.

If the All-Risks approach is not acceptable to the underwriter as being too broad, then a Named Perils transit policy might insure the property

while the property is on land – fire, malicious mischief, lightning, cyclone, tornado, flood, strike, riot, vandalism; and collision, derailment or overturn of the transporting vehicle;

while the property is waterborne – fire and perils of the seas, including liability for general averages salvage charges; or

theft of an entire shipping cargo, excluding pilferage, whether the property is on land or on water.

PROPERTY EXCLUSIONS

As a general rule, property exclusions are usually for property that can be more appropriately insured in other types of policies. Some of the exclusions could be:

accounts, bills, currency, deeds, money, notes, securities, fine arts, jewelry, and other similar valuables;

property shipped by mail or parcel post; items covered by ocean Marine insurance, until the Marine insurance expires; property shipped under an “on-deck” bill of lading (which means the property is to be

shipped on the deck of a vessel. Because of the high chances of damage to property on the deck of an ocean-going vehicle, underwriters generally are not interested).

COVERED LOCATIONS

The property is covered regardless of where the property is located while it is in transit, within the territorial limits of the policy (usually the U.S. and Canada). They may exclude shipment on the Mississippi or Ohio rivers, or the Great Lakes, or other waterways that are not acceptable to the underwriter. Many policies cover the property only while in the custody of a

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specified class of carriers – air, truck, rail, etc. Many transit policies also cover property on wharves, piers and bulkheads, in depots or stations, or on platforms if it is in the custody of the carrier and is incidental to transportation. This is just an extension and clarification of the “in transit” provision and is used to prevent lapse of coverage if property is placed temporarily in storage. If property is sent to be processed, or is delivered on consignment for sale or distribution, the policy can be extended to provide coverage.

VALUATION OF THE PROPERTY

There may be a clause in the policy that indicates how valuation is to be accomplished in case of loss or damage. If no such clause exists, then the insurance company would be liable for the actual amount of the loss at the time and place of the loss.

A policy may say that the value is the invoice cost at the time and place of shipment, but this type of statement could result in a difference between the liability of the insurance company to the insured, and the liability of the common carrier because the common carrier is liable for the actual loss and cannot specify a method of valuation.

The most common type of valuation clause says that property is to be valued at the amount of invoice, and to include prepaid or advanced freight, plus any charges or costs associated with the property in transit since the beginning of the shipment. If there is no invoice, the property is to be valued at its actual cash market value at destination, at the day of the loss.

CONSUMER APPLICATIONPrebuilt Rooms to Go, is a manufacturer of prefabricated office and storage buildings. When

they transport outside of the immediate area, since the buildings are rather wide, neighboring states usually require a trailing vehicle with flashing lights to follow the vehicle carrying the pre-fabricated building.

Prebuilt is insured for loss or damage to their buildings while in transit. While moving a building to its final stop after traveling by freeway for 500 miles, the road leading to the site gave way under the weight of the truck and building, overturning the truck and building, and demolishing the building.

If, for some reason, there had been no invoice, per se, the valuation of the loss would have been the actual cash value (market value) at the destination. However, since there was an invoice, then the valuation would have included the amount of the invoice, plus the cost of the accompanying trailing vehicle plus the usual freight charges.

LIMITS OF INSURANCEAnnual Transit insurance policies specify separate limits of insurance depending upon type

of transit, such as railroad, motor trucks, scheduled air carriers, and messengers. Another limit may be placed on property on the insured’s own vehicles. Another limit applies to any one

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disaster and this limit can be determined by total amount of property in transit within a particular geographical area over a particular time frame.

RECOVERIES FROM COMMON CARRIERS

There is always a provision which protects the subrogation rights of the insurance company, and is usually stated that the insurance “shall in no wise inure directly or indirectly to the benefit of any carrier or other bailee.”

Many policies also contain a “impairment of property rights” clause which state that “any act of the insured impairing the right of the insured to collect the full value of any loss or damage from a carrier or bailee shall invalidate the policy.” Obviously, this is another and stronger provision to protect the right of the insurer to subrogate. A situation could arise when the insured is permitted to accept the ordinary bill of lading issued by carriers for hire, as they frequently include released valuation conditions, and their acceptance could violate the “impairment of recovery rights.” These situations can usually be worked around, either at time of loss or at time of insurance.

PASSING OF TITLE

The sales contract between shipper and the consignee usually specifies that the goods are shipped F.O.B. It is important to determine whether the goods are shipped F.O.B. Point of Shipment, or F.O.B. at the Consignee’s Location, as this could determine who is responsible at time of loss. However, the shipper’s transit policy can be extended to include coverage of goods while in transit, regardless of what “type” of F.O.B. is used.

PREMIUM PAYMENTS

The premium is based upon the total value of all goods covered during the term of the policy. It is customary for annual transit insurance policies to be written on a reporting basis with an annual adjustment of premium. The insured estimates receipts and shipments as close as possible, and then pays the premium in advance based on these assumptions. At the end of the year, actual figures are used and the insured will pay the additional premium, or receive a refund of any overpayment.

Premiums may be paid monthly (or quarterly) in some situations where there is enough business to warrant the added expenses of handling. In many cases, the insurer may require a deposit premium that could be ¼ of the estimated annual premium, or more. The policy may also have a clause that requires the insured to report the actual values shipped that were covered by the policy, and the insured must keep an accurate record of all such shipments. Many underwriters consider at least three years of reports to be necessary for an estimate.

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UNDERWRITING

The principal underwriting considerations for a transit insurance policy, would certainly include

The property being shipped and its susceptibility to loss or damage, including breakage, spoilage and other causes of loss.

How the property is to be transported and the type of the carrier. Some good, for instance, have greater exposure to theft if shipped by truck, rather than by railroad.

The type of bill of lading used, the extent of the released value, and terms of the sale (such as F.O.B. destination, etc.) must be considered. The terms of the sale will indicate during what part of the trip the carrier is liable.

The loss experience of the shipper.

The length of the trip during which property will be shipped.

What type(s) of packing and/or containers will be used. Containerization can reduce losses by theft and even by handling.

The limits of insurance and the type of valuation clause employed.

Note: When the policy will include coverage for owner’s property on the owner’s trucks, there obviously is no subrogation possible from a carrier. This would seem to justify a higher loss, however this can be balanced out because the insured would take more care in handling as it is “their” goods and they have direct supervision of the property while it is in transit.

MOTOR TRUCK CARGO INSURANCE

Annual Transit Insurance as described earlier, applies to the property of the shippers and protects the owners of such property from losses while in transit. The carrier that is transporting the property has a legal liability to the owner (hence, an insurable interest). This insurable interest is generally covered by a Motor Truck Cargo Insurance policy purchased by the carrier and which also covers the interest of the owner also because it pays direct property damage coverage.

There is a lot of business written under this coverage. It is a nonfiled class which provides considerable flexibility in coverages and rates charged. Since trucking companies vary greatly in

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what they haul, their methods of operation, and the area in which they operate, most policies are from a modified form of the insurer who generally has many such forms on hand.

The carriers form of Motor Truck Cargo Insurance indemnifies the insured (carrier) from loss or damage resulting from legal liability of the carrier. The policy does not insure against loss of the property, unless the insured is legally liable for the loss. It covers only the interest of the trucker, and not that of the shipper, owner or consignee.

CONSUMER APPLICATIONMetro Trucking hauls cargo from a large to several smaller cities within a 500 mile range.

They have a Motor Truck Cargo insurance policy which covers flood damage.During a trip between cities on a frequently-traveled two-lane highway, a severe

thunderstorm caused a small creek that ran under the highway to overflow, washing the truck off the road and ruining the cargo. It was later determined that this damage was caused by an act of God, and therefore the carrier was not legally liable. Therefore the insurance company is under no obligation to pay the loss.

COVERAGESCarrier forms require that loss must result from a covered cause in order for the insurance to

pay. Coverages differ depending upon whether it is a Bill of Lading Form, or Named Perils Form.

Bill of Lading Form functions much like an All-Risks form, and is subject to certain exclusions. For example, some policies will exclude the following:

governmental action, nuclear hazard, war and military action; delay, loss of use, loss of market, or other consequential loss; trick, or device and unauthorized instructions; dishonest acts of the insured, the insured’s employees, or anyone entrusted with the

property; inherent vice; insects, rodents or vermin; breakage, breakdown or failure of any refrigeration unit, contamination, corrosion, rust,

dampness or dryness, cold or heat, any change in appearance-smell-texture or taste.

In some policies, the above exclusions may be covered if caused by fire, lightning, windstorm, hail, smoke, explosion, rioters, strikers, civil commotion, vandalism, earthquake, flood, theft or attempted theft, or accident to the vehicle carrying the property.

Named Perils Form is nonfiled, so there can be some variation, but generally, the following are covered:

Fire, lightning or explosion; Windstorm; Collision of the conveyance with any other vehicle or object (does not provide coverage

for loss resulting from the cargo striking a vehicle or object);77

Overturn of the conveyance; Collapse of bridge, wharf, dock, platform or culvert; Stranding, sinking, burning, or collision of any regular ferry; Flood (defined as the rising of any natural body of water); Theft, but excluding pilferage.

Named Perils Forms are usually subject to the usual exclusions that appear in the Bill of Lading forms, as listed earlier.

PROPERTY COVERED

The policy usually stipulates a description of the property transported. It can be as broad as “general merchandise” for a common carrier. The coverage also applies to goods for which the carrier is legally liable as carrier, bailee, or warehouseman, or bill of lading or shipping receipt issued by the insured.

The coverage only applies to lawful goods and merchandise (cannot insure unlawful goods). In addition, certain goods cannot be insured:

accounts, bills, deeds, evidences of debt, money, notes, securities, jewelry, precious stones or other similar valuables;

paintings, statuary, and other works or art; property carried gratuitously or as an accommodation.

LIMITATIONSSome forms will limit the amount of insurance on loss resulting from theft of certain items

that are particularly susceptible to theft, such as alcohol, wine, liquor, cigarettes/tobacco, or furs. Live animals are not covered for death by natural means. Art is usually limited by a dollar amount.

TIME PERIOD

Since Motor Truck Cargo insurance covers property in transit, it is necessary to determine when the transit starts and ends. This is a not a simple question in many cases, and there have been numerous lawsuits on this subject. Courts have usually held that transit time does not start for an owner hauling its own property the same as for those carriers carrying goods for others. For an owner with their own property, transit starts when the property has left the starting point on its way to the final destination. For a carrier, transit starts when the property has been placed in the care of the carrier and ready for delivery.

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The transit does not end when movement of the property ceases. There are times when property may be stored temporarily for the convenience of the shipper or the owner, and during this time the property is still considered as being “moved.” Reloading of cargo, or sorting processes does not create a cessation of movement generally. However, it is stated in Handbook on Insurance Claims, that when “goods in transit reach some intermediate point where the movement is stopped for the purpose of having something done to the goods not related to the transportation, then the transportation has ceased, and a period of storage has begun.”

When property is being transported by the owner, it (transit) is not interrupted by any stops that are normal for the route, including overnight stops.

CONSUMER APPLICATIONHigh Point Furniture manufacturers chairs and uses Orange Transport to ship the chairs.

Orange carries Motor Truck Cargo insurance. High Point uses their own trucks to transport the chairs from High Point to Raleigh, where Orange picks up the cargo. High Point carries Motor Truck Cargo insurance to cover the intrastate shipment. For that purposes, transit starts when High Point loads the furniture into its trucks.

Orange then has the responsibility for the cargo from Raleigh to Atlanta, where they have a warehouse used for distribution of cargo. At the warehouse, the furniture is loaded into smaller trucks for shipment to retail centers in Atlanta, Jacksonville, Birmingham and New Orleans. The truck driver going to New Orleans stops overnight, and the insurance still covers the cargo as it is considered still in transit and Orange is responsible.

When some of the furniture reaches Jacksonville, a furniture repair shop contracted with High Point sprays the chairs, particularly the wicker furniture, to help avoid swelling of the furniture and the joints in the high humidity in Jacksonville and South Florida. At the repair shop, the transit is considered as ceased when the furniture was treated by the repair shop. If Orange would transport the sprayed furniture to Miami, Orlando and Tampa, then a new invoice would have to be made, however an Extension of Coverage Endorsement can be obtained which would continue the coverage until it arrives at the final destination at the retail stores in South Florida (Discussed in “Extension of Coverage” section of this Chapter).

Transit ceases when the property has been delivered to its destination. While there has been and will continue to be, discussions as to what constitutes an effective delivery, generally delivery has not been completed if anything remains to be done to effectuate the delivery.

COVERED LOCATIONS

Most Motor Truck Cargo policies show a radius of operations. A “local” hauler is one considered to be one that operates within a radius of approximately 50 miles. An intermediate hauler may operate over a radius of 200 miles and usually they make a trip out and back in the same day. Long distance haulers are those that operate in a larger radius, with most of their trips being “overnight” or longer.

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SCHEDULING

On smaller policies, it is usually the practice of the insurer to list the vehicles covered, with identification by motor and serial number. Therefore, cargo is only covered when being carried by one of the scheduled trucks. For larger operations, trucks are not identified, and trucks used temporarily can be used to haul cargo if necessary. If all of the insured’s trucks are scheduled, however, then normal practice allows substitute vehicles to be used when a scheduled vehicle is not able to operate.

LIMITS OF INSURANCE

If the trucks are scheduled, a limit for each truck is shown. Policies will show a limit of insurance per truck and a catastrophe limit of insurance when more than one truck is involved or when terminal coverage is applicable (see below).

EXTENSION OF COVERAGE

An extension of coverage can be added by endorsement, or just “built in” to a Motor Truck Cargo policy. One of the most common types of extension is “Terminal Coverage.”

Terminal Coverage is necessary on occasion, because the insuring clause usually covers the legal liability of the insured “for loss or damage to goods when loaded for shipment on and in transit in or on the vehicles owned, operated or hired for or by the named insured…” With the growth and sophistication of Motor Truck lines, companies have established terminals where the cargo can be sorted by routes and “transshipped.” The carrier’s liability during the time the cargo is in the terminal is the same as while the cargo is in actual transit and is moving. Therefore, an extension to cover the cargoes while in the terminal for a stated period of time (24-48-72 hours) is used.

The Motor Truck Cargo policies often also provide for amounts of coverage for freight charges that are earned but not collectable due to an insured loss. They also may provide for an extension to pay the expenses necessary to remove cargo debris following an insured loss.

OTHER PROVISIONS

Some other provisions common to the carrier’s forms are:

INDEMNITY AGREEMENTThe insured must reimburse the insurer for any amounts that the insured is required to pay

because of the attachment to the policy of any federal or state endorsement.

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FINES AND ASSESSMENTSExcludes coverage for any penalties the insured is required to pay as the result of the

violation of any law or regulation relating to the delay in the payment of, or denial or settlement of, any claim.

COINSURANCECoinsurance is seldom used as the carrier rarely knows the full value of the cargo, but when

it is included; it pertains to limits on vehicles, and also to limits on terminals.

VALUATIONThere are different ways to value property. One way is to use the value of the lesser of actual

cash value, or the amount for which the insured is liable for under the shipping document. Another way is to value the property at the least of the amount of the invoice or actual cash value at time of loss, or the value that is shown on the bill of lading or shipping list, or the cost to repair or replace the property with other of like kind and quality.

SETTLEMENT OF LOSS WITH PROPERTY OWNERSThe insurer always reserves the right to adjust a claim directly with the owner of the

property.

DEDUCTIBLE(Not to be confused with Coinsurance). Deductibles are almost always used in Motor Truck

Cargo policies, and will vary depending upon the rate charged and the exposures.

GROSS RECEIPT REPORTING CLAUSEThe gross receipts are often used to rate Motor Truck Cargo insurance. The determination of

the gross receipts can vary. One definition is “the total amount to which the insured is entitled – collected or uncollected – for the transportation of property, regardless if the shipment originates with the insured or another carrier.” Many times the policy will require that the report of gross receipts be received no later than 30 days after the end of each reporting period.

FILINGS FOR FEDERAL AND STATE AUTHORITIES

Motor Truck carriers operating within federal jurisdiction are required to show that suitable cargo insurance is in effect. This provision is met by attaching an ICC form to the insurance policy, and the insurance company then files a similar form to the ICC. This endorsement states the amount of loss covered by insurance and is binding on the insurer regardless if the vehicles, terminals or warehouse(s) are specifically named in the policy.

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In actual practice however, the carrier pays the shipper for any (valid) claims, which is not covered under the insurance policy. But, if the carrier does not pay the claim, the owner (shipper) has the right to approach the insurance company directly. If the insurer pays a claim or part of a claim to the shipper, then the insurer has the right to go after the carrier for reimbursement. Again, in actual practice, many times the reason that the carrier did not pay the claim anyway was because of financial reasons. Therefore in most of these situations the insurer just has to “eat” the claims.

ICC filings are in effect until cancelled, with a 30-day notice provision.

Most states require similar filings with their Public Utility Commission or Public Service Commission.

OWNERS FORMS

Owners forms are quite similar to carrier forms in format and in the coverages and terminology, however there are some differences, such as (but not limited to)

The owners policy covers only the owner’s interest in its own goods.

The owners form does not contain a schedule for terminals.

Covering of cargo by tarpaulins and other similar coverings are not present in the owners form.

Owners forms almost always contain a coinsurance clause (usually 100% coinsurance).

In owners policies, the valuation of property is used based upon the amount of invoice, including prepaid or advanced freight. If there is no invoice, then the valuation is usually cash market value at the destination at day of loss.

Frequently there will be an extension of coverage for property located on the owner’s premises prior to transport or at a stopover while the transit and is interrupted, limited to a specific number of days or hours.

It should be pointed out that when owners carry their own goods, they are considered as private carriers. The insurance covering private carriers covers direct damage and not the insured’s legal liability. Therefore, the insurer will be responsible for most of the losses, including acts of God. It might be assumed that because of the nearly limitless liability of the insurance company in case of loss, the experience of private carriers would be terrible. But actually the experience of private carriers is better than with common and contract carriers, probably because they have a tendency to operate only on short hauls, and most importantly, the goods actually belongs to the transporter, so they will take much better care of the property.

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Also, there are no terminal fires charged against the private carriers as the insurers do not cover owner’s good on owner’s premises. One other thing, private carriers have a tendency to keep their trucks in better condition as they are not under the pressure to make frequent runs in order to keep customers.

SPECIALIZED MOTOR TRUCK CARGO POLICIES

In addition to the forms listed above, there are also specialized forms which include the Household Goods Carriers, and the Carloading Companies and Freight Consolidators.

HOUSEHOLD GOODS CARRIERS

If a carrier is a small carrier and is not involved with warehousing household goods, then they can be insured on the usual Motor Truck Cargo form. For the large household goods carriers, a specialized form is used. Some of the coverages as listed below will appear on most Household Goods Carriers forms.

CARRIERS LIABILITYCoverage is provided for liability for loss to property in transit, including temporary storage

in transit. Household Goods carriers charges include a specified number of days for storage in transit. Premiums are collected on gross receipts reporting basis.

WAREHOUSE LEGAL LIABILITYOnce the above mentioned “storage in transit” period has expired, the carrier then becomes

liable as a warehouseman. A warehouseman is only responsible for losses caused by its negligence, and this section of the policy provides such coverage. Premiums are usually a flat annual premium.

CUSTOMERS HOUSEHOLD GOODSAt the request of the shipper, the company may issue a policy of insurance (certificate) that

provides insurance for property in transit or in transit and in storage. The policy provides rates for each of these certificates. This is a method whereby each customer receives a certificate of insurance covering their own personal shipment. Cancellation of the master policy does not cancel the certificates. Another section insures the accrued charges that are uncollectable under this section of the policy.

MOVING EQUIPMENTThe dollies, burlap, blankets, skids, etc. are insured under this section.

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GOVERNMENT AGENCY CONTRACTS – MILITARY TRAFFIC MANAGEMENT AGENCY ENDORSEMENT.

These sections cover the insured’s liability for property accepted under contract with a government agency. For military personnel the policy is amended to comply with the requirements of the Department of Defense regarding transportation of household goods (also for civilian employees affected by these military requirements).

CARLOADING COMPANIES OR FREIGHT CONSOLIDATORSSome of the functions of freight brokers and consolidators operate similarly to common

carriers (as discussed previously under “Indirect Carriers”), and their legal liability can be covered in the same way. Each insured is rated individually. The policy is designed to fit the terminal hazards of the operation, the insured’s trucking operation (if any) and the contracts with other truckers.

UNDERWRITINGAs with all Inland Marine policies, there are a variety of factors to be considered with

underwriting Motor Truck Cargo insurance. Some of these are:

type of carrier (common, contract, private, etc.) number of vehicles routes over which the insured operates commodities carried average value per truck load amounts of insurance required terminal locations and security arrangements protective devices on trucks filing requirement (ICC &/or State) annual gross receipts.

Past loss history is very important, as is the insured’s financial condition. If a carrier is not in a strong financial position, then escrow deposits and irrevocable letters of credit can be used

The types of commodities hauled can be important, especially if they are of a type that is particularly susceptible to theft. Some commodities can be limited by percentage, e.g., no more than 20% of the limit on liability will apply on the special commodities – or it can be expressed as a dollar amount. In order to offer insurance on those commodities, underwriters may require an extra measure of protection, such as an alarm system installed, a requirement that a person must be with the cargo at all times, the theft must be the results of forced entry, and in some cases, the vehicle must be part of a convoy (or perhaps followed by another vehicle).

Many carrier forms exclude loss or damage caused by or resulting from breakdown of refrigeration equipment. This can be overcome if there are other refrigeration units available along the route &/or the availability of quick access to another refrigerated unit.

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The extension of coverage to terminals creates a serious additional hazard as the largest insured motor truck cargo losses have been because of terminal fires. Besides, cargo in one truck may only be a fraction of the total exposure as cargo from several vehicles can be stored in a terminal at one time. When terminals are covered, they are listed (scheduled) and there is a catastrophe limit for vehicles and terminals.

RATINGThe rate for a policy is multiplied by the policy amount to compute the premium – which is

usually paid annually in advance. The amount of premium is the total of all the amounts applying to the different trucks.

Factors that affect the rates are the limits of insurance, the coverages, radius of operation, terminals, deductible amount, property carried and whether there is an operating alarm system.

If the premiums are based upon the gross receipts, it is usually used to cover all of the operations of the insured as a trucker, and the individual trucks are not listed. This is often used for large fleets of trucks, as it would be tedious and not cost-effective to list new trucks every time one is added to the fleet, or to subtract those that are not used any longer. Underwriting is different also, as the underwriter considers the previous loss experience, limits of insurance, commodities hauled, terminal exposures (if any), radius of operation, and other such factors – even including the how much the individual cooperates with the underwriting requirements.

For owner/operators (drivers who own their own truck or tractor), they work under the operating authority of the carrier who issues the bill of lading and who hired the owner/operator and who, therefore, is liable to the shipper for the goods while in the custody of the owner/operator. Owner/operators may or may not, have insurance to make payment to the insurer in those cases where the owner/operator is responsible for a loss and for which the carrier had to make payment to the shipper. Therefore, reputation of the owner/operator is highly prized by carriers who use owner/operators.

Problems can arise with the owner/operator, as illustrated by the following Consumer Application.

CONSUMER APPLICATIONBill owns his own truck and is under contract to Tomson Trucking as an owner/operator.

Under the carrier policy carried by Tomson, the owner/operator’s truck is not scheduled and the premium is collected on a gross receipts basis. Since the truck was not scheduled, the carrier still has to report the full amount collected for the shipment. Under the contract with Bill, Tomson gives 75% of the shipping charge to Bill, and Tomson keeps 25%. (Continued on next page)

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While carrying a load of perishable items through Tennessee, Bill’s truck’s brakes failed coming down a mountain and Bill had to turn onto a speed ramp. However, the ramp was not adequate to keep the truck from turning over, with the result that the load was a total loss.

Even though Bill got 75% of the shipping fee, Tomson was responsible for 100% of the cargo during the entire trip. If Bill had insurance as is usually required, then his insurance would pay Tomson for the loss. If Bill did not have the insurance, then Tomson would have to sue Bill to get reimbursed.

STUDY QUESTIONS

1. Which of the following reasons is NOT considered when a shipper is determining the need for Inland Marine coverage?

A. The risk of property loss is always transferred to the carrier.B. It often takes time and money to collect from a carrier.C. There may be a limit on carrier liability.D. Carriers are not liable for all causes of loss.

2. Annual Transit Insurance policies’ property exclusions are generally thoseA. that can more appropriately be insured in other types of policies.B. that make it extremely difficult to ever collect from an insurer.C. of insects, war or nuclear exclusions, leaking liquids, and shrinkage.D. that do not cover property on land or waterborne.

3. The Inland Marine Form that indemnifies the insured carrier from loss or damage resulting from legal liability of the carrier, is the carriers form of

A. Annual Transit insurance.B. Carriers Liability insurance.C. Motor Truck Cargo insurance.D. Trip Transit insurance.

4. Under a Motor Truck Cargo insurance policy, goods are shipped by a common carrier to a warehouse where wheels are placed on each of the shipped items, and then the same carrier distributes the material to 3 locations of the shipper. Which is correct?A. The carrier is considered as having control of the property during the entire trip, and the

trip therefore is not ended until the goods reach the 3 shipper locations.B. The trip is actually broken into 2 parts, to the warehouse and from the warehouse to the

locations, but it is considered as uninterrupted transit for each section.C. The time that the goods are in the warehouse having the wheels inserted, is considered as

storage time and the cargo is not under the control of the carrier. In effect, the carrier has two separate “transits”, with an interval between trips as the goods are considered as being “in storage.”

D. The insurance policy will not allow a second carrier to become involved. Therefore, the shipper must contract with a second carrier to carry the second leg of the trip. The goods being “worked on” is considered as in the custody of the first carrier.

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5. “For loss or damage to goods when loaded for shipment on and in transit in or on the vehicles owned, operated or hired for or by the named insured…” is contained on an Extension of the Motor Truck Cargo policy, which is called

A. Consideration phrases.B. Claims Location Transfer.C. Alienation of Responsibility.D. Terminal Coverage.

6. The methods of valuation for cargo under a Motor Truck Cargo policy, does NOT include taking into consideration

A. the actual cash value of the amount liable under the shipping document.B. the value shown in the bill of lading.C. the cost to repair or replace the property with like kind and quality,D. the cost of maintenance of the transporting vehicle during the transporting of the goods.

7. When owners carry their own goods, they are responsible for liabilities that the insurer will cover. Which of the following statements is correct?A. Since the liability of the insurer is nearly limitless, private carrier experience is bad.B. Private carriers are not an insurable class in most states.C. Experience with private carriers is better than common and contract carriers.D. Since terminal fires are charged against private carriers, the private carrier’s experience

is much worse in fire-caused claims.

8. The Household Goods Carriers form is used instead of Motor Truck Cargo form becauseA. Motor Truck Cargo form does not cover household goods in transit.B. Motor Truck Cargo form does not cover warehousing of household goods.C. Household Goods Carrier form is more widely approved.D. Warehouse Legal Liability is not available under the Household Goods Carrier form.

9. The Freight Consolidation form does not coverA. the terminal hazards of the operation.B. negligence of the truck driver while carrying goods in transit.C. the insured’s trucking operation (if any).D. the contracts with other truckers.

10. For carriers that use owners/operators, the __________ of the owner/operator is highly prized.A. ageB. sizeC. reputationD. private automobile insurance

ANSWERS TO STUDY QUESTIONS1A 2A 3C 4C 5D 6D 7C 8B 9B 10C

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CHAPTER SIX - TRIP TRANSIT & MAIL INSURANCECHAPTER SIX - TRIP TRANSIT & MAIL INSURANCE

As the name would imply, trip transit insurance is used for a single trip, and can be used by a carrier, an owner who ships their own property, or a shipper who is having property shipped by a carrier. It is a nonfiled form and printed conditions vary from company to company.

Generally, the property is valued at the amount of invoice, or if no invoice, then by the actual cash market value at time and place of loss. They are usually subject to a 100% coinsurance clause. Both Named Perils and All-Risks forms are available. When Named Perils forms are used, the named perils covered are the usual fire, flood, etc., collapse provisions, collision, derailment or overturn of the conveyance, and generally for theft. Exclusions usually eliminate coverage caused by or resulting from delay, loss of market, or loss of use; inherent vice or gradual deterioration; strikes or riots; employees dishonesty; war and nuclear occurrences.

Rates are a matter of judgement and underwriting is about the same as for other forms. Care has to be taken if the policy is requested to just cover a commodity that is susceptible to breakage, or for theft (if theft is covered). Sometimes these policies are used when large and/or expensive machines are shipped, in which case the underwriter wants to make sure that a loss of income claim couldn’t end up costing excessive amounts if something should happen to the machine while in transit. A small property damage loss could trigger a huge claim for loss of income. Deductibles are an important consideration and for household items and other cargo where small breakage claims can be expected, smaller deductibles can be used.

ARMORED CAR AND MESSENGER INSURANCE

Armored cars are used to transfer money and securities and on occasion, banks and other financial services may use a messenger service to transfer valuable documents or material. Messengers may be armed, depending upon the value of the material being transferred. Coverage can be written for either the shipper or to cover the liability of the carrier. In some cases, if the shipper is a financial institution, then the coverage can be written as an endorsement to a mail policy, or a separate policy. These forms are not filed.

Usually, the coverage is provided on an All-Risks basis with exclusions. The exclusion for employee dishonesty may or may not be on the policy. The property that is covered is spelled out, and the policy can cover stocks, bonds, coupons, gold, silver, platinum, coins, paper money and bullion, and other valuable items.

Limits of insurance depends on whether the property is being transported by armored car, or whether the messenger is armed or not. It is important that the shipper keep the property value

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under the insurance limits, or they must notify the insurer if there is an excess and do so before the property is shipped.

When the policy is written for the account of the shipper, it may be designated as excess over a particular brokers or bankers blanket bond, and if the policy is written with a deductible, the deductible is the amount of the blanket bond.

The premium is usually on a flat basis, and is based upon the amount of the primary coverage, the amount shipped during the year, and hazards that are present for the operation. Rates are based upon these hazards, and apply to each $100 of value of property shipped.

This insurance is a specialty class and is written by a very few insurers. The form is written for each particular situation so the uses of this type of coverage are many.

MAIL COVERAGE

Most people are not aware that commercial insurance covering shipments by the United States Postal Service (USPS) is available. Many businesses prefer the commercial insurance as there is no need to stand in line at the Post Office, the cost of the insurance is often less than that of the USPS (even though the limits of the USPS insurance is limited), and in many cases, the commercial insurance can make faster claims settlements.

The limits of insurance depends upon the type of mail service that is used and commercial insurance can be used to cover all types of mail service handled by the USPS, except for parcel post. The ISO offers one form for these coverages, the AAIS has forms filed for registered, certified and express mail. That does not mean that parcel post cannot get commercial insurance, but only that there is not a filed form for it, and parcel post and “transit cash letter insurance” may both be written on a nonfiled basis.

The ISO form is most often used, and is described below.

The ISO mail coverage form applies to: first class mail, certified mail, USPS express mail, registered mail send by banks, bankers, trust companies, insurance companies, security

brokers and investment corporations, other persons/firms/corporation whose business is of fiduciary nature and those

corporations who act as security transfer agents or registrars for their own security issues.

For any other person or organization, mail insurance is only on a nonfiled basis.

The mail coverage only covers those valuable items which are likely to be mailed. For first class mail, certified mail, USPS express mail or registered mail, covered property is (1) bonds,

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(2) stock certificates, (3) certificate of deposit (CD’s), (4) other securities; coupons if detached from the bonds, (5) postage and revenue stamps; (6) postal, express and other money orders; (7) checks, drafts, notes, bills of lading, warehouse receipts and other commercial papers; (8) other documents and papers of value except unsold travelers checks and currency.

Bullion, platinum and other precious metals; currency, unsold travelers checks, food stamps, jewelry, watches, precious and semi-precious stones, and other similar valuable property are included for coverage when sent by registered mail.

Property is covered while in the “care, custody, or control of government postal service,” and while in transit to or from the government post office by common carrier or messenger. Note that “government” is used, as the form can also be used in Canada. Therefore, property is covered until it has been delivered to the address shown on the shipping package, or delivered to the proper person/firm at a different address if the address shown is incorrect, or if it is returned to the sender in case of non-delivery. Mailed property will not be covered while it is at the premises of any mail-receiving agency.

COVERED PERILS

The “covered causes of loss” means Risks of Direct Physical Loss to covered property except for the losses listed in the exclusions. In other words, this is the All-Risks coverage. The only exclusions are the governmental action exclusion and the war and military action exclusion, and an exclusion of any weapon employing atomic fission or fusion or any mine of torpedo. Obviously, this is a very broad coverage.

LIMITS OF INSURANCE

Limits of insurance depend primarily upon the types of mail that the insured uses. The three types are (1) first class and certified mail, (2) USPS express mail, and (3) registered mail. Within in each type of mail, there are separate limits for

property in any one shipping package, property to any one addressee on any one day, property sent between the insured’s offices or to its transfer agents, and property sent to others than those mentioned above.

In addition, separate limits may be used for USPS express mail to non-negotiable securities, detached coupons, and other covered property. For registered mail, there are separate limits for currency, unsold travelers checks, jewelry, watches, precious and semiprecious stones, and similar valuable property, and all other covered property.

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CONDITIONS

Losses are subject to the Commercial Inland Marine Conditions Form, plus others related to records, valuation, reports, premium, cancellation, etc., some of which are discussed below.

RECORDS

Every mailing has to be recorded prior to loss and must include a description of the property, the destination of the property, the type of mail use and the value of the property contained in each shipping package covered. The mail form has an “errors and oversight extension” that covers property even though it may be incorrectly reported due to errors or oversight, with attendant rules regarding correcting any such error or oversight, etc. If an error or oversight can result in the value of the covered property in one shipping package exceeding the limit of insurance, the insurer will pay only the proportion of any loss that the applicable limit of insurance bears to the actual value of the property on the date of mailing.

CONSUMER APPLICATIONConsolidated Jewelry mails a diamond pendant to Sigmund Inc., by express mail.

Consolidated’s policy limit of insurance on any one shipping package is $25,000, but Consolidated sent the wrong diamond pendant because of a misprint in the internal shipping order, and the pendant that was mailed was worth $50,000.

During the mailing the shipping package was dropped and ran over by a truck, causing breakage damage of $10,000. Consolidated could only recover $5,000 as it was covered for ½ (50%) of the value as the limit of insurance ($25,000) is 50% of the worth of the pendant.

VALUATION

The covered property is valued at its actual value, but not less than its market value, on the date of the mailing, or to put it another way, property is valued at its actual value or its market value, whichever is greater. For bonds, stock certificates, certificates of deposit and other securities, the insurer will pay no more than 125% of the value the insured has recorded. For all over covered property, the insurer will pay no more than the value the insured has recorded.

CONSUMER APPLICATIONTrans-securities mails 500 shares of Ajax Company to Bill Smith that has a market value of

$52,000, but has an actual value of $65,000 at the time it was mailed. The securities get lost in the mail or they are stolen from a post office, but in any event they never reach Bill Smith.

Trans-securities will be able to receive the full $65,000 as that just happens to be 125% of $52,000.

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REPORTS AND PREMIUM

The type of reporting (monthly, annual, etc.) will be on the Declarations page. Within 30 days after the end of each reporting period, the insured is required to report to the insurer the total value of all covered property sent during the preceding reporting period. The report will list the values for each type of property separately, and for each type of mail for which a rate is shown in the Declarations. Generally, the insurer will require a deposit premium, adjusted at the end of the reporting period. The form will require an annual minimum premium that must be paid, even if the premiums computed are less than the minimum premium.

CANCELLATIONIn addition to any other provisions regarding cancellation, the form also stipulates that the

coverages applies to all mailings of covered property made up to the date and time of cancellation.

TERRITORYFirst class mail, certified mail, and USPS express mail are covered anywhere in the U.S.,

U.S. Virgin Islands, Canada, Puerto Rico, and territories and possessions of the U.S. Registered mail is covered anywhere in the world.

DUTIES IN CASE OF LOSSIn addition to the duties outlines in the Commercial Inland Marine coverages, the insured

must provide proof of interest in the property, affidavits that the property was mailed and was not received by the addressee &/or property owner, plus any receipts issued by the Post Office.

PAYMENT OF LOSSThe insurer will pay for any covered loss within 7 days after agreement with the insured, a

court decision or an appraisal award.

OTHER INSURANCEIf there is other insurance, this policy will share on a pro-rata basis with the other insurer,

except that if the loss is due to a theft by an employee of either the sender or the addressee, then the mail form is excess over other insurance, collectible or not. If the loss is not due to theft by an employee, and it is covered by a blanket bond, then the insurer will be primarily liable and has no recourse against the blanket bond.

RATINGThe Inland Marine division of the ISO provide the rates for the mail form and are filed for

shipments within the continental U.S., with limits of insurance of $250,000 for each package and $1,100,00 for one addressee in any one day. Rates for shipments for other areas are not filed.

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ENDORSEMENTS

Transfer Agents Mail endorsement covers first class, certified or registered mail if the sender insured is acting as a transfer agent or similar position. It covers non-negotiable securities and other certificates that may be negotiable, with maximum value not to exceed $150 per package mailed on any one day, and it is insured for only nondelivery.

Negotiable securities can be sent under air bill of any named air carrier within the continental U.S. The value of the package must be declared as actual value but not less than the market value on the day the package was sent.

Coverage can be afforded to securities sent by the U.S. Treasury or other federal governmental agency and only pertains to shipments sent by registered mail.

Another endorsement can be added that allows for the premium for first class or certified mail to be a function of the number of packages sent by the insured.

PARCEL POST INSURANCE

Many firms use parcel post commercially, such as large mail-order houses and those who handle specialty items not usually sold in stores. It is a nonfiled class of business.

COVERED PERILS AND PROPERTY

The Parcel Post Insurance policy covers a package and its contents against loss or damage from any external cause, including nondelivery, with exclusions of war and nuclear reaction. There are other exclusions as shown below.

The types of property covered must be described specifically in the policy. There is one important stipulation: The property must be usual to the insured’s business. There are certain types of business that are excluded:

accounts, bills, currency, deeds, evidences of debt, money, notes or securities; merchandise shipped on consignment unless shipped in fulfillment of an order or

consigned to parties to whom the insured had previously sold merchandise; perishable items, except against loss by fire, theft, pilferage or nonarrival; packages incorrectly addressed, inadequately packaged, or on which the postage is not

fully prepaid; shipments sent to transients at hotels, except sales personnel of the insured, unless sent by

registered mail or government insured parcel post;

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packaged bearing descriptive labels, unless such labels are in compliance with the laws of regulatory authorities;

packages not bearing the notation “Return Postage Guaranteed.”

The policy covers property only while it is in the custody of the USPS.

CONSUMER APPLICATIONTech Springs manufacture specialty springs used in certain types of communication devices

and they use parcel post generally to ship the springs to their customers. Since the springs are usually quite small but each order will contain typically between 50 and 250 springs, they are packaged so that they can be easily handled by one person. They have a collection box located outside of their main office building. They have carried insurance by a Parcel Post form.

One day they had completed several larger-than-usual orders and they were all going to be sent by parcel post on the same day. The person that takes the packages from their shipping department to the collection box was away that day, so a clerk from the shipping department took them to the collection box. Since there were more boxes than the collection box could hold, and since she did not know what to do and the office was closed, she simply stacked the excess packages on top of the collection box. Soon afterwards and before the mail truck arrived, some local gang members went by and took the boxes, hoping that they would contain something they could pawn. When they discovered the springs, they then totally destroyed the springs in frustration.

The Parcel Post Inland Marine form would not cover those destroyed springs, as they were not in the actual possession of the USPS.

LIMITS OF INSURANCE

Policy limits usually range from $100 per package shipped by regular parcel post or unregistered mail, to $500 per package shipped by USPS - insured parcel post or registered mail. If property is shipped C.O.D., there is usually no use for this coverage as USPS insures packages for the full value, up to a maximum of $500.

DUPLICATION OF COVERAGE

If a parcel post package is insured by both the USPS and a commercial parcel post policy, the loss will be apportioned between the two by a formula:

USPS Insurance (or actual value whichever is less) X Actual Value or = USPS(The amount above plus) Cost of Repairs LiabilityTotal Commercial Insurance (or actual value, whichever is less)

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If the parcel post policy has a deductible, the USPS will pay the deductible before applying the formula.

CONSUMER APPLICATIONSpecial-Tees manufacturers T-shirts and uses the mail heavily for shipping the finished

shirts, shipping by insured parcel post. They usually insure their embroidered special-order shirts for $200 as a matter of practice, even though some of the shirts may be sold for as much as $350 or more. They also carry Parcel Post coverage with Supreme Insurance with limits of a loss at $500.

A package containing a shirt that they were selling for $250 was destroyed when a mail sack fell out of a truck in the rain, the package came open and the shirt was ruined

The Postal Service and Supreme Insurance would apportion their share of the loss as follows:USPS Ins. = $ 200 (Times Actual Value - $250) = 4/9 of $250 = $111.11$200 + $250 (actual value) = $450

USPS would pay $111.11, and Supreme Ins. would pay $138.89

PREMIUMS

The policy is usually written on reporting basis with a monthly, quarterly or annual adjustment. The insured is, as usual, required to keep complete and comprehensive records.

UNDERWRITING

As one would expect, articles that are unusually fragile or susceptible to theft or loss, create the greatest underwriting problems. Proper packaging is absolutely essential. Rates are applied to each $100 value of shipment, and vary considerably according to the exposure and the loss experience of the insured. Overseas rates are treated separately, and a rate schedule for each country will be a part of the policy.

TRANSIT CASH LETTER

This is a highly specialized form and covers letters containing checks, promissory notes, drafts, and other similar items sent by one bank to another bank. The insurance covers these items while in transit.

This is a nonfiled form, and there are many variations in conditions. Transit can include any means agreed upon by the insured and the insurer and may cover shipments sent to the wrong address or returned to the insured by the addressee.

This form is so specialized that there really are no hard and fast rules for this coverage, and more detail is outside the scope of this text.

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STUDY QUESTIONS

1. Which of the following statements regarding Trip Transit Insurance is NOT true?A. It can be used for a single trip by a carrier.B. It is used only for multiple trips.C. It may be used by an owner who ships his/her own property.D. It may be used by a shipper who is having property shipped by a carrier.

2. Commercial insurance can be used to cover all types of mail service handles by the U.S. Postal Service (USPS), exceptA. parcel post.B. registered mail.C. certified mail.D. express mail.

3. Jewelry, money, bullion, watches and precious stones may be covered by commercial insurance when in custody of the USPS and is sent byA. parcel post.B. registered mail.C. certified mail.D. express mail.

4. Property being shipped by USPS and insured commercially, is valuedA. at its actual value, provided it is less than its market value.B. at no more 100% of the value the insured has recorded for stocks, bonds, other securities.C. at its actual value, but not less than its market value, on the date of the mailing.D. only for the value the insured has recorded, for all goods shipped.

5. In case of a loss under Mail coverage, it is not necessary for the insured to provideA. proof of interest in the property.B. affidavits that the property was mailed & not received by the addressee.C. the name and employee number of the postal employee than accepted the mail.D. any receipts issued by the Post Office.

6. Which of the following statements regarding Endorsements to Mail coverage is not correct?A. Transfer Agents Mail Endorsement covers registered mail only.B. Negotiable securities can be sent under air bill of any named air carrier within the

continental U.S.C. Coverage can be afforded to securities sent by the U.S. Treasury by registered mail.D. An Endorsement can be added that allows for the premium for first class or certified mail

to be a function of the number of packages sent by the insured.

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7. If a parcel post package is insured by both the USPS and a commercial parcel post policy, if there is a loss, how is the loss apportioned between the two?A. The USPS has full coverage responsibility.B. By a formula whereby the commercial insurance is divided by the USPS insurance, times

the actual value or cost of repairs, and that equals the liability of the commercial insurance company.

C. The commercial insurance carrier assumes all responsibility of the coverage.D. By a formula whereby the commercial insurance is divided by the USPS insurance, times

the actual value or cost of repairs, and that equals the liability of the USPS.

8. The greatest underwriting problems of the commercial mail policies is (are)A. employee theft loss.B. breakage and theft.C. fire.D. misdelivery.

9. If a person has a package containing checks, promissory notes, drafts and other similar items, sent from one bank to another bank, this can be covered byA. USPS insurance only.B. a nonfiled Transit Cash Letter form.C. a Transit Cash Letter form which cannot by law cover shipments sent to the wrong

address and returned to the insured by the addressee.D. an ISO filed Transit Cash Letter form.

10. Premier Corp. sends goods worth $500 to a customer C.O.D. by USPS.A. Premier’s commercial mail insurance should cover this package.B. Commercial mail insurance cannot be used for goods worth $500.C. There is no use for commercial insurance, as USPS insures packages for the full value, up

to $500.D. USPS will not insure a parcel post package for more than $100, so the commercial

insurance will have to cover the remainder or a portion thereof.

ANSWERS TO STUDY QUESTIONS

1B 2A 3B 4C 5C 6A 7D 8B 9D 10C

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CHAPTER SEVEN - INSTRUMENTALITIES OF TRANSPORTATION AND COMMUNICATION

INTRODUCTION

For many years the only ones who were willing to insure bridges were Inland Marine underwriters, principally because insurance companies that sell fire and casualty insurance were so divided that the only ones that would step forward were Marine underwriters. This practice was so accepted by the time of the Nation-Wide Marine Definition, that it was accepted that bridges and tunnels can be insured by Inland Marine insurance, and it was later expanded to other areas, such as pipelines, power transmission lines, telephone and telegraph lines, radio and television equipment, etc. Since there was such a diversity of coverage, it was difficult to name the category, but eventually they became known as “Instrumentalities of Transportation and Communication.” Actually, that is just what they are.

Another reason for the Marine coverage on bridges and tunnels was that historically some of the biggest losses to bridges and tunnels were caused by ships going under a bridge (or crashing into it) or over a tunnel.

These coverages are so technical that full discussion of their provisions conditions and applications are beyond the scope of this text. However, they are an important part of Inland Marine insurance, so some familiarity with the forms and their application is in order.

BRIDGES

The (earlier) 1953 Definition states that bridges cannot be insured under an Inland Marine policy if the only perils to be insured against are fire, lightning, windstorm, sprinkler leakage, hail, explosion, earthquake and riot or civil commotion. The forms had originally been filed, but were later withdrawn, but present forms closely follow the previously-filed forms.

There are three basic forms: Bridge Property Damage Form, Bridge Builders Risk Form, and Bridge Use And Occupancy Form.

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BRIDGE PROPERTY DAMAGE FORMS

This form insures against direct physical loss or damage to completed bridges

PROPERTY COVERED AND PERILSThis policy is different than others inasmuch it covers direct physical loss or damage

however caused. One condition requires that the bridge be kept and maintained in a “thorough” state of repair, or the insurer will not be liable for any losses or damage. There is another condition that states in essence that the policy will be void if the construction or “character” of the bridge is changed or altered in any material way. Of course, temporary changes for repairs do not apply to this condition.

The only exclusions besides war and nuclear exclusion, is loss or damage caused by or resulting from inherent defect, wear and tear, gradual deterioration or expansion or contraction due to change of temperature, unless the bridge or a material part of it, collapses.

VALUATIONValuation is based on actual cash value, with replacement cost coverage available for steel

and concrete bridges.

COINSURANCEThere is an 80% coinsurance provision, but when replacement cost is covered, the

coinsurance can be suspended for 18 months with a statement of compliance by a qualified engineer.

DEDUCTIBLEDeductibles are a flat amount, usually one percent of the bridge value, and will apply after

the application of the 80% coinsurance clause.

DEBRIS REMOVALDebris removal is an optional coverage, and is either an extension of the insurance under one

form, or an additional amount of insurance under another.

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CONSUMER APPLICATIONSnowy Inn in Vermont is undergoing a restoration and expansion, and part of the expansion

is to replace a bridge that leads to the Inn with a more traditional Covered bridge. The Inn has a Bridge Damage insurance policy that pays for damages to the bridge, however it specifically states the policy will be void if the character of the bridge changes. Obviously, this would be the case.

Snowy Inn then decides that they will simply build a new bridge and change the main road to the Inn, which would be scenic anyway, and reduce the old bridge to one lane and use it only for business and trades persons, etc.. They employ Riley Contractors to build the bridge. Riley purchases a Builders Risk Form and it was a good thing that they did, as when the bridge was started, it was early Spring and the total Spring thaw had not occurred. They were into the building process for about 3 weeks, when a sudden thaw upriver caused ice floes to come down the river unexpectedly, destroying some footing that they had already sunk.

After the bridge was completed in July and the Mayor cut the ribbon to open the bridge, a bad storm came up and lightning hit the bridge which not only put a hole in the roof, it damaged the footings under the bridge so that the bridge had to be closed for 3 weeks for repair. During this time, the other bridge would not do the job and was hard to get to anyway, so the Inn lost considerable money during one of their big seasons. Fortunately, the Inn had a Completed Bridge business interruption insurance policy. There was a 7 day waiting period, which is typical, but the insurance paid while the bridge was closed for the other two weeks.

Sometimes it pays to have a brother-in-law in the insurance business as he made sure that the Inn was fully covered at all times…

BUILDERS RISK FORM

The Bridge Builders Risk Form insures against direct physical damages to bridges while they are being built and can be written either in Named Perils form or in All-Risks form.

PROPERTY COVEREDThe policy covers the bridges entirely, including foundation, additions, permanent fixtures,

etc., plus it also covers materials and equipment and supplies which will become part of the finished bridge, and any temporary structures. There is no coverage for property in transit and the coverage only covers the property while it is at the stated site.

COVERED PERILSThere are the usual coverages of direct physical loss caused fire, windstorm, lightning, flood

or rising water, ice, explosion, earthquake or collision (excludes any collision with materials at

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the job site unless the collision is caused by one of the other covered perils). There is a lengthy exclusion for loss or damage due to suspension of construction.

The All-Risks form also excludes loss, damage or expense caused by wear and tear, gradual deterioration, expansion/contraction due to temperature change, and error, omission or deficiency in design, specifications or materials.

SPECIAL CONDITIONSUnless the insurer agrees in writing, the policy will be void if the general design or method of

construction is materially altered or changed; if it is assigned or transferred to another party or if there is any change in the ownership of the property; and if the insured conceals or misrepresentation any material facts; or is involved in fraud relating to the insurance.

REPORTINGThe policy is a reporting form and it provides increasing amounts as the value of the property

increases. This entails a detailed explanation of how the values are to be reported and the policy premium provisions. This is important in these policies as in case of a loss, the insurer will only be responsible on a proportional basis (as in a coinsurance clause).

The policy may also be written on a flat premium basis known as a “completed value basis.”

Deductibles also apply to both forms, and is a percentage of the total amount at risk at the time of loss.

VALUATIONThis valuation provision is “tough” in this form as it states the insurer will not be liable for

more than the cost or repairing or replacing the property damaged or lost with material of like kind and quality, after deducting depreciation. The insurer is not liable for any loss because of any law, ordinance, regulation, permit or license regulating construction or repair.

This policy is in force until the construction is completed or the expiration date of the policy, whichever occurs first.

BRIDGE USE AND OCCUPANCY FORM

This form covers business interruption and loss of income resulting from necessary interruption of the use of the property resulting from direct loss or damage, however caused. Revenue is defined as income from tolls and other operating sources that do not continue during the term of the policy.

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The policy contains a daily limitation for loss, limited to 1/365 of the policy amount. Coverage applies only to loss of revenue after a 7-day waiting period (other waiting periods are available).

Exclusions are similar to those in the other two builders forms, with 2 notable exceptions: Losses because the insured failed to keep the property in good repair, and failure or breakdown of machinery unless caused by external causes not otherwise excluded. The exclusion of government regulations, ordinance, etc., is part of the form, but may be eliminated in some cases.

There are provisions for establishing a provisional premium and amount of insurance, and a formula for establishing such premiums. The amount of insurance can be increased automatically by 125%, and it typically contains a 100% coinsurance clause.

UNDERWRITING OF BRIDGE POLICIES

Obviously risks regarding bridges under construction and bridges that have been built are so different and that must be treated differently. Either way, the type of bridge has a lot to do with evaluating the risk. The type of material used for the construction of the bridge, whether truss or beam bridges and the method of construction must all be taken into consideration.

CONSTRUCTION MATERIALSBridges may be constructed out of steel, reinforced concrete, pre-stressed concrete and wood.

Many bridges are built out of more than one of these materials, such as concrete used for the lower part (substructure) and steel for the upper (superstructure). Wooden bridges are usually small bridges, often built for the rustic appeal. Railroad bridges may still be built out of wood as in many parts of the country wood (timber) is inexpensive.

TYPES OF BRIDGE STRUCTURESThere are several major types of bridge structures. Truss or beam bridges are frequently

used, particularly for railroads. They consist of long beams across bridge piers, with concrete usually used for the decking.

Arch bridges or multi-arched bridges is the type of structure where the load factor is higher than a typical truss or beam bridge. The arch can be either above or below the decking.

Suspension bridges are probably the best known bridges, such as the Golden Gate bridge. The combination of the towers, the supporting cables and the esthetic styling create some difficult underwriting problems because this type of bridge has the potential for serious losses.

The cable-stayed bridge is where the decking or the road is supported by cables that directly transfer the load to a central tower. The Skyway Bridge south of St. Petersburg, Florida, is an attractive example of this type of bridge.

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Another common bridge is the box-girder constructed bridge, which consists of a long span, usually over wide rivers or valleys. Generally they are used for bridges at a higher elevation than the surrounding area, thus allowing for traffic to pass under the bridge.

BRIDGE BUILDING SYSTEMSOne common method of building bridges is the use of “falsework” whereby temporary

bridge supports or piers are erected which carry the weight of the bridge until the bridge has been completed and the load-bearing part of the bridge can support the loads. After the bridge is completed, the falsework is removed.

Prefabrication or cantilevering is a system whereby sections of the bridge are prefabricated, then hoisted into place (usually by cranes), and then joined together to make the bridge. This is done after the piers have been installed and are in place and ready to accept the load.

BUILDERS RISK EXPOSURES

Builders risk policies are generally written to insure the owner of the bridge or the bridge building contractor(s). The principal underwriting concerns can be divided into the following areas of concern:

Foundations, which support the piers, are considered along with the bed upon which they are placed. The strength of the foundations must be enough to support the completed bridge and the weight of the traffic using it.

Abutments must be thick enough and solid enough to avoid collapse if there should be excessive rain. Actually, abutments consist of the dirt and rocks, etc., usually evacuated from nearby areas. Frequently they can be covered with concrete or rock to keep them from washing away or slipping.

Caissons are the base for the piers. On land they are built before the piers can be constructed, in water they are usually floated out to the bridge and then sunk into the ground.

Reinforced concrete footings and pile caps are cast at the construction site. Particular care must be taken when constructed in the water, as a round “wall” is erected on the bed of the body of water, and then the water is pumped out and it is then filled with concrete. Many things can go wrong during this operation.

Piers are usually made of concrete, but can be made of steel or stone and even wood in some cases. Sometimes prefabricated piers are used, and every time that they are handled, this makes them more subject to failure.

The Superstructure obviously is particularly susceptible to windstorm damage

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COMPLETED BRIDGESThe factors involved in underwriting completed bridges are quite different than the

underwriting of bridges under construction. The risks are numerous, including possible damage from floods, ice, ship collision, dredging close to the bridge, windstorm, earthquake and just normal wear and tear on the bridge must be considered.

For loss of income and business interruption insurance, consideration must be given to how long it would take to repair or replace the bridge under the “worse scenario.” Checking for alternate routes to alleviate traffic problems in case the bridge is unable to be used, is necessary.

TUNNELS

Tunnel insurance is also a nonfiled class and they are insured much like the bridges, i.e. direct physical loss during construction, after construction and loss of income.

Tunneling by its very nature, is unique. The variety of material that the tunnel runs through runs the gamut from mountain tunnels to underwater tunnels. The techniques vary widely, such as using prefabricated sections for underwater tunnels, to using explosives and drills to penetrate rocky areas.

Each type of tunnel has its own risks. For instance, when tunneling through rock, there are risks of the tunnel collapsing or the roof falling, plus the always-present danger when explosives are used.

Much as in bridge insurance, the condition of established tunnels, the maintenance and repairs, are prime underwriting questions. The type of traffic through the tunnel determines the exposure to fire and explosion. The questions are many, and every tunnel is different.

DAMS

Dams are also unique in their applications. Each is an engineering triumph and some generate power, others are used for more mundane purposes, such as irrigation and for flood control in cases of rising waters. Dam insurance is a nonfiled class.

Dams are built of differing material, depending upon the geographical location, the amount of water that it will restrain, and the purpose of the dam. Some dams, like the large dams that produce hydroelectric power, are constructed of reinforced concrete and must depend upon firm and solid footings. Some dams are built between rock formations which then become part of the

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function of the dam. Those dams built to divert rivers during flood stages can be constructed of dirt, rocks, concrete and sometimes metal. These dams are called “cofferdams” and must be high enough to contain the water at its highest point during the flood seasons.

During construction of hydroelectric dams, particular attention must be paid to the turbines and other equipment that will be transported and installed at the dam. In addition, during construction care must be taken that the water is not too high, so that it would allow water to flow over a cofferdam. In certain parts of the country, the hazards of earthquake must be seriously considered

PIERS, WHARVES, DOCKS AND SLIPS

The Definition includes piers, wharves, docks and slips, dry docks and marine railways. This is a nonfiled class of business.

This is another unique class(s) of business, and each situation is different. As with many Inland Marine coverages of this type, common sense seems to be the principal tool of the underwriters. Obvious hazards such foots, marine traffic, location, type of material, etc., etc. will be considered.

Coverage may be either on an All-Risks basis, or Named Perils. In the 1953 Definition, perils of fire, lightning, windstorm, sprinkler leakage, hail, explosion, earthquake, riot and civil commotion cannot be covered. This is mentioned as some states still use the 1953 Definition. Therefore, the only perils that can be insured in those states would be damage caused by floating ice, a boat/ship ramming the structure, flood, or something other than a boat or ship ramming into the structure. Generally, losses due to marine life are excluded from the All-Risks coverage.

PIPELINES

Pipelines are another “instrumentality of transportation” under the 1976 Definition. “All property at manufacturing, producing, refining, converting, heating or conditioning plants” are excluded. Pipelines are a nonfiled class of business and insurance can be written on the construction of a pipeline, or on a completed pipeline. The contents of the pipeline can be covered, and loss of income because of damage to the pipeline, can also be covered. Some policies will also cover tanks and the contents of the tanks, when operated as part of a pipeline.

Parts of pipeline construction can be insured separately, such as the pipeline crossing a body of water when the pipeline may be pre-assembled and joined over the water.

Generally, coverage is provided on an All-Risks basis, with exclusions that pertain to the type of risk being insured. Typical exclusions would be losses due to wear and tear, gradual

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deterioration, mechanical or electrical breakdown, defective design, plans or specification or defective workmanship and material, and the contraction-expansion of the pipeline due to change in temperature. Collapse is usually covered, so if the collapse was caused by the contraction or expansion of the pipeline due to temperature changes, then it would be covered.

Underwriting considerations are numerous, and depend mostly on geographical features. Areas where the pipelines go underwater are of particular interest, not only because of construction hazards, but also because of repair difficulties for completed pipelines.

POWER AND TRANSMISSION LINES

Power and transmission lines are also covered under the Definition and is a nonfiled class of business. All-Risks of direct physical loss or damage is the usual coverage. Since power and transmission lines can be either high up in the air on concrete poles, or under the ground in tunnel-like covers, exclusions can vary widely. Generally they exclude the usual wear and tear and deterioration, mechanical breakdown, change of temperature, faulty materials, short circuits unless fire ensures, property under repair, flood, earthquake and employee dishonesty, war and nuclear incidents.

Coverage extensions can be purchased to cover debris removal, certain tower repair situations, loss of income and extra expense coverages. The policy can usually be voided if there is any change in the construction, design, etc., of a tower, and there is usually a 100% coinsurance clause.

RAILROAD ROLLING STOCK

Coverage for railroad rolling stock is not covered under the Definition, and actually is sort of a “step-child” as even though it may not be “legitimately” Inland Marine, it has traditionally been insured as an Inland Marine coverage. It was a filed form until the 1980’s, when it was withdrawn, so in general, it is an unfiled and unregulated form.

There are several classes of people who have an interest in railroad rolling stock, such as public transit authorities, shippers, railroads and private car lines, utilities, and even individuals, lessors and lessees. Some of these own their own railroad cars, some own and lease, and some simply lease railroad cars. Railroads may exchange cars between railroads (at which time they become “foreign” cars), and the railroads responsibilities for these “foreign” cars are covered by association regulations. For some individuals, there are tax ramifications that make ownership of the cars quite financially attractive. If the car is leased, then the contract between lessee and lessor spells out the responsibilities of each.

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COVERED PROPERTY

The property covered by these forms would encompass locomotives, passenger cars, passenger coaches, box cars, flat cars, tank cars, etc., - not to forget the children’s friend, the Caboose! The property is almost always scheduled.

COVERED PERILS

The policy may be either All-Risks or Named Perils. Named perils are the usual fire, lightning, collision, strike or riot, plus derailment or overturn. The All-Risks form usually excludes wear and tear, gradual deterioration, latent defect, loss due to artificial current to electrical equipment, and mechanical breakdown or structural failure. As typical, the exclusions will not be excluded if a covered perils ensues.

VALUATION

Determining the value of rolling stock is rather unusual, and will be either replacement cost, actual cash value, or the “settlement value.” Settlement value is a method established by a railroad association ruling that takes into consideration (depending upon how old the stock is and the type of rolling stock insured) the (a) the Depreciated value; (b) 120% of the Salvage value, or (c) the Salvage value only – depending upon which is the greater. Of course, there are specific rules as how to determine the Depreciated value and the Salvage value.

DETERMINING LIABILITY

Subrogation is used considerably in the insuring of railroad rolling stock, particularly where “foreign” cars are involved. Typically, if the amount of loss to a damaged car is in excess of the valuation amount, then the responsible railroad has the option of either keeping the car and paying the valued amount to the railroad car owner, or if the car is not damaged to the valued amount, then railroad that owns the car may either have the car returned to them, or have the railroad that damaged the car pay for the repairs. These rules may seem clumsy or complicated, but the railroads are used to them as they all belong to the American Association of Railroads who outline the railroad’s responsibilities in the AAR Rules of Interchange.

SPECIALTY RAILROADS

There are many “Specialty” or “Short-Line” railroads operating in the United States. Their purpose varies widely, from hauling freight for short distances, to hauling passengers around a theme park. Some move very slowly while others (usually transporting goods) move quite

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rapidly. Some of them are pulled by electric or diesel locomotives, others by vintage or coal-burning steam locomotives. They account for less than 10% of the total railroad industry.

These railroads are so specialized that each situation must stand on its own. Obviously the forms are nonfiled and each situation has its own unique perils, hazards and liabilities, so the forms are “tailor-made” to fit the particular situation.

STUDY QUESTIONS

1. Which of the following is NOT a type of Inland Marine Bridge Form?A. bridge property damageB. bridge Builders RiskC. bridge construction financing creditD. bridge occupancy

2. The Bridge form is different than most other Inland Marine forms, becauseA. it does not cover direct physical loss or damage to a bridge.B. the bridge must be completed and in operation before it can be insured under an Inland

Marine coverage.C. the policy covers direct physical loss or damage however caused.D. it must be issued only by a Marine insurer.

3. Which of the following will not void a Builders Risk (Bridge) policy, assuming the insurer had not agreed in writing?A. The completed bridge is to be used as a toll bridge, a fact that had not been decided when

the bridge construction began.B. The general design of method of construction is materially altered or changed.C. The policy is assigned or transferred to another party or if there is a change in ownership

of the property.D. The insured conceals or misrepresents material facts or is involved in fraud relating to the

insurance.

4. The Bridge Use and Occupancy FormA. covers loss of income only from any cause.B. covers business interruption and loss of income resulting from necessary interruption of

the use of the property resulting from direct loss or damage, however caused.C. covers business interruption and loss of income resulting from necessary interruption of

the use of the property resulting from direct loss or damage, caused from insured perils only.

D. covers only privately owned toll drawbridges.

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5. Bridge Builders Risk policies are generally writtenA. to insure the owner of the bridge only,B. to insure the bridge building contractor only.C. to insure only privately owned toll bridges.D. to insure the owner of the bridge or the bridge building contractor(s).

6. Tunnels may be insured under Inland Marine forms. Which of the following is true?A. Tunneling is unique, they are all different, and the risks are never identical to other

tunnels.B. Tunnels may be insured if they are only through mountains; tunnels under water is

covered by Marine insurance,C. Once the tunnel has been built and insured, the continued maintenance of the tunnel is of

no concern to the insurer, only to the Federal Government.D. The form is “boilerplate”, and is filed with the State Insurance Departments.

7. Which of the following is not eligible for insurance under an “instrumentality of transportation” pipeline form?A. A pre-assembled portion of a pipeline crossing a body of water.B. The contents of a pipeline.C. Loss of income due to damage to the pipeline.D. Losses due to mechanical breakdown.

8. Ceno Gas Co. runs a pipeline carrying natural gas through 3 states. In an area where the ground was particularly hard and rough, the pipeline is on steel supports aboveground as much as 15 feet. The pipeline is insured under the Inland Marine form with the usual exclusions of wear and tear, gradual deterioration, etc., including contraction-expansion of the pipeline due to change in temperature. The area where the pipeline is exposed is in an area of moderate temperatures and few storms, however a storm brought a sudden cold front through, and the temperatures dropped over 30 degrees in an hour. Because of this, the steel supports of the pipeline and the pipeline itself, contracted so rapidly that the supports collapsed, rupturing the pipeline.A. Only the contents would be covered.B. Since the collapse was caused by the temperature change, and since collapse was covered,

this damage to the pipeline would be covered under the policy.C. The policy does not cover contraction of the pipeline, so the insurer is not liable.D. Only reconstruction of the supports would be covered by the policy.

9. Railroad Rolling Stock can be covered by Inland Marine insurance, A. but there are not many people who have an interest in this type of insurance at all.B. and public transit authorities, shippers, railroads and private care line, utilities and even

individuals are interested in this type of coverage.C. but this type of policy only covers railroad rolling stock that is owned by the operators.D. but there is no tax ramifications so ownership of cars is not attractive.

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10. In determining the loss value under Railroad Rolling Stock insurance, “settlement value” is one method. “Settlement Value”

A. is a method prescribed by law, that states that only a court of law can settle the value.B. is a method established by the Railroad Association that takes into consideration several

pertinent factors, such as age and type of equipment, depreciated value and the salvage value.

C. is the amount that rolling stock of the same type and age, can get in the open market.D. is the same as the replacement cost.

ANSWERS TO STUDY QUESTIONS

1C 2C 3A 4B 5D 6A 7D 8B 9B 10B

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CHAPTER EIGHT - CONTRACTORS EQUIPMENT INSURANCECHAPTER EIGHT - CONTRACTORS EQUIPMENT INSURANCE

Contractors equipment Inland Marine insurance provides more commercial Inland Marine insurance premium than any other class, and also covers a wider variety of exposures than any other Inland Marine class.

Contractors Equipment Inland Marine insurance is a “world unto itself.” Contracting operations can be conducted in all kinds of situations and in a very wide variety of environment, such as above and underground, in forests, in mountains and hills, and just about anywhere where people build. Therefore, there are many insureds who are eligible for this type of coverage, including but not limited to:

road builders; building contractors; excavators; steel erectors; demolition crews; builders of bridges and tunnels; dam builders; governmental agencies having responsibilities for maintenance, road construction, snow

removal; landscape companies; cemetery maintenance services; shipyard contractors; farmers and others who build ponds of clears land for others, etc., etc.

Another long list could be provided of the types of equipment used by these various types of contractors, but some of the most common would include tractors, cranes, graders, forklifts, backhoes, front-end loaders, bulldozers, draglines, concrete mixers, and on and on. Smaller items used by contractors are also insured, such as jackhammers, portable generators and pneumatic tools, etc. Even shovels and rakes can be included.

To be covered by Inland Marine insurance, by definition the equipment must be of a “mobile or floating nature.” This has been interpreted quite liberally, as asphalt mixing plants and stone crushers have been found to be eligible for coverage under a contractors equipment insurance policy.

One area that has caused some difficulty in determining eligibility for this insurance, is that of highway use. According to the prevailing Nationwide Marine Definition, any vehicle that is designed for highway use is not eligible for coverage under an Inland Marine policy. However, some of the contractors equipment is mounted on rubber tires. The distinction seems to be based on the primary use of the equipment for which it is designed. If the equipment performs its

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duties at the site to which it is moved, then it is eligible, even though it may have rubber tires and can travel on highways.

Obviously, this causes some interesting problems. For instance, if a portable drilling rig is mounted on a truck chassis and is not separated from the chassis when drilling, then it would be eligible even though when going from site to site, it travels on a highway. The drilling rigs are generally mounted on a chassis that is designed for travelling over rough terrain, and the chassis becomes part of the drilling rig.

CONSUMER APPLICATIONCourtland Cement company provides ready-mixed concrete for large contractors at the

worksites. They use large cement-mixer types of trucks, which cannot be insured under an Inland Marine form as they are classified as vehicles. They recently developed a large concrete mixer that is transported from location to location by a large truck tractor and is mounted on wheels so that the tractor can tow it to the work location. Once it is at the job site, the tractor leaves it, and the mixer remains until it is no longer needed at that location. Concrete and gravel are transported to the mixer by other trucks. In this case, the mixer would be eligible for coverage under the Inland Marine form.

PROVISIONS

This is a nonfiled class but most insurance companies have forms that they generally use and throughout the years have achieved some standardization. The provisions listed below are typical in most of the contractor equipment policies.

PROPERTY COVERED

With the vast number of types of contractors equipment being used, it is necessary to spell out exactly what equipment is being covered by schedule, although it may be written for a single total amount of insurance as a blanket policy. Small items such as shovels and other hand tools, can best be covered by a blanket declaration (such as “23 long handled shovels, 34 concrete hoes, etc.), whereas large equipment would be scheduled individually. When equipment is scheduled, identification must be complete with identification number, model number, year and make of equipment.

Blanket policies may be used for those who have a rapid turnover in equipment. For underwriting purposes, the insurer will have to be furnished with a complete list of all equipment to be covered at inception of the policy, with provisions for annual adjustment. Loss payments are usually limited to a maximum on any one item insured.

If the equipment is rented or leased, it may also be covered. If the insured is unable to provide a schedule of equipment, then the equipment may be covered under a blanket policy,

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with limitations as to value of any specified item. The insured is required to report the cost of the rental or lease, and at a specified time, they must also report the value of the equipment.

Scheduled policies usually have a provision that allows coverage of newly acquired equipment, but such equipment must be reported within 30 days of acquisition. This equipment may be owned, leased or rented. Until the equipment is scheduled, it is usually covered for either a particular dollar amount, or a specified percentage of the total insurance amount.

CONSUMER APPLICATIONGeneral Contractors, Inc., has a Contractors Equipment policy. They recently contracted for

construction of an office park in an area that has unusually heavy clay soil. They decide that they need a newer type of trencher that can handle the clay better. The trencher was delivered on a Friday, so it was used over the weekend as General was on a 7-days a week schedule.

While using the trencher on Sunday, an abandoned culvert was crossed by the trencher, the trencher’s digging mechanism became entangled with a hole in the culvert which then collapsed, overturning the trencher and causing considerable damage to the equipment.

The insurance policies provision for covering new equipment prior to scheduling was either 25% of the total amount of the policy, or $50,000, whichever was less. The damage to the trencher was only $11,000, so it fit well within the limits of the provision.

PROPERTY EXCLUSIONS

The wording for these exclusions may vary from policy to policy, and may or may not include all of the following exclusion examples.

Aircraft and watercraft. Automobile, motorcycles, trucks, trailers and semi-trailers, or simply put, any vehicle

designed and principally used for highway transportation. Equipment of property that is loaned, rented or leased to others. This provision may be

deleted if the insured can show responsibility on the part of the insured and if the insured has had a good record in renting or leasing the equipment.

Property located underground. Equipment specially designed and used underground, can be insured by a form designed for that purpose.

Tires and tubes are excluded unless the damage or loss is caused by fire, windstorm or theft, or is “coincident” with other loss or damaged covered by the policy. This means that if, for example, the equipment was damaged by a covered loss – such as by collapse of a wall severely damaging the equipment – and the tires were also damaged, then they would be covered. If vandals slashed the tires, they would not be covered.

Valuable papers such as blueprints, designs, specifications or other such papers, as they should be covered under a valuable papers coverage.

Property that would properly be insured under a Builders Risk policy or Installation Floater or similar type of coverage.

“Consumable property”, such as oil, fuel, grease, asphalt aggregate and other paving or building materials and supplies. Again, they would be covered under other forms.

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COVERED PERILS

Contractors Equipment policies are written either on an All-Risks or Named Perils basis. The All-Risks policy uses typical wording for this provision: “all risks of direct physical loss or damage from any external cause” are insured, except as excluded. When the policy is a Named Perils, the following perils are covered, and since there is no standardized wording for these policies, there are variations.

fire and lightning; windstorm and hail; explosions; flood (rising navigable waters); earthquake; collapse of bridge or culvert; theft; collision, upset or overturn; Perils of the sea, if the covered property is on a ferryboat; vandalism or malicious mischief.

Underground mining equipment would usually have added pertinent perils peculiar to underground work, such as the roof falling in, cave-ins, landslides, and the breaking of drilling equipment due to pressure from the material being drilled.

EXCLUDED PERILS

The excluded perils and the wording of these perils, are often quite different from policy to policy, but generally exclude the following:

If the equipment is rated for load weight, loss or damage caused by exceeding the manufactures suggested limit is excluded.

Cranes and derrick booms are excluded, except if the loss or damage was caused by fire, windstorm, lightning, hail, explosion, riot, etc.

The breakdown or failure of the equipment due to mechanical or electrical failure is excluded, unless the loss or damage is caused by fire, lightning or explosion.

Wear and tear and gradual deterioration, rust, damage due to dampness, inherent vice or latent defect are excluded, as they are in most Inland Marine policies.

Dishonesty of employees, which is also common in most Inland Marine policies. Unexplained loss and mysterious disappearance, such provision is found in most All-

Risks policies and those Named Perils policies that cover theft. Any repairing, adjusting, servicing, or maintenance operations, as these are usually borne

by the insured. If fire or explosion is result of any repairing, etc., then the loss by the fire or explosion is covered.

War and nuclear hazards.

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There can be other exclusions, one of which could be any brush-burning exposure where a tractor or other machinery is used to push trash or debris into a burning pile.

DEDUCTIBLES

The deductible in a Contractors Equipment policy is very important for underwriting as it can make the difference between profit or no profit on a policy. Deductibles can be applied to a covered loss or it can be applied to certain perils or insured property. A deductible can apply to a particular covered activity or equipment operations or location of equipment (such as while waterborne). They can be a flat amount, such as $100, $500, $1,000, $2,000 or more, or it can be expressed as a percentage, such as “1% of the sum insured, but not less than $1,000 nor more than $5,000.”

VALUATION

Contractors Equipment policies are usually valued on an actual cash value basis, taking into consideration depreciation. Replacement cost may also be used but many policies will apply replacement cost only if the insured item is actually replaced or repaired.

LIMIT OF INSURANCE

Scheduled policies usually have a limit of insurance that applies to each item insured. They will also frequently have a catastrophic limit that applies when two or more items are involved in the same loss, which may be less than the total of all of the scheduled items.

COINSURANCE

Coinsurance for blanket policies are usually 90% or 100%, scheduled policies are usually subject to at least 80%, and the coinsurance percentage applies to each item scheduled.

COVERAGE EXTENSIONS

Other coverage can be added and some of the most often used are coverage for employee’s tools and clothing, debris removal, rental reimbursement, and business interruption and extra expense.

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UNDERWRITING

Perhaps as an oversimplification of a very complex issue, underwriting for this type of policy requires considerable knowledge of all of the various types of contracting operations that use mobile equipment, and knowledge of the perils that can cause damage or loss to the various types of equipment used in each operation.

TYPES OF OPERATIONS

There are many types of operations that use mobile equipment. just a few of which are mentioned below.

Road Building is an obvious operation that uses mobile equipment, such as graders, excavators, dithers, loaders, rollers, earthmovers, etc. Hazards are principally fire, theft, vandalism and upset, and in some cases, explosion if explosives are used. Equipment is usually spread around, reducing the maximum loss that could be occurred.

Strip mining is usually performed by draglines, drills, shovels, loaders, etc. Hazards of overturning the equipment and blasting are present.

Sub-level Quarry and Open-pit mining can become a substantial operation as they usually last a long time, with roads built into the sides of the evacuation. Equipment will be working down in the pit and also at the surface. In addition to the hazard of overturn, they’re also hazards of flooding, falling rock, flooding and explosion.

Stevedoring is the loading and unloading of cargo from ships, and covers forklifts, cherry pickers, cranes, lifts and other types of equipment built to handle material. The equipment is usually very well maintained, principal hazards are fire and equipment falling overboard.

Shipyard operations use equipment such as cranes, forklifts, mobile cranes, burning and welding equipment. Principal hazards are fire and windstorm.

Building contractors are perhaps the most common of the contractors using equipment that can be covered under this form, which would include pile drivers, cranes, derricks, excavators and similar equipment. Hazards are fire, windstorm, vandalism, collapse of cranes or contact with other structures, upset of evacuating equipment, etc.

Marine contractors use waterborne equipment such as cranes, compressors, pile drivers and other equipment usually carried on barges, and highly susceptible to falling overboard and sinking to the bottom of the water. An underwriter will have to determine the seaworthiness of the carrying vessel, and determine how securely the equipment is fastened down.

Logging operations present different kinds of exposures, and use such vehicles as tractors, graders, yarders, loaders and skidders, and other equipment designed for logging. There are

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hazards of sliding or skidding down a mountain, turning over, burning in forest or brush fires, theft, vandalism, turn-overs. The ability to move some of the equipment quickly has an effect on the probable maximum loss, as well as the condition and availability of logging roads.

Coal mining is another different field. Mining can be for bituminous, lignite or anthracite coal, and the coal can be mined underground, strip mining, or by “augur and punch-hole mining techniques. Each of these methods have their own peculiarities and hazards.

Oil and gas well exploratory rigs, and even well servicing equipment, can be insured. The major hazards are blowout and cratering. This equipment is very costly and in case of fire, it could be very costly. The servicing equipment is used for existing wells, and does not have the exposures that the exploratory rigs have. Their principal hazards are windstorms and fire.

Operations using cranes are another highly specialized field as there are many types of cranes and they can be used for many purposes. Because they are quite expensive and because they have the potential for substantial losses, the underwriter must be as thorough as possible.

The most common types of cranes are:

Overhead Cranes that travel on fixed overhead rails and are used principally in manufacturing and assembly operations.

Super (or Mast) Cranes are those with long booms – making them prime candidates for collapse. They can be mounted on trucks or rails or on treads.

Gantry Cranes are those that are mounted on travelling bridges or spans, used mostly at shipyards and docks. Windstorms are a particular hazard to these types of cranes.

Hammerhead or Tower Crane is really more of a derrick. A derrick has a fixed base, while a crane traditionally has a mobile base. These types of cranes are used for erecting large buildings and have a long boom with counterweight. Some of them are “climbing” cranes, which means they can move up as the high-rise building moves up. Even light winds can affect hammerhead cranes.

Hydraulic Cranes can be used for many functions as they can be mounted on wheels or crawler treads and they have a telescoping boom to which they can add extensions. Generally they appear to be a crane mounted on a truck – which they really are in most cases. Since they are telescoping, they can collapse, or turn over.

Boom Collapse is a definite hazard with booms as they represent a large part of the total value of a crane. The booms are made in sections and are moved up and down when additional sections are to be added or deleted, which can cause metal fatigue if it bent just a little during the dismantling of the boom. The principal cause of boom damage is improper operation, such as bumping the boom against another object. Any sudden stopping or movement of a boom can cause damage.

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PROBABLE MAXIMUM LOSS

The probable maximum loss (PML) is used for underwriting for many Inland Marine forms. In the case of contractors equipment, the size, value and location of the equipment will contribute to the PML. Risks unique to the particular piece of equipment lend to the calculation of the PML, such the risk of roof collapse for equipment used for underground mining.

INSURANCE TO VALUE

Contractors equipment insurance has a most unusual problem in attempting to place a value on the equipment. The value of used equipment has a tendency to appreciate in value, rather than depreciate. This makes it very difficult for underwriters to determine if the values on the policy are adequate. Underwriters must rely upon catalogs and guides to the value of equipment, to determine the values of used equipment.

Contractors will declare the value of equipment on their tax forms, which have been depreciated as much as the government will allow. Some contractors use their tax forms for valuation purposes when applying for insurance. If the underwriter is not careful, it would be quite possible that a partial loss may extend to the total limits of the policy.

BUSINESS INTERRUPTION AND EXTRA EXPENSE

In order to write the business interruption and extra expense coverage, the underwriter must make sure that there are contracts of insurance present that will support the limit of insurance requested. Business interruption can be written on either a single piece of equipment, or on an entire schedule.

Particular items of equipment that are essential to the operations of the contractor are usually those insured. For instance, a large crane is essential to a building contractor that erects multi-story buildings. The underwriter needs to ascertain if the insured equipment can be easily replaced or repaired in case of damage or loss. In any event, it will require considerable investigation.

Extra expense is the amount of money necessary for the contractor to continue operations in case of a total or partial loss. Sometimes there can be both loss of income (business interruption) and extra expense involved. Business interruption insurance usually includes extra expense to the extent that it will actually reduce the actual loss.

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RATING

As with many Inland Marine coverages, the premium can be developed by applying a rate to the limit of insurance for each individual piece of equipment or to the entire schedule. The underwriter may apply rates for specific pieces of equipment, such as cranes and asphalt plants. Deductibles can be applied to all pieces of equipment, or just to specific pieces of equipment.

STUDY QUESTIONS

1. Contractors Equipment insurance provides more ____________________ than any other Inland Marine class, and also covers ___________________ than any other Inland Marine class.A. exclusions - more propertyB. commercial Inland Marine insurance premium - a wider variety of exposuresC. commission - larger insurance agencies block of businessD. losses - more risk

2. In order for contractors equipment to be covered under the Contractors Equipment form, the equipmentA. must be of a mobile or floating nature.B. must exceed $100,000 in value for each identifiable scheduled item of equipment.C. must be kept inside a covered building when not in use.D. must be leased or rented.

3. If a contractor has a rapid turnover in equipment, the type of Contractors Equipment policy would probably beA. a scheduled form.B. a blanket policy.C. a Commercial Crime policy.D. a Commercial Property Policy.

4. Juniper Contractors is a road building contractor, covered by a Contractors Equipment policy. Their large road grader had very expensive and large tires. Asphalt being applied to a road near the grader was hit by lightning, setting the asphalt on fire, which in turn burned the grader but principally destroying the tires.A. The tires would not be covered as they are specifically excluded from these policies.B. The tires would be covered only if the lightning itself hit the tires.C. The tires were damaged by a covered cause of loss, so the tires are covered.D. These policies all exclude damage caused by asphalt or other flammable material.

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5. The following losses occurred to Juniper Contractors on the same day: A contractor’s dump truck rated for 5 ton went through a bridge carrying a 7 ton load of rock. Lightning strikes a crane used for construction of a 10 story office building. While changing the oil and servicing construction equipment, a wrench hit a steel rod, causing a spark which started a fire, destroying the truck that was being serviced. When the gas tank on the truck caught on fire, the explosion destroyed an asphalt spreader. Would the Contractors Equipment policy cover these losses and if so, which ones?A. Dump truck is not covered, every other loss would be covered.B. All of these losses are generally excluded, so none of them would be covered.C. The asphalt spreader loss is not the result of a direct loss (the adjacent truck catching on

fire), so it alone would not be covered.D. All of these losses would be covered as they were all the direct result of a covered peril.

6. Deductibles in a Contractors Equipment policy is important, and but normally cannot be appliedA. to a certain loss, certain peril, or insured property.B. to a covered activity or equipment operations.C. to the location of equipment.D. to underwriting considerations, as underwriters are forbidden by law to take into

consideration deductibles when underwriting – in many states they are not allowed to change the applied-for deductible in these forms.

7. Mast, Gantry, Hammerhead and Hydraulic are types ofA. bridges.B. cranes.C. heavy equipment earth movers.D. tunnel construction equipment.

8. With a Contractors Equipment policy, Business Interruption coverageA. is not available.B. can be written only on an entire schedule of equipment to avoid anti-selection.C. can be written on a single piece of equipment or on a schedule of equipment.D. can be written, however any extra expense affiliated with loss of income can not.

9. Extra Expense coverage under a Contractors Equipment policy is A. the amount of money necessary for the contractor to continue operations in case of a total

or partial loss, and there may be both business interruption and extra expense involved.B. the additional cost of insuring interim leased equipment to make sure the contractor meets

his completion deadline.C. the additional premium charged when there is either sudden increase in the size of the

construction job, or there is an additional simultaneous construction job.D. not available in most states.

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10. When underwriting Contractors Equipment insurance, the PML is used toA. determine the commissions paid on the policy based on the premium (Premium

Masticulation Loading)B. evaluate the experience and expertise of general contractor at time of underwriting,

(Probable Methodology Limitations).C. determine the probable maximum loss , taking into consideration the size, value and

location of the equipment.D. determine the formula for contributing to a loss in case of duplication of insurance.

ANSWERS TO STUDY QUESTIONS

1B 2A 3B 4C 5A 6D 7B 8C 9A 10C

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CHAPTER NINE - BAILEE/BAILOR COVERAGESCHAPTER NINE - BAILEE/BAILOR COVERAGES

INTRODUCTION

A Bailee is a person who has temporary rightful possession of another’s property.

This chapter will discuss the Inland Marine coverages that insure property while it is in the custody of another (bailee), and insurance that covers the property while it is in the custody of the other person, often the owner, and is the bailor. While previous chapters have been involved with Inland Marine insurance on cargoes and property that is moveable, and equipment used by contractors, this area is different in many respects.

There are more than one bailee policy – for instance one form is a bailee liability policy that provides coverage only if the bailee is liable for the loss, while another form, bailee customer’s policy, covers the property regardless of the liability of the bailee.

Bailor policies on the other hand, are issued in the name of the bailor which can be a person or organization, that has lawful possession of the property prior to releasing it to the care and custody of the bailee.

One of the most common bailee policies is that used for a dry cleaning establishment or a watch repair store, etc.

The 1976 Nation-Wide Marine Definition provides that an Inland Marine policy may be written on any kind of property while in transit to or from, or in the custody of, a bailee. The bailee must not be owned or operated or controlled by the bailor.

COMMON EXCLUSIONS

Personal property floaters (to be discussed later in this text) and several other types of Inland Marine insurance have exclusions in common. Rather than continue to specify those exclusions, the following list of exclusions common in All-Risks policies are usually those listed within the policy as exclusions, with certain differences that can be discussed or expanded upon within the text pertaining to the coverage under study.

Gradual deterioration, wear and tear;

Insects, vermin, inherent vice;

Hostile or warlike action in time of peace or war, including action taken in hindering, combating or defending against an actual, impending or expected attack; action by an

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agent of a government, power, authority or forces; any weapon of war employing atomic fission or radioactive force whether in time of peace or war;

Nuclear reaction or nuclear radiation or radioactive contamination, whether such loss be direct or indirect, proximate or remote or is caused by, contributed to, or aggravated by the perils insured against. (There is usually coverage for direct loss by fire resulting from such causes);

Insurrection, rebellion, revolution, civil war, usurped power, or action taken by governmental authority in hindering, combating or defending against such occurrence.

LIABILITY OF BAILEES

A bailee has rightful temporary possession of another’s property. Another legal definition is “the party to whom personal property is delivered under a contract of bailment.” (Black’s Law Dictionary). Volumes have been written on the subject of “bailment” and there have been many court cases. Black’s defines Bailment as “A delivery of goods or personal property, by one person to another, in trust for the execution of a special object upon or in relation to such goods, beneficial either to the bailor or bailee or both, and upon a contract, express of implied, to perform the trust and carry out such object, and thereupon either to redeliver the good to the bailor or otherwise dispose of the same in conformity with the purpose of the trust.”

Bailment may be distinguished from a conditional sales contract in which property is turned over to another party with the intention that the title will pass to the other party upon the completion of stipulated conditions (since as payment of a balance due).

Legally, while there are many types of bailment – common law lists 6 types of bailment, and other legal scholars have listed as many as 7 – there are the three types that are relevant to Inland Marine insurance.

1. Gratuitous bailment for the benefit of the bailor. It has been legally defined as “another name for depositum or naked bailment, which is made only for the benefit of the bailor and is not a source of profit for the bailee.” “Depositum” simply means to be kept for the use of the bailor. An example would be when a neighbor takes care of your pet while you are away on a trip and for which there is no payment.

2. Gratuitous for the benefit of the bailee is the second type. This simply means that there is no payment, but the benefit is that of the bailee. Dagwood Bumstead’s neighbor who is always borrowing his tools is a good example.

3. The third type is bailment for hire and for the mutual benefit of both bailee and bailor. Legally, “a contract in which the bailor agrees to pay an adequate recompense for the safekeeping of the thing entrusted to the custody of the bailee, and the bailee agrees to keep it and restore it on the request of the bailor, in the same condition substantially as he

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received it, excepting injury or loss from causes for which he is not responsible.” This may also be referred to as commercial bailments.

(And just in case one would arrive at the conclusion that legal scholars are ALL longwinded, an English Lord quoted frequently in common law, said that “bailment should be divided for all practical purposes as, First, those bailments which are for the benefit of the bailor, or some other person whom he represents; second, those for the benefit of the bailee, or some person represented by him; third, those which are for the benefit of both parties.”)

DEGREE OF CARE

What difference does it make as to which type of bailment is under consideration? Basically, the bailee has certain responsibilities to the bailor for the safety of the property and these responsibilities depend greatly on the type of bailment in question.

Obviously, a bailee who is taking care of a neighbor’s pet, or is storing some furniture in their basement, and for which they will not be paid, would not be required to exercise as much care as a bailee for hire. This does go a little further though, as for example, a bailee who stores expensive furs for profit would have to exercise greater care while serving as a bailee, than a bailee who fixes lawnmowers. The bailee has to anticipate the hazards of the property of which they have in their custody, and must take appropriate action. Using the same examples, a furrier who stores furs must be aware of the possibilities of theft and must have an elaborate alarm system and locked vaults for this property. A repair shop that repairs lawnmowers, although there would be a theft problem also, if the mowers are locked inside a secure building when there is no one present at the shop, this should be considered as adequate.

Still, the degree of care required is less than that of a carrier. In contrast, the responsibility of a carrier to protect other’s property is almost that of an insurer. A bailee must only use the care that an ordinarily prudent person would exercise, under the circumstances, in handling his/her own property. To go a little further, a carrier is responsible for loss by fire (except when it is an act of God), but the bailee is liable for damages by fire only if the bailee has been negligent.

However, some courts have taken the stand that the bailor can make a prima facie case of negligence by showing that the property was not returned or that it was returned in damaged condition. (This comes up frequently on televisions “Judge” shows – like Judge Judy, for instance). This really just shifts the balance of proof to the bailee, as after all, the bailee is the only one who really knows what has happened to property in his/her custody.

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CONSUMER APPLICATIONSam’s expensive Sony video camera stopped working, so he took it to Electronic Al’s shop

to be repaired. Sam was notified that a special battery had to be ordered and it would take 3 days before Al could repair it. Al kept it in a locked steel cabinet on a central alarm system.

The second day of custody, a fire broke out at night and before the security company could get the fire department out there, part of the building was destroyed including the cabinet in which the camera was stored. The fire investigator determined that the fire was caused by squirrels who had chewed a wire in the attic. Al was not aware of any squirrels in his building.

Sam maintained that it was Al’s job to keep good care of his camera. Had he kept it in a “more” fireproof cabinet, it would not have been destroyed.

Al contended that the building was kept spotless (proven by photos), and he had an excellent alarm system. Al was concerned about theft because such cameras and other equipment that he repaired, were known targets of many thieves. The steel cabinet was made of heavy material but the problem was the heat, and not the fire itself. The heat had melted the plastic in the camera, rendering it a useless pile of plastic. The building was sturdy, in good repair, and had no history of fire.

The court would probably rule that Al was not responsible for the fire and was not negligent.

Where property is in the exclusive possession of a bailee for hire and is damaged in a way that ordinarily does not occur without negligence, the burden of proof is upon the bailee to show that the injury was not occasioned by his negligence. Braman-Johnson Flying Service, Inc. v. Thompson, 167 Misc. 167, 3 NYS(2) 602(1938)

It should be noted that it is against public interest for a person to contract away their entire negligence liability, therefore the bailor may not waive their rights against the bailee for negligence. However, the bailee may limit the amount of liability by limiting the valuation of the property, and in many cases, if the bailor insists the valuation is too low, for an added cost, it can be raised.

CONSUMER APPLICATIONBruce parks his new BMW roadster in Jake’s garage while he attends a business meeting in a

nearby office building. The garage attendant asks Bruce how long he will be, and when he replied that he would be about 6 hours, the attendant parks the car with the keys in it near the entrance. Normally, the car would be “buried” behind other cars that would be leaving earlier, and the keys would be kept in a cabinet in the office. However, the attendant was planning on showing the car to his girl friend as she came by at lunch time, and he thought it would be “cool” to “rev-up” the motor. However, when he went to get the car when she showed up, the car was gone. Evidently the car had been stolen and had been driven out when the attendants were all busy. The garage had a sign conspicuously posted, stating: “Not responsible for fire or theft.”

When taken to court, the parking garage was determined to be responsible as they were negligent in parking the car and leaving the keys in the ignition. The garage cannot contract away its liability.

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BAILEE LIABILITY POLICY

Simply put, the Bailee Liability Policy will cover all sums that the insured has become legally obligated to pay because of a loss to customer’s property caused by an insured peril. The liability policy would appear to be adequate to cover the goods that the customers leave with the Bailee. There is also a secondary type of policy, the Bailees Customers Insurance, that will cover the customer’s property while in the possession of the Bailee, whether the Bailee is responsible legally for the loss or not.

CONSUMER APPLICATIONNathan takes all of his winter suits, jackets and coats to Jen’s Dry-cleaning Store, as he does

every spring so that the clothes will be stored clean. Next door to Jen’s is a former supermarket that is being now converted to a health club. While remodeling the store, some wires are cut accidentally and some of the rubber flooring being installed catches on fire, causing a lot of dark, noxious smoke which permeated most of the shopping center.

While Jen’s store was not damaged other than by smoke, it meant that all of the clothing in the store had to be re-cleaned in an effort to get rid of the smoke fumes. Unfortunately, cleaning again did not work, and Nathan’s clothes were ruined.

Jen cannot be held liable as she was not responsible for the damage, however with a Bailees Customers Insurance policy, that policy would pay. As a practical matter, however, if Jen had not covered her customer’s clothing damage, no one would want to do business with her again.

LAUNDRIES AND DRY CLEANERS INSURANCE

The laundries and dry cleaners bailee insurance is probably the best known of the bailee policies and may be written under either Named Perils or All-Risks.

The bailees customers form (Named Perils) covers all lawful goods which are the property of others, and which are accepted by the insured bailee for the purpose of cleaning, laundering, pressing, dyeing, repairing or alteration. It does not cover any property belonging to the insured whether for his own use or for sale. There is also an “accrued charge” section that states that in addition to the coverage on the actual property of the customers, protection is given against the loss of unpaid charges for services which the insured cannot collect because of the destruction of or damages to the property on which he has performed such services.

It does not cover goods held for storage or goods for which there is no charge made.

This form covers property while on the premises occupied by the insured, or in a branch store, or while in the custody of the insured’s collecting agents, or while being transported to and

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from customers, or between the insured’s premises and branch stores or agents. Coverage may be automatically extended under some polices, to those newly acquired locations until reported (usually within 72 hours of acquisition). The form covers property in transit within the U.S. and Canada and does not cover any property shipped in the mail (unless there is a special endorsement for this coverage).

COVERAGE

The Named Perils form covers the following hazards (while in buildings) Fire; Windstorm, hail, cyclone or tornado; Explosion, steam boiler or otherwise; Aircraft and falling objects therefrom; Motor vehicles (with exception of those owned/operated by/for the insured or other

custodian of property); Smoke, excluding from industrial apparatus; Strikers, or labor disturbance; Sprinkler leakage; Earthquake; Flood – rising waters of rivers and streams; Theft, including burglary and holdup; Collision of the vehicle carrying the insured property; Confusion of goods (unable to identify property, etc., but only if arising from covered

peril)

There is also coverage for goods in transit, usually stipulating that the goods must be carried in closed trucks with suitable locks and the goods are stolen by forcing the lock, or if the entire vehicle is stolen. For goods left overnight, usually coverage only applies to those vehicles locked in the insured’s private garage or building occupied by the insured.

EXCLUSIONS

In addition to those normally found in this type of policy (see COMMON EXCLUSIONS discussed earlier), the policy does not insure against losses due to dishonest acts of any employee, the insured, or bailees. Unless it is specifically endorsed, the policy does not cover loss while the goods are in the custody of another bailee.

CONSUMER APPLICATIONConrad Cleaners has a cleaning location near an area of highly priced condominiums with

ocean views, and most of the clientele are wealthy. Mrs. Smythe, a good customer, brings her winter coats in each Spring for cleaning, and then has them picked up for storage by a local storage company. However, this Spring the local storage company has gone out of business, so Conrad tells Mrs. Smythe that she should not worry, as he knows a good storage company and he

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will make the arrangements, and since Mrs. Smythe is going on a three week cruise, it will be all be taken care of by the time she gets back. (Continued on next page)

In realty, Conrad was blowing smoke as he had no idea as to where he could store the coats. Before Mrs. Smythe arrived home, the coats were destroyed when Conrad’s sprinkler system started operating one night, and by morning when Conrad arrived at the store, water was all over, and some cans of cleaning fluid and dye had fallen and a lot of clothing was ruined, including Mrs. Smythe’s coats.

Does Conrad’s Bailee policy cover this? According to the standard wording of the policy, goods which are held for storage (or at no charge) would not be covered. Who will end up paying for the “unstored” coats of Mrs. Smythe? Conrad, if he wants to stay in business in this area.

VALUATION

The policy will pay for the actual cash value, plus any labor or service charges that may have accrued. There is a limit of liability for any single loss, plus a catastrophic limit of loss, with separate limits for each location or branches.

LOSS REPORTING

This form has typical loss reporting requirements, such as reporting to police in case of theft, immediate notice must be given to the insurer or its agent and proof of loss must be filed within 4 months of the date of the loss.

This form is attached to the basic Inland Marine Transportation policy which contain other clauses common to Inland Marine insurance.

BAILEES ALL-RISKS POLICIES

With the All-Risks form, there are usually 2 separate limits of liability – one for goods on premises of the insured, and the other for goods in transit. This form usually contains a deductible.

Like all All-Risks policies, there are no specific perils, all risks are assumed subject to exclusions. In addition to the COMMON EXCLUSIONS discussed previously, the form will exclude all property belonging to the insured or its affiliates, goods held for storage, damages sustained due to any process while actually being worked upon and resulting therefrom (except for fire), loss while goods are in custody of any other bailee, and loss due to the dishonesty of the insured, employees or others to which the property is entrusted.

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FURRIERS’ CUSTOMERS POLICY

The furrier requires a different policy than that offered to dry cleaners and laundries, for obvious reasons. The furs are usually stored on the premises for an extended period of time, and the furs are generally of much more value than any items in a dry cleaners or laundry. The theft hazard is much more significant with a furrier, than with the dry cleaners or laundry. The coverage offered covers more than just what the furrier is liable for, it actually will cover the property of the customer.

The Furriers’ policies cover two types of property:

1. FURS & ARTICLES TRIMMED IN FURAny article of clothing that is either fur, or is trimmed in fur, is covered, whether the insured

accepts it for storage or for cleaning, altering, repairing, remodeling or similar services.

2. GARMENTS OTHER THAN FURSGarment other than fur can be covered but only if it is accepted for storage. Cleaning and

repair of other articles must be covered under the bailee’s customer policy. If both fur and non-fur items are accepted, then the furrier must carry both policies to be able to have the necessary coverage.

This type of coverage is also available to other businesses that may accept furs for storage.

Unlike the bailee customers policy, if furs that are cleaned and in storage are damaged or destroyed, the insured cannot be reimbursed for the cleaning services unless there is a separate endorsement covering such service charges.

PROPERTY NOT COVERED

Any property owned by the insured, a subsidiary or affiliate, is not covered.

Property on the premises or while in transit to or from the customers location, or to another location for storage, repairs or alternations is covered, while in the U.S. or Canada.

COVERED PERILS

This policy is an All-Risks policy and will cover mysterious disappearance, water damage, dampness, chemical damage and any other peril not specifically excluded.

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PERILS NOT COVERED

In addition to COMMON EXCLUSIONS discussed earlier, the following exclusions are basic to furrier policies:

The policy will not cover loss or damage caused by any work on the insured property, unless the damage was caused by fire or explosion.

CONSUMER APPLICATIONAt Chins Furrier’s, an employee was cleaning furs before storing them for the summer. He

inadvertently spilled cleaning fluid over 3 coats but he dropped a lit cigarette onto one of them, setting it on fire. The employee was able to confine the fire to the one fur. The other two furs were ruined, however, as the cleaning fluid spots damaged the fur.

The Furriers’ policy would not cover the damage to the spotted coats, but would cover the one that was further damaged by fire.

The policy will not cover any warranties or assumed liability of the insured.

CONSUMER APPLICATIONChin (of Chin’s Furriers) was going to make some minor repairs to a mink coat for a

customer, who mentioned that she would like to have the mink just a little lighter. Chin promised the customer that he could accomplish this, and he further guaranteed that she would be happy with the color.

When Chin’s customer came to pick up the mink, she nearly had a heart attack. The mink was a lighter color, in fact it was several lighter colors. When Chin had attempted to die the mink, the chemicals did not cover evenly. Chin agreed to reimburse the customer for the fur.

His insurance would not cover the damage as he had assumed the liability for the process.

The policy does pay for loss caused by the dishonesty of an employee, but is only as an excess over any other insurance covering employee dishonesty.

CUSTOMER APPLICATIONChin (yep – he’s still in business) decided to hire a couple more employees. Since they were

not family members and he did not know them well, he decided to take out an additional policy (a Blanket Position Bond) which covers any dishonesty of any employee up to $5,000. This is in addition to his Bailees Customer Form policy.

A stored mink worth $8,500 disappears one day, and one of his new employees does not show up for work and cannot be found. Chin heaves a sigh of relief when he discovers that although his Blanket policy will cover only $5,000, his Bailees Customer Form policy will cover the additional $3,500.

Chin had accepted the stolen coat for the amount of $8,500 and had given the customer a receipt for that amount.

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Like the Bailees’ Customers Form, the Furriers’ policy is liable only for the actual cash value of the property at the time of the loss, or the cost to repair or replace the property with like kind and quality, whichever is less. In addition, the policy does not cover any property unless the insured has issued a written receipt for the item.

POLICY LIMITS

The policy has a limit for each article and a maximum limit for each of the premises used for storage, whether listed or not, and for property in transit. There is also an aggregate limit for any one loss, regardless of how many locations may be involved.

EXCESS LEGAL LIABILITY

Normally, the furrier will not be responsible for more than the amount stated on the receipt given to the customer at the time the property changes custody. However, if the bailee is guilty of gross negligence or of conversion, then they could be held liable for an amount greater than that in the receipt. This added liability can be insured against under an endorsement, the Furriers’ Customers Excess Legal Liability Endorsement. This Endorsement contains a limit per article and a limit for all loss sustained in any one situation.

CONSUMERS APPLICATIONChin accepts a fur for cleaning and storage from Mrs. Richley, a beautiful sable for which he

gives Mrs. Richley a receipt for $55,000. Earlier in the year, he had added a Legal Liability extension endorsement to his Customers policy. The fur had a stain that other furriers had declined to attempt to remove, however Mr. Chin was able to restore the sable to where it looked like new.

The annual Furrier’s Ball was coming up, and since Chin knew that many other furriers had turned down cleaning of this coat, he wanted to show the other furriers how good he was, so he had his girlfriend wear the sable to the ball.

Upon arrival at the ball, his girlfriend wore the sable around the entire room while Chin bragged about his accomplishment. Thereafter, the girlfriend took the sable to the cloakroom as she thought it was too warm to keep wearing it all night. When they got ready to leave, the sable was gone.

Under his Customers policy, he would not have been covered as the sable had been moved from the premises without the permission of the owner. However, the Excess Legal Liability Endorsement did cover the coat, assuming the limit of liability under the Endorsement did not exceed the $55,000.

FUR FLOATER COVERAGE

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An unusual aspect of this type of policy is that in all but 9 states, the policy may cover property even when it is not in custody of the insured. This is done by issuing a Certificate to the owner of the property when the insured items are not in the custody of the insured. The customer will pay extra for this service, of course, but it is less expensive than having to purchase a regular Fur Floater.

PREMIUMS

Premiums are determined by using a fire insurance rate plus a loading charge, depending upon the construction and security of the vault. The insured is required to report each month of the values of goods covered by stating the total amount shown on the receipts at the end of the previous month. The monthly reporting is usually not required if the policy is less than $100,000 and which do not provide for the issuance of certificates.

MISCELLANEOUS BAILEE FORMS

The bailee coverages just discussed have been around for years and are the principal bailee plans. However, special situations have arisen and the bailee forms have expanded in number to provide coverage when necessary. There will continue to be additional forms as commerce continues to grow, and with the increasing service sector of the economy and the incredible growth of technology, specialized forms will need to be created.

There are various other Bailee forms that are Inland Marine class of business under the Marine Definition. Some of the more important ones should be mentioned here.

WAREHOUSEMEN’S LEGAL LIABILITY

Warehousemen are insured only for losses for which they are legally liable, and as a bailee, a warehouseman is liable caused by its negligence and the burden of proof is on the shoulders of the bailee. Therefore, coverage for defense costs are an important part of this policy. This is a nonfiled form(s).

The determination of the amount of the warehouseman’s liability for negligence can be limited by applying Section 7-204 of the Uniform Commercial Code, which allows the limitation as to damages by contract or by the warehouse receipt. The amount can be extended and additional rates can be charged, subject to the warehouseman’s tariff. The warehouse receipt, for instance, can limit the liability by using a certain percentage of the base rate (such as 500%). With some warehousemen, particularly cold storage warehousemen, the limit could be based upon the square footage taken by the goods of the bailor.

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Basically, there are the two types of warehousemen – general storage and cold-storage. Each is rated differently and cold storage warehousemen generally have conditions that do not appear in the warehousemen’s policy that covers the storing of general merchandise.

Typically, the insuring clause states that the insurer will pay all sums the insured becomes obligated to pay by reason of its legal liability. Defense costs are usually insured, with supplemental coverage available for premiums on appeal bonds or on bonds to release attachments for amounts not in excess of the insurer’s limit of liability, interest on the judgement or other reasonable expenses incurred by the insured at the insurers request.

Property excluded varies from one insurance company to another, but usually include such things as bills, deeds, money, bullion, furs, manufactured tobacco, alcoholic beverages, jewelry, watches, precious stones, gold, silver, platinum, etc., animals, fish, birds, property of insured’s employees, and property owned by the insured.

Perils excluded include insects, vermin, mechanical breakdown, faulty material, repairing-restoration-retouching process, water damage, willful illegal sale of property, illegal conversion, etc., assumed liability, employee dishonesty, war & nuclear hazard. There is also usually an exclusion of dampness or dryness of atmosphere, changing of temperatures, etc., etc.

If the warehouse is refrigerated, the coverage could be extended to cover the insured’s legal liability for damage to property due to a change in temperature, in which case the insured must maintain protective safeguards. The insured could even be required to maintain mechanical breakdown insurance covering the heating and refrigeration equipment at the insured’s premises.

PRESSING OR TAILOR SHOPS

This is a another type of the bailee customers policy, usually written on small shops that do clothing repair and tailoring, in most cases acting as an agent for a larger laundry or dry cleaner. The premium is usually quite small and is paid on an annual basis.

REPAIR SHOPS

This form will also follow the format of the bailee customers policy but are written to cover property being repaired, such as television sets, stereo units and other electronic items, plus small machinery (not automobiles, discussed later). If an expensive TV is destroyed in a fire and the bailee is not legally responsible, customers would be quite unhappy, so this form can be written for the benefit of the customer. Coverage is usually on a Named Perils basis, but it can also be written on al All-Risks basis.

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DEPARTMENT STORES & FURNITURE STORESMany Department and Furniture stores also repair customer’s property and believe that it is

necessary to buy bailees customers insurance. Whether such coverage is necessary or not, depends upon the value of the property being repaired. For instance, if very expensive furniture is being repaired, then it would be of importance to have such coverage. If the amounts are small, the store’s general property insurance might be adequate. Again, loss that would not be the responsibility of the bailee would probably be covered, as for stores of this type, reputation is all-important, so an Inland Marine coverage might just save the store’s very existence.

CONSIGNMENT STORESMany stores accept property on consignment for sale or for distribution. Art galleries are

often used as a prime example of the necessity of having bailee customers insurance &/or bailee legal liability insurance. Art galleries very often accept artwork from various artists for sale and display. Some of the artwork can be extremely valuable, and therefore the art galleries as a matter of practice, contract with the artists or the owners of the art as to the value of the art.

AUCTIONEERSAuctioneers accept property that will be sold at auction, and therefore assume bailee risks.

The need for insurance will depend greatly upon the contract between the auctioneers and the owners of the property.

COLD STORAGE LOCKERSThe 1953 Definition specifically mentioned this coverage, but it was ignored in the 1976

Definition as it was automatically qualified. The early Definition named this class because in some instances there is no processing involved, and at that time it would not therefore qualify. The coverage applies to customer’s property accepted for storage in a cold storage locker. It can be written either All-Risks or Named Perils. The policies will usually require that the insurer be notified immediately if the refrigeration units fail and are not likely to be repaired within 6 hours.

SELF-STORAGE UNITSThis is a relatively new industry that continues to grow as the society becomes more mobile.

These units resemble rows of private garages and since the owner of the units has no control over the contents – the customers rent the units and then put their property inside the units – there is a question whether the owner of the units can have a responsibility for a loss. Of course, in today’s litigious society, such insurance might provide peace of mind for the units owner.

AUTO REPAIRAutomobile dealers, service stations, body and muffler shops, brake shops and similar types

of businesses that take care of their customers’ cars, are NOT an Inland Marine class of business. Even though they appear to be “bailees”, the coverage originated as a branch of automobile insurance and still is under commercial automobile insurance lines.

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However, under the garage coverage form filed by the ISO, which provides liability coverage for garage operations and liability physical damage coverage on the insured’s automobiles, there is a garagekeepers section that covers damage for customers cars left with the insured.

OTHER BAILEE COVERAGES

There are so many bailee coverages that it is not possible to list them all. Some of the coverages are

film developers, enlargers and retouchers; picture framers, fine arts cleaners and restorers; boatyards and mooring facilities (can be either Marine or Inland Marine); kennels, horse breeders and veterinarians; bank safety deposit facilities.

In addition, there are situations where the property is rented but there is no landlord-tenant relationship such as there would be in real estate. Therefore, the relationship is that of a Bailment For Hire, or in some cases, Bailment Lease.

Bailment for Hire: A contract in which the bailor agrees to pay an adequate recompense for the safe-keeping of the thing entrusted to the custody of the bailee, and the bailee agrees to keep it and restore it on the request of the bailor, in the same condition substantially as he received it, excepting injury or loss from causes for which he is not responsible.

Bailment Lease: A legal method by which one desiring to purchase an article but unable to pay therefor at the time, may secure possession thereof with the right to use and enjoy it as long as he pays stipulated rentals and becomes absolute owner after completing such installment payments, on payment of an additional sum which may be nominal.

The following businesses may operate as a bailment for hire, or may also, in some cases, operate as a bailment lease. For instance, many of the furniture stores lease (or rent) furniture and the payments go toward the purchase of the furniture which remains the property of the store until the payments, or a percentage thereof, equal the selling price of the furniture. At that time, title to the furniture passes to the customer.

car, truck and boat rentals or leases; furniture rentals; computer and equipment leasing; telephone systems leasing.

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BAILOR COVERAGES

A Bailor is an individual who retains title to property that is being transferred on a temporary basis to the care, custody and/or control of another.

While it is common practice for Bailees to carry insurance on customer’s property which is in their custody, in some situations it is usual for the owner of the property – the “Bailor” – to insure goods that are no longer in their control and are in the hands of a bailee. A typical situation would be where a shipper insures his own goods while they are being transported.

In certain businesses, work is done at other locations, perhaps even contracted out for repair or assembly for instance. The garment industry uses bailor coverage as they customarily send out clothing to contractors and subcontractors. The policies are Inland Marine policies because under the Nation-Wide Marine Definition, Inland Marine status is granted to “property in transit to and from and in custody of bailees.”

CONSUMER APPLICATIONFine Arts Publishing Company prints magazines and brochures on various fine arts that are

for sale, or just of interest to art connoisseurs. They contract out the actual printing as it takes very expensive specialized equipment to print at the quality they feel their readers want.

On occasion the printer will subcontract out special typesetting jobs also. Fine Arts wants to protect their plates, negatives and in particular, their artwork, while it is in the hands of the printer and any of the printer’s subcontractors.

There is no filing on this type of insurance, but it qualified as a Bailor policy under the Definition.

Note that the term “Floater” is used with these types of Inland Marine policies. This is proper, and many Bailor coverages are called “Owner’s Commercial Floaters.”

A “Floater” is the coverage for property which moves from location to location, either on a scheduled or unscheduled basis. If the Floater covers scheduled property, coverage is listed for each item. If a Floater covers unscheduled property, all property is covered for the same limits of insurance.

GARMENT CONTRACTORS’ FLOATER

Clothing (garment) manufacturers as a matter of practice, will send out jobs to be performed by contractors or subcontractors. Manufacturing of garments include several different specialties, and there are contractors that do the pleating, button-hole makers, embroiderers, etc. Some of the manufacturers require their contractors to insure the goods, but generally it is the

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manufacturer who buys the insurance. Interestingly, the policy is called a “Garment Contractors’ Floater, even though it is purchased by the manufacturer.

This insurance covers garments and parts of garments, materials, supplies and even containers for such property, and the property is insured whether it is finished or unfinished. It covers not only the property of the insured, but any property held in trust, on consignment or commission, or anything upon which the insured has made advances.

The policy does not cover property on the premises of the insured, therefore it is provided only when the property is away from the insured’s premises, in the U.S. or Canada.

COVERAGESThere are actually three coverages with this policy, appropriately labeled “A”, “B”, and “C.”

COVERAGE A This policy covers property, which is temporarily at a location other than the insured’s, and is

at the contractor’s (or subcontractor’s) location even if the contractor is not named in the policy. (Coverage on unnamed contractor’s premises is limited to a percentage of the total amount of insurance – see discussion later under Coinsurance Clause).

This coverage is rather broad as it also covers property of others for which the insured is liable or has made an advance payment.

The coverage extends to transit coverage between the insured’s premises and the premises of the contractor or subcontractor, or mills and/or suppliers, and transported by railroad or railway express company, public or private truckers, land transfer of other land transportation carriers, air transportation carriers, on trucks owned or operated for the insured or the contractor, or messengers.

COVERAGE B Coverage B applies only if the declarations show a limit of insurance for that coverage and if

Coverage B is purchased, the property is also insured while at the insured’s premises, or in transit between the insured and the contractor.

COVERAGE C Coverage C is available only on All-Risks form and can cover the following types of

property while at the location described in the policy: furniture and fixtures, machinery, tools and their parts, patterns, molds, models and dies, and office equipment and supplies.

Coverages B and C oftentimes are not purchased as goods can be covered under a regular commercial property insurance policy.

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PROPERTY COVERED

All property while in transit is covered when being transported between the insured’s premises and that of a contractor or subcontractor. It is covered against all risks of loss or damage, from any external cause, subject to the stated exclusions.

While the goods are on the premises of the contractors or subcontractors, the property is covered against the following perils:1. Fire and lightning.2. Windstorm, hail, smoke, vehicles and aircraft (there are no coverages for explosion, riot or

civil commotion.3. Sprinkler leakage.4. Water damage. There is considerable differentiation between goods on the insured’s

premises (which has a much more restricted coverage provision) and on the contractors premises.

5. Burglary – requiring force and violence visible marks, entering by force and violence.6. Holdup – defined as the forcible taking of property by violence or other felonious act

committed in the presence of a custodian of the property.

CONSUMER APPLICATIONFabric Finishers, Inc., is a contractor of Stuart’s Clothing Mfg., and is under contract to

perform trendy embroidery on certain expensive articles of clothing. Fabric’s plant is in a commercial building with a lot of foot and car traffic in front.

Fabric had recently received a lot of publicity in a trade journal about the quality of the work they were performing. After lunch hour, a thief mingles with the employees and gains entrance to the building. He takes 4 pair of embroidered slacks and puts them into a shopping bag when no one is watching, and is able to leave the store undetected.

Later in the day, another thief is walking by and sees a stack of very expensive embroidered slacks stacked on a table near a window. He returns later with a brick and when the workers take a coffee break, he breaks the window with the brick, snatches several pair of slacks, and then in full sight of the supervisor of that department, runs down the street. The supervisor gives chase, but is unable to catch the thief.

The policy would not cover the stolen slacks that were removed without anyone knowing about it, but in the second instance, the policy would cover this situation as it was “forcible taking by violence” and in the presence of a custodian of the property.

7. Boiler explosion, originating within steam boilers, pipes, fly wheels, engines and machinery connected therewith. (No other type of explosion is covered).

OPTIONAL ADDITIONAL COVERAGESThe following 4 additional coverages are used so common that the policy form lists them

with space afterwards for the word “covered”, and if covered and the premium paid, then these additional coverages will be included.

Theft. When covered, it will substitute for No. 5 above.138

Strikes, riots, malicious mischief and explosion. The “explosion” part excludes explosion of steam vessels, but the basic policy will cover steam boiler explosions.

Consequential damage to garments. Consequential damage to garments including broken lots, size or color ranges (includes

coverage granted under No. 3 above. If the insured sells by full lot or range of sizes and colors, and is unable to do so because of a loss due to an insured peril, then the insured is covered for such loss. However, the loss must pertain to only garments located at the location of the loss.

CONSUMER APPLICATIONGarments of Fabric Finisher’s, Inc., while working on garments for Stuart’s Mfg., has a fire

loss which causes damage to 24 size 16 embroidered slacks. It is normal practice of Fabric to work on one size at a time of specialty and expensive items such as this, and then ship the finished goods to Stuart’s when the order for a particular size is completed. Therefore, Stuart’s already has a full stock of other all other sizes of these slacks.

Since Stuart’s is not able to make up a full lot of these slacks by the contracted time, Stuart files for a loss under their policy. However, the policy does not cover undamaged garments that were located at Stuart’s warehouse, since the loss occurred at the contractor’s (Fabric) premises. Stuart could only collect for the damaged ones under this policy.

ITEMS EXCLUDEDThere are several exclusions, as listed below. Many of the types of property excluded would

not be covered under Coverage A or B as shown above, as they pertain only to garments specifically listed. Some of these exclusions would apply under Coverage C, however. Note that many, if not most, of these items that are excluded can be insured under other Inland Marine or commercial property coverages.

Property shipped by Mail. Leggings, spats (do people still wear these?), footwear or hosiery. Headwear. Jewelry or Costume jewelry. Fine arts. Musical instruments, photographic equipment & supplies and accessories. Signs or outdoor equipment. Air conditioners or domestic appliances. Carpets or cloth awnings. Data processing equipment and media (such as diskettes, magnetic tapes, compact discs,

and includes data stored on the media.

HAZARDS EXCLUDED(See COMMON EXCLUSIONS discussion earlier) This policy also excludes:

1. Delay or loss of market. Even though the insured would be covered for damage to goods in transit, he is not covered for a delay in making delivery.

2. Chafing and/or rubbing.

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3. Dishonest acts of employees of the insured, or of a contractor or subcontractor.

VALUATION OF LOSSThis policy pays for loss or damage up to the actual cash value of the property at the time and

location of the loss, but not more than replacement cost. Cost of labor is taken into consideration in determining the actual cash value.

COINSURANCE CLAUSEThis form is written with a 100% coinsurance clause and the insured is required to carry

insurance which is equal to the total value of the goods, whether on the insured’s premises, or on the premises of a contractor.

Under available Coverage A, earlier it was mentioned that unnamed contractors can be covered but only for a percentage of the insured amount. A discussion of the limits of liability for both named and unnamed contractors warrant a discussion at this point.

There is a maximum limit of liability listed beside each named contractor in the policy. For the unnamed contractors, a limit of liability is inserted to apply to any unnamed location, but only for a maximum of 25% of the total amount of insured carried, or $25,000, whichever is less. Therefore, the insured does not have to specify any contractor that has custody of his goods, if the value of such goods does not exceed 25% or the total amount carried, or $25,000. If any contractor has goods of the insured for amounts above the 25%/$25,000, then the contractor must be listed and the limit of liability must be set high enough to cover the risk

CONSUMER APPLICATIONStuart’s Manufacturing sends garments to be processed to four different contractors, each of

whom is “expert” in their specialized field of garment manufacturing. The values of the garments sent to each contractor at any one time would be valued as follows:

Fabric Finishers $50,000Button Magic $25,000EZLinings $30,000StraytSeems $45,000 (Continued on next page)

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To comply with the coinsurance requirements, he carries $150,000, which is total of all goods at all contractors. The limit of liability for unnamed contractors would be 25% of the total insurance ($150,000) or $37,500. Therefore Fabric Finishers and StraytSeems will have to be specifically named in the policy. The only two contractors would be automatically covered as the total values of the goods in their custody would be under $37,500.

The Coinsurance clause requires that the insured carry 100% of the values at risk at all contractors, whether named or unnamed.

GARMENT CONTRACTORS ALL-RISKS FLOATER

If the policy is written on an All-Risks basis, the policy will insure against all direct physical loss of or damage to the property covered subject to the exclusions of the basic policy. As typical of an All-Risks policies, the exclusions are most important.

Sabotage, theft, conversion, or other act of omissions or a dishonest character by the insured or employees or by any person to whom the insured property is delivered or entrusted to for any purpose. An exception is made for loss which occurs while the property is deposited for safe custody or while in the custody of a carrier for hire or a porter not on the insured’s payroll.

Nuclear Reaction of radiation and contamination. If caused by a fire, the direct loss that results from the nuclear reaction would be covered.

Delay, loss of market and gradual deterioration, any type of rubbing, chafing, insects, vermin and inherent vice.

Seizure or destruction under quarantine, or customers’ regulation, is not covered. Confiscation by order of any government or public authority and contraband or illegal trade is not covered.

Mysterious disappearance or an unexplained loss or shortage that is disclosed when taking inventory is not covered.

Hostile or war-like action in time of peace, and any weapon of war that is employed to create an atomic fusion or radioactive force, or any insurrection, rebellion, revolution or civil war.

Loss resulting from property being worked on, except if fire or explosion develops, in which case the policy would cover any loss created by the fire of explosion.

PATTERN AND DIE FLOATER

Another type of Bailor insurance is the Pattern and Die Floater. In manufacturing, many companies will send their patterns and dies to foundries where they are used in castings. As with the Garment policy, the policy covers loss or damage to the property while it is in transit to and from and on the premises of, the foundry.

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The policy can be written on a Named Perils basis, or on an All-Risks basis. Exclusions usually exclude losses arising out of wear and tear, depreciation, poor workmanship, inherent vice, fading, rusting, splitting, cracking, and other similar types of situations. There is usually a coinsurance clause if the policy is not written on a reporting form.

The key difference in this coverage and other floaters is that patterns and dies can become obsolete rather rapidly at times, so the valuation can be difficult. Some forms’ valuation clause values the property at replacement cost at place and date of loss, less depreciation, including depreciation for obsolescence. Record keeping of all patterns in use, with attendant values, is very important.

STUDY QUESTIONS

1. A Bailee is A. a person who has temporary rightful possession of another’s property.B. a person or firm who posts bonds to release people from incarceration.C. an owner of property who puts his property into the possession of another for a lawful

purpose.D. a person or business that transports the goods of others for a fee.

2. If a neighbor borrows a riding lawnmower when his mower is broken, this is legallyA. Gratuitous bailment for the benefit of the bailor.B. Gratuitous bailment for the benefit of the bailee.C. Bailment for hire.D. Implied Bailment.

3. The degree of care that a bailee has towards the bailor,A. depends greatly upon the type of bailment in question.B. is that of what a normal person would exercise with their own property.C. is much more than that of a carrier.D. is not established by law or practice.

4. The type of Bailee’s insurance that would cover a loss to customer’s property caused by an insured peril, whether the bailee is responsible or not, is A. Bailee’s Liability Policy.B. Bailee’s All-Risks policies.C. Bailee’s Customers insurance.D. Bailee’s Negligence Blanket insurance.

5. Under a Furriers’ Customers Policy, how will coats not made of fur or fur trimmed, be covered for repair &/or cleaning?

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A. Under the Furriers’ Customers Policy, all coats are covered if they are accepted for cleaning and repair.

B. The Furrier will have to also have a Bailee’s Customers policy.C. The Furrier can not be covered for non-fur coats under any situation.D. The Furriers’ Customers Policy will cover the non-fur coat if it is also accepted for

storage.

6. Jones Furriers’ ruined an expensive sable coat when an employee dropped a lit cigarette on the coat. The receipt given by Jones to the owner indicated the coat was valued at $50,000 and Jones offered that amount to the coat owner. The coat owner sued anyway. What can happen next?A. Jones is on good footing – legally the owner must accept $50,000 in full payment.B. There is no additional coverage available to Jones, so anything awarded over $50,000

must always come out of his own pocket.C. Since the coat was ruined by an employee, Jones has no liability. The coat owner must

go after the employee exclusively.D. Jones could have carried the Furriers’ Customers Excess Legal Liability Endorsement,

which would have insured Jones against any added liability. The coat owner may certainly sue if the bailee (Jones) was guilty of gross negligence in the eyes of the court.

7. Direct Cable is a telemarketing firm that leases the telephone equipment as they are not financially able to pay for it at one time. They pay a set sum each month until such time as they have paid a predetermined amount, approximately the worth of the system, at which time they will make a modest payment, and then the equipment is theirs. Direct wants to protect this system as they are functioning as a Bailee until the equipment is fully purchased and the title has passed. What type of Bailee situation is this?A. Bailment Lease.B. Bailment for hire.C. Installment Bailment.D. Reversible Ownership Bailment.

8. The coverage for property which moves from location to location, either on a scheduled or unscheduled basis, is calledA. Inland Marine Coverage.B. Marine Coverage.C. Motor Truck Cargo insurance.D. a Floater.

9. A Garment Contractors’ Floater policyA. covers garments or parts of garments while on the premises of the insured.B. is never bought by the manufacturer, only by the contractors.

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C. does not cover property on the premises of the insured, so it is provided only when the property is away from the insured’s premises in the U.S. or Canada.

D. covers garments that are completely finished only.

10. The biggest problem at loss time with the Pattern and Die Floater isA. the loss evaluation must be done by contracted Engineers only.B. that patterns and dies can become obsolete in a short period of time.C. that any loss settlements must be approved by the State Pattern & Die Committee of the

Department of Management Control.D. the costs of Patterns and Dies are so inexpensive that it is more expensive to investigate a

loss than to just simply pay for the loss without investigation.

ANSWERS TO STUDY QUESTIONS

1A 2B 3A 4C 5B 6D 7A 8D 9C 10B

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CHAPTER TEN - COVERING BOTH REAL AND PERSONALCHAPTER TEN - COVERING BOTH REAL AND PERSONAL PROPERTYPROPERTY

It is rather obvious that the types of properties mentioned in the Nation-Wide Definition are personal property and refers to property that can be moved and is not part of a structure that is attached to the ground. Buildings and land (and other structures attached thereto) are considered as real property. There are three types of Inland Marine policies that cover both personal property and real property.

1. Builders Risk policies : These policies cover structures and buildings during the construction stages and the policy covers the structures and buildings and to any personal property that will become part of the building or structure. The Builders Risk policy discussed here will pertain to the construction of buildings and similar structures. Other types of Builders Risk policies have been discussed in the section on Instrumentalities of Transportation.

2. Installation Floaters : While the principal coverage under this type of Inland Marine coverage is moveable property such as electrical or heating or plumbing, etc., equipment, during the time that it is being installed, coverage can continue once it is installed and until the construction has been completed and accepted by the owner (or the insured’s interest may expire, if before the building has been completed). Once this equipment is installed, it becomes real property.

3. Difference in Conditions policy (DIC): Coverage for a physical structure, machinery, inventory, and merchandise within the structure in the event of earthquakes, flood collapses and subsidence strikes. Even though coverage is on an All-Risks basis, important perils are excluded, such as fire, vandalism, sprinkler leakage, employee dishonesty, boiler and machinery losses, and mysterious disappearance, since it is assumed that the insured business already has coverage for these perils under a business property insurance policy.

The Installation Floaters and the Builders Risk policies will be discussed together here, as they are very similar and separate discussions would be repetitious.

BUILDERS RISK POLICIES & INSTALLATION FLOATERS

As indicated above, these policies cover real property during construction, or while being renovated or repaired, in addition the personal property that will become a permanent part of the structure is also covered. Under an Installation Floater, coverage will stop when the “interest of the insured” stops or when the project has been completed and accepted by the owner, whichever is first. According to the Marine Definition, Builders Risk policies and Installation Floaters must insure against perils other than fire and extended coverage.

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The Definition allows coverage on property in transit on its way to the construction site, and “during temporary storage or deposit.”

Generally, and in most states, Builders Risks can be insured either under a commercial property policy or an Inland Marine policy. The rates of the commercial property policy are generally filed, whereas the rates and conditions of the Inland Marine Builders Risk policy are not filed. Therefore, and as usual, this allows the Inland Marine Builders Risk policies to be broader in terms.

CONSUMERS APPLICATIONGranite Construction Co. is trying to determine whether they should purchase a Builders

Risk policy or simply go with their commercial property policy. On their latest construction project, the architects require certain facings that can best be built at another location and then transported to the building and attached. The commercial property policy will only cover the facings while they are on or in the structure or located within 100 feet of the structure. The facings will have to be transported about 35 miles after they have been made and before they can become a permanent part of the building.

The Builders Risk policy covers the property while at the building site, at a temporary storage location, and while in transit. Also, since the facings will be made of copper, they can be stolen as the value for salvage would be considerable. The commercial property policy only covers the facings from theft while they are attached as part of the building. The Builders Risk has no such restriction.

The President of Granite decides that it would be in his company’s best interest to purchase the Builders Risk policy so as to best to protect the rather expensive and unique building facings.

While Builders Risk policies are usually nonfiled, there are a few states that require Builders Risk filings. Also, many companies use a standardized form for the general contractors, and are used for schools, shopping centers, apartment houses, office buildings, condominiums, private residences and other such construction. Construction of electrical utility plants and oil refineries, and similar types of operation, especially those that require very expensive machinery and equipment to be installed, would not be candidates for a “standard” form.

Under an Installation Floater, the insured may be the owner of the property, the contractor doing the construction and installation, or may be the one that is selling the property. Under a Builders Risk policy, the insured may be the owner of the property under construction, the contractor, or can also be both the owner and the contractor, or can also be a subcontractor.

PROPERTY COVERED

Both, the Builders Risk policy and the Installation Floater cover property owned by the insured, and also covers property of other parties if the insured is so liable.

The Builders Risk policy covers the property that is being constructed, or being re-constructed, altered or repaired, and also consists of certain machinery, equipment, supplies and

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fixtures that will eventually become part of the structure. Often, scaffolding and temporary structures are included.

Installation floaters are usually used to cover plumbing, heating, cooling and electrical systems and such, and can be written to include such items as carpeting, tile, glass, elevators, machinery, etc.

Property that is excluded from the Builders Risk and or Installation Floaters can vary by policy and by company, but typical exclusions would include

trees, shrubs, grass, plants or land values; plans, drawings, designs, blueprints or specifications; property in storage unless it has been specifically assigned to a job site; machinery and tools and equipment, etc., that will not become part of the permanent

building or structure; (Builders Risk only) existing property to which alterations, repairs or additions are being

made.

Since the majority of the Builders Risk and Installation Floater policies are All-Risks policies, in addition to the usual exclusions, the following exclusions are frequently added:

error, omission, or deficiency in design, faulty workmanship or faulty materials; subsidence, settling, cracking, shrinking, bulging, or expansion of foundations,

pavements, sidewalks, driveways, walls, patios, floors, roofs or ceilings (unless covered by specified perils);

loss or damage caused by snow, rain or sleet to property in the open that is not a permanent part of the structure or installation, except for property in the custody of a carrier for hire;

loss covered under any guarantee, warranty, or other similar assumed obligations; order of any governmental authority, or enforcement of any state ordinance or law that

requires the demolition of any part of insured property damaged by a covered peril; testing of machinery or equipment; delay penalties; flood and water damage; earthquake; and employee dishonesty.

Installation floaters generally exclude wear and tear, gradual deterioration and inherent vice, and may exclude mechanical breakdown, electrical injury from artificial causes, errors in design, faulty workmanship or materials, and explosion or rupture of steam boilers.

COVERAGE PERIOD

The time frame is usually stated in the policy to begin when transit commences, or when the insured acquires a financial interest in the property (even if the property has not begun to be transported). Builders Risk and Installation Floaters may be stated to end at the earliest of (1)

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when the financial interest of the insured ceases; (2) when the purchaser accepts the property as complete; (3) when the policy expires or is canceled. For Builders Risk only, (4) when the property is put to its intended use, leased or rented to others, or occupied; (5) 30 days (or 60 or 90 days) after construction has stopped; or (6) when the insured abandons the construction with no intention to complete the work.

LIMITS OF INSURANCE

There will be a separate limit of insurance for property in transit and to property at the job site, and the Builders Risk policies will include a limit for property at a location other than at the job site.

EXTENSIONS OF COVERAGE

Builders risk policies can be extended to include loss of rents, loss of earnings, and “soft costs.”

When a property under construction is damaged by an insured peril with the result that there is a delay in completion of the structure, there can be loss of earnings, particularly if the building was to be rented to others. He could lose income from rents. If the owner was going to use the building for his own purposes, then he would lose income because of the time element. Coverage is usually on an actual loss sustained basis.

The building owner might suffer from other costs (“soft costs”) such as additional interest expense that can be incurred if the construction loan has to be renegotiated; advertising expense can be higher as future tenants will have to be notified of the delay and if some tenants do not rent or lease space because of timing, then additional tenants may be needed. Also, additional real estate taxes may be due because of the extension of the construction time, and more commissions may have to be paid to real estate agents if they have to renegotiate the leases they have obtained.

VALUATION BASIS

For Builders Risk policies, the basis of settlement is usually the cost of the materials and labor involved in repairing or replacing the property with materials “of like kind.”

For Installation Floaters, they may provide for actual cash value for property of the insured, and if the insured is liable for the property of others, the amount for which the insured is liable is the valuation.

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UNDERWRITING

The underwriters for Builders Risk and Installation Floaters must contend with a multitude of exposures. The principal ones are the old standbys – fire, theft, windstorm, vandalism, collapse, transportation, and depending upon the geography – flood, earthquake, strikes and civil unrest.

Fire is the most important cause of loss as it is usually the most expensive. Fire protection, both public and private, must be carefully studied and documented. How tall the building is and the construction material used in the building have a major impact on fire and ensuing damages. Frame or wooden buildings are the most susceptible to fire. High-rise reinforced concrete buildings require extensive use of forms for pouring concrete, with the fire hazards thereof. Many fires are caused by temporary heating equipment and cutting and welding. On the high-rise building under construction, it is important that the standpipes that provide the water supply increase in height as the building increases in height, thereby making sure that there is always an adequate water supply.

Loss by theft and vandalism and arson can be minimized by taking the proper precautions, such as fencing, lighting, alarm systems on trailers and storage sheds, and security guards. For those buildings being erected in areas where windstorms are frequent, such as hurricane seasons, construction that will take more than a year must be carefully underwritten and many times will include a higher deductible and a lower limit of insurance for losses caused by windstorms, as buildings in those areas are particularly susceptible to flooding and earthquake.

A rather unusual type of coverage for these policies is operational testing. For instance, if the building is a chemical plant, certain chemicals can be introduced into the system under pressure, and therefore must be tested at high pressure &/or high temperatures. At electric generating plants, they are exposed to hazardous steam conditions, and turbines are necessarily tested at high rates of speed. If there are design flaws or errors in construction, testing such as this can cause substantial damage. Because of the technical aspect of testing equipment, and the potential for substantial losses, some policies will have a sub-limit of insurance for losses which occur during the testing phases. They may also require the presence of an expert in that particular field.

Because of the uniqueness of this type of forms, they are often written on a manuscript form, which can mean that a producer writes the form. In these cases there has to be very close checking of all of the vernacular and the using of legal terminology so that the intent of both the insurer and the insured can be reached.

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DIFFERENCE IN CONDITIONS COVERAGE

Originally, the “Difference in Conditions (DIC) coverage was used only for Marine policies, and started as an Inland Marine coverage when fire insurance policies were Named Perils forms and this policy was created to bridge the gap between the fire insurance policy and the All-Risks policy. Today, of course, the All-Risks policy is available, but the DIC policy is nonfiled and is an Inland Marine class of business, therefore it offers considerable flexibility. For instance, while flood and earthquake losses are excluded in regular All-Risks policies, they can be included in a DIC policy.

A more precise definition of DIC coverage is as follows:

Difference in Conditions insurance provides coverage for a physical structure, machinery, inventory and merchandise within the structure, in the event of earthquakes, flood collapses, and subsidence strikes.

“Even though the coverage is on an All-Risks basis, important perils are excluded, such as fire, vandalism, sprinkler leakage, employee dishonesty, boiler and machinery losses, and mysterious disappearance, since it is assumed that the insured business already has coverage for these perils under a business property insurance policy.” (Dictionary of Insurance Terms, Third Edition)

As a general rule, DIC insurance is intended to apply to catastrophic losses, and therefore it has high deductibles. There are many forms on the market today as nearly all DIC policies are individually created to suit the particular situation.

PROPERTY AND PERILS COVERED

The property to be covered can be personal or real property, or both. Every building and/or the contents of every building may be listed, or it can use a blanket statement, e.g., “all real and personal property owned by the insured or for which the insured may be liable.” If this approach is used, a single limit of insurance is usually stated.

Properties that the insurer may not feel they want to insure or properties that can best be insured under a more usual and customary form, can be excluded. These exclusions can be (and certainly not restricted to) currency, jewelry & precious stones, securities and negotiable instruments; animals, crops, lumber and other plants; data processing equipment; property in transit or being constructed; boats, airplanes, vehicles designed for highway use, railroad stock and pipelines; tunnels, mines, and property therein; piers, wharves, bulkheads, pilings, docks, dams, reservoirs; and property of the insured sold by conditional sales, trust agreements, or other

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deferred payment plans. From this abbreviated list, it is apparent that the DIC policy is a policy that insures property that doesn’t fit into regular Inland Marine forms.

As an All-Risks policy, the DIC policies insure against risks of direct physical loss or damage from any external cause, except as excluded. Therefore, the perils that are excluded should tie in with the basic policy. Occasionally, there can be some duplication of coverage, in which case the “other insurance” clause will be invoked. Typically, excluded perils would be fire, lightning, windstorm, hail, explosion, riot, riot attending a strike, civil commotion, aircraft, vehicles, smoke, sprinkler leakage, vandalism and malicious mischief, and any other perils that may be insured (including by endorsement) on the base policy.

One can legitimately ask, since there are so many exclusions and they tie so closely to what is covered in the basic policy, doesn’t the DIC policy simply say that they will not cover what is covered in the basic policy? Actually, the form is frequently written in this manner, by referring to the basic policy by insurer, policy number, date or issue, etc., that positively identifies the basic policy. They have also been issued in the same manner, but exclude those perils insured under a standard property form, if that state has a standardized policy form.

A list of perils that could be excluded would be quite lengthy, but would include such items as contamination, deterioration; errors in design or processing, rain; snow, sleet; employee dishonesty; steam boiler perils; shrinkage, evaporation, etc.; earthquakes or floods; mysterious disappearance; war and nuclear hazards, etc., etc.

The policy can be extended to cover loss of income or business interruption. Flood coverage is often excluded, and when it is excluded, it may be so broad that in certain cases the entire exclusion would be removed and a more moderate exclusion would be provided. The same situation arises with earthquake exclusions in some cases as it can also be exceptionally broad and exclude any earth movement of any kind.

LIMITS

In some cases, a limit of insurance can be assigned to each piece of property each at different locations. Generally there is only one limit of insurance, and since there usually is no coinsurance, the limit can be a percentage of the property insured. If business interruption is included, then there is usually a limit for that coverage, and when flood or earthquake coverage is added, there are additional limits for these.

DEDUCTIBLES

One deductible can apply to physical loss only, or it can be used for both business interruption and physical loss, or on the other hand, a separate one can be used for business interruption. If flood and/or earthquake coverage is afforded, then there will be separate

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deductibles for those. Flood deductibles are usually expressed as a dollar amount, while earthquake deductibles are usually either a dollar amount, a percentage of either the property damaged, or the total value of property in a particular zone.

VALUATION OF PROPERTY

Usually the valuation follows the basic policy, such as cash value, replacement cost or some other valuation. Different valuation methods can apply to the property covered, particularly since this policy can cover such a wide variety and large number of perils.

OTHER INSURANCE

DIC policies are almost always stipulated to be excess over other insurance covering the same property against the same peril. DIC policies may also allow for other insurance which would be another excess over the limits in the DIC policy, as the DIC policy is frequently written in “layers."

UNDERWRITING

Because the DIC policy can be written on so many types of property, each with their own particular perils, the underwriting of each policy can be quite a challenge for the underwriter. Obviously underwriting of DIC policies requires a lot of technical expertise tempered with an abundance of common sense.

The three most common DIC losses are water damage, collapse, and burglary.

Water damage is the most common DIC loss, caused by ruptured pipes, leaking roofs and surface water. The age and condition of the plumbing is of prime importance. In some cases, if there is a danger of surface water causing damage during runoff, the underwriter must be aware of low areas where water can stand, and in some cases there can be drainage ditches dug or berms erected where necessary.

Roof collapse is the most common loss due to collapse, generally because of too much weight on the roof, such as snow drifts or heavy rains. Where there are several flat roofs next to this increases the possibility of excess weight on any particular roof.

As in all lines of insurance, the exposure of burglary is in direct relationship to the value of the property insured and the difficulty of access. Alarm systems, security guards, building locks and construction, etc., all must be known in order to underwrite the DIC policy properly.

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Earthquakes are not common, but they can be the most severe in property losses. Property underwriters are usually aware of the various seismic zones and the possibility of earthquakes in certain areas. Within the contiguous 48 states, there has been seismic activity reported in all states, with the upper Midwestern states, and an area along the gulf coast. Actually, only North Dakota, Minnesota, Wisconsin and Florida have no seismic activity reported anywhere in the state. Alaska has a lot of activity, as does Puerto Rico and all of the Hawaiian Islands, except Kauai. When an underwriter excludes earthquake, they usually exclude shock damage, but not damage resulting from other covered perils that occur because of the quake.

In respect to exposure to flood loss, the United States Army Corps of Engineers provides a 100-year flood plain study that shows where floods are likely to occur.

Underwriters will use inspections to help them evaluate the risk, and can call upon either their own engineers for specialized exposures, or contract with inspection companies for more routine risks.

STUDY QUESTIONS

1. Which of the following Inland Marine policies covers both personal property and real property?A. Garment Contractors Floater.B. Furriers’ Customers insurance.C. Builders Risk policies.D. Contractor’s Equipment Floater.

2. Since a Commercial Property Policy (CPP) is filed, and the Inland Marine Builders Risk policies are not filed, A. the provisions of the CPP are broader and more attractive to many customers.B. the provisions of the nonfiled form are broader.C. the Builders Risk policy is not available in most states.D. the Builders Risk policy still must file their rates in most states.

3. Under an Installation Floater, the insured cannot beA. the owner.B. the contractor.C. the seller of the property.D. a subcontractor.

4. The majority of the Builders Risk and the Installation Floaters areA. on the Named Perils form.B. on the All-Risks form.C. designed to cover settling, cracking, shrinking, etc., of foundations.D. designed to cover damage from rain or snow.

5. On the Builders Risk form, the coverage period begins

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A. when the policy is written.B. when the purchaser accepts the property as complete.C. when the property is leased to others,D. when transit commences or when the insured acquires a financial interest in the property.

6. For Builders Risk policies, the basis of settlement in case of loss, isA. the amount that an appraiser puts on the property.B. the cost of the materials and labor involved in repair or replacing the property with

materials of like kind.C. the invoice amount. D. actual cash value for property of the insured, for other’s property – liability of the

insured would pertain.

7. The most important cause of loss for Builders Risk isA. flood.B. windstorm.C. fire.D. riot.

8. What type of insurance provides coverage for a physical structure, machinery, inventory and merchandise within the structure, in the event of earthquakes, flood collapses and subsidence strikes.A. Builders Risk insurance.B. Installation Floater.C. Contractors Equipment insurance.D. Difference in Conditions insurance.

9. Under a Difference in Conditions policy, what type of property is covered.A. Real property.B. Personal property.C. Real or Personal property, or both.D. Commercial property only.

10. Difference in Conditions (DIC) insurance frequently is written in addition to other insurance covering the same property. In case of a loss, the DIC policy is almost always considered as A. excess over the other insurance.B. secondary to the other insurance.C. shared on a pro-rate basis with the other insurance.D. void if the same property is covered.

ANSWERS TO STUDY QUESTIONS

1C 12B 3C 4B 5D 6B 7C 8D 9C 10A

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CHAPTER ELEVEN - DEALERS POLICIESCHAPTER ELEVEN - DEALERS POLICIES

The 1953 Nation-Wide Marine Definition first established that certain specified dealers can be insured under an Inland Marine policy. This may seem odd as the insurance would cover the goods sold by the dealer and the largest exposure would be at the dealer’s place of business. However, that leaves “gaps” in coverage, such as goods in transit or insurance on some types of goods, such as portable equipment. The only practical way would be to use the flexibility of the Inland Marine insurance policies.

The 1976 Definition added fine arts dealers and stamp & coin dealers to those covered in the 1953 Definitions. It should be noted that only those dealers who are specifically mentioned in the Definitions are covered under Inland Marine provisions. Other dealers who operate very similarly to those mentioned in the definition, such as Automobile Dealers, Marine suppliers, etc., can be covered under commercial property insurance, or as in the case of the Auto dealers, with Commercial Auto policies.

For reference, Section F, subsection 19, is as follows:

19. Policies covering personal property which, when sold to the ultimate purchaser, may be covered specifically, by the owner, under Inland Marine Policies including:(a) Musical Instrument Dealers Policies, covering property consisting principally of

musical instruments and their accessories. Radios, televisions, record players and combinations thereof are not deemed musical instruments.

(b) Camera Dealers Policies, covering property consisting principally of cameras and their accessories.

(c) Furrier's Dealers Policies, covering property consisting principally of furs and fur garments.

(d) Equipment Dealers Policies, covering mobile equipment consisting of binders, reapers, tractors, harvesters, harrows, tedders and other similar agricultural equipment and accessories therefor; construction equipment consisting of bulldozers, road scrapers, tractors, compressors, pneumatic tools and similar equipment and accessories therefor; but excluding motor vehicles designed for highway use.

(e) Stamp and Coin Dealers covering property of philatelic and numismatic nature.(f) Jewelers' Block Policies.(g) Fine Arts Dealers

Such policies may include coverage of money in locked safes or vaults on the Assured's premises. Such policies also may include coverage of furniture, fixtures, tools, machinery, patterns, molds, dies and tenant insureds interest in improvements of buildings.

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JEWELERS BLOCK

Please note the use of the word “Block”, which is believed to come from the French “en bloc”, defined as “all together.” Dealers policies cover not only the goods that the insured has for sale during the normal course of business, but also covers any personal property of the insured – “all together.”

The Jewelers Block policy is one of the earliest types of Inland Marine insurance, and was used as an example when constructing other Inland Marine policies. It has been a filed class of business, however if the dealers (retailers in this case) have an average inventory of over $250,000, then it is not subject to the filed provisions. However, the form itself will closely adhere to the filed form. The coverage provided under this policy pertains to the exposures inherent in very expensive articles of small volume, which can be easily transported, therefore extremely attractive to thieves.

Simply put, Jewelers Block Insurance is a type of Inland Marine insurance that provides coverage for jewels, watches, gold, silver, platinum, pearls, previous and semiprecious stones. Property can be owned by the insured jeweler, or can be customer’s property in the care, custody and control of the jeweler. Coverage is on an All-Risks basis except specifically excluded perils, such as wear and tear; war; delay; loss of markets; flood; earthquake; loss or damage while jewelry is being worn by the insured or his or her representatives; loss resulting from the infidelity of any person under the care, custody, and control of the insured; damage or destruction of jewelry after it leaves the insured under an installment contract; mysterious disappearance; and shipments of jewelry not sent registered first class mail.

The form and rules as shown here are those of the ISO. AAIS forms and rules are comparable.

PROPERTY COVERED

Covered property is as stated above, but if the insured is a department store, with a separate department for jewelry, silverware &/or watches, then the policy will only apply to those departments.

There are several notable risks that are covered under the filed form, such as wholesalers, manufacturers and distributors of jewelry, and other commodities shown under the filed form, plus those dealers who are exclusively diamond stone dealers – both industrial and for jewelry; dealers of bullion and precious metals; auction dealers; fine arts/antiques dealers; and pawnbrokers, etc.

Covered property when on exhibition is not covered under the filed rates (but can, of course, be covered under a nonfiled form). Underwriters need to consider this exposure separately, as there are many things to be considered in such an exposure.

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The stock of the jewelers is covered regardless of whether it is located on the premises, in transit from the premises to another location, in the custody of employees, or located anywhere else.

Legal liability does not extend to the coverage of property that belongs to others that are not in the jewelry business.

PROPERTY EXCLUDED

If the jeweler’s property is sold under a deferred payment sales agreement, then it is not covered once it leaves the jewelers premises. The reasoning behind this is that the item is no longer in the control of the insured jeweler so the jeweler should not be held liable. For the same (loss of control) reason, jewelry that is in a showcase away from the insured’s premises will not be covered. Insurance can be obtained for jewelry shown in an area outside of the insured’s premises, but under another policy.

There are other situations where the property is not insured. The subject of property being on exhibition has been previously covered, and in the same vein, any jewelry work by the insured or an employee or a person who is a member of an organization involved in the jewelry trade, will not be covered.

GOOD IN TRANSIT

Interestingly, mailing of jewelry or goods of the insured jeweler is only covered if it is mailed by USPS registered mail – and not by express, certified or parcel post. If the goods are transported by armored car or by parcel transportation of a bus lines, it will be covered, but not if it is shipped by railroad, waterborne or air carriers unless under the parcel shipment or baggage services of the carrier. Goods shipped by a motor carrier will not be covered, unless the carrier is exclusively the insured’s parcel delivery service.

It pretty much goes without saying that contraband or goods illegally transported, will not be covered.

EXCLUDED CAUSES OF LOSS, THEFT, ETC.

If insurance limits are not shown for jewelry and articles in a show window, the theft of goods in a show window resulting from the window being broken or smashed are not covered. If there is a show windows coverage shown in the declarations page, there will be different limits for when the business is open and when it is closed, and for whether the windows are protected in some fashion or unprotected.

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Any theft of goods from an unattended vehicle will not be covered unless the owner or an employee (whose job is to be with the vehicle) is actually upon or in the vehicle when the theft occurred.

As stated earlier, there is the standard exclusion for dishonest acts by the insured, employees, etc. There are exceptions, such as while the property is in the custody of a porter or helper that is not on the employer’s payroll, when the insured &/or employees deposit the property for safekeeping while travelling, or when the property is in the custody of carriers.

As discussed earlier in this text, theft losses by trick or device or unauthorized instructions, are excluded.

Theft losses are also excluded if the loss is by unexplained disappearance, due to a shortage that was discovered during inventory, or if the shortage loss pertains to property in transit when the cargo was under seal and the seals were unbroken.

OPTIONS AND EXTENSIONS

There are several options and extensions of coverage for the jeweler block coverage. The extension (there is only one extension) covers damage caused by theft or attempted theft to other buildings the insured owns or for which he is legally liable.

Options that may be elected include the ability to insure additional property, including furniture, fixtures, office supplies, machinery, tools, patterns, dies molds, improvement and betterments, etc. Another option would coverage loss of money by theft when the safes or vaults are “broken open” – without the evidence of the safe or vault being “broken open”, there would be no coverage.

DEDUCTIBLES

The Jewelers Block Insurance has a mandatory deductible of $500, with higher deductibles available.

SPECIAL PROVISIONS

1. There is a special valuation clause which adds “the lowest figure put on the property in your inventories, stock books, stock papers or lists existing as of the time of loss.” This is in addition to the usual 3 types (cash value, restoring value, and replacing value).

2. Itemized and accurate records of the business must be kept for three years after the coverage ends and the insured is required to take a physical inventory of all stock at least annually.

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3. The “protective safeguards” in effect when the policy is issued, must be maintained in good working condition and operating when the business is closed. This is a rather severe provision and not complying with this provision will render the insurance suspended until the safeguards are back in operation.

4. If the insured’s premises are changed or risk of loss has been “materially increased,” the coverage will cease unless the company, in writing, agrees to the changes in premises.

CAMERA AND MUSICAL INSTRUMENT DEALERS

Camera and Musical Instrument Dealers insurance provides coverage on an All-Risks basis for the insured’s own property as well as property of others under the insured firm’s care, custody and control. Exclusions are wear and tear, mysterious disappearance, earthquake, flood, theft from an unlocked and unattended vehicle, loss of market, and delay.

Coverage for both cameras and musical instruments are written on the same form as both articles are precision-made and can be damaged easily.

PROPERTY COVERED

While the property covered is cameras and musical instruments, it also states in the form that coverage is provided to “stock in trade consisting principally of cameras or musical instruments and related equipment and accessories, and to property of others that is in the control or custody of the insured.” The use of the word “principally” would allow other articles carried in stock that are not specifically cameras or musical instruments. The other items in stock must be sold incidental to the musical instruments or cameras. Radios, television sets, record players and tape recorders are not considered as musical instruments.

Cameras and/or musical instruments that are sold in departments of department stores, are covered but all other goods sold in the store would not be covered.

Other items can be covered, such as furniture, fixtures, office supplies, machinery, tools, fittings, patterns, dies, molds models and tenants’ improvements and betterments. Theft damage to the insured’s premises are covered.

Certain types of property are excluded, such as accounts, bills, currency, deeds, money, notes, securities and property sent by mail (unless by registered mail or government-insured mail), and property sold under a deferred payment sales agreement.

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Exclusions in this policy are as stated above.

LIMITS OF INSURANCE

Separate limits of insurance apply to property that is (1) at described premises; (2) away from premises in the care, custody or control of the insured or the insured’s employees; (3) in transit; (4) not at the insured’s premises and is not included above; and (5) all covered property at all locations.

The valuation of property for camera and musical instrument dealers insurance depend upon whether it is unsold property, sold property, property of others and negatives, positives or prints. For unsold property, the usual cash value, restoring value or replacement value applies. Sold property is net selling price.

The same provisions regarding the keeping of records and inventory, and protective safeguards that are discussed with Jewelers Block insurance apply to the Camera and Musical Instrument Block insurance.

There is an 80% coinsurance clause.

EQUIPMENT DEALERS

Equipment Dealers Insurance provides coverage on All-Risks basis for such items as binders, reapers, harvesters, plows, tractors, pneumatic tools and compressors, bulldozers, and road scrapers. Excluded from coverage is wear and tear, loss due to delay, loss of market, consequential loss such as loss of income because of damage to the equipment and mechanical breakdown. Property excluded includes aircraft, watercraft, motor vehicles, and property sold on an installment contract basis after it has left the care, custody and control of the insured dealer.

Simply put, this policy covers property consisting principally of mobile agricultural and construction equipment and other such related accessories. Since some if it is stored outside, the policy provides coverage for property inside and outside the premises.

PROPERTY COVERED

For an additional premium, the insured may cover such things as furniture, fixtures, office supplies, improvements, betterments, machinery, tools and fittings, patterns, dies, molds and models.

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Property not covered includes accounts, bills, currency, deeds, money, notes, securities, etc. Automobile, motor trucks, motorcycles, aircraft, and watercraft are excluded, obviously because of the potential problems in defining mobile equipment with these excluded items.

The insured may have property of others deleted from the policy. Property leased, rented or sold is excluded, including property sold under a deferred payment plan “after it has left the custody of carriers for hire when you are responsible for delivery.” Contraband or property in the course of illegal transportation or trade are excluded.

The exclusions in this form are identical to exclusions in the camera and musical instrument dealers form, except earthquake is not excluded, and this form does not have exclusions for theft from unattended automobile, and marring, scratching, exposure to light, and so on.

LIMITS OF INSURANCE

Separate limits of insurance apply to property that is (1) at described premises; (2) at other premises the insured acquires (with limits) (3) in transit; (4) not at the insured’s premises and is not included above; and (5) all covered property at all locations.

There is an 80% coinsurance provision.

Valuation conditions, and the records & inventory and protective safeguard conditions, are the same as in the Camera and Musical Instrument policy.

FINE ARTS DEALERS

Fine Arts Dealers insurance provides coverage for works of art, antiques, and similar articles of value on an All-Risks basis, subject to the exclusions of wear and tear, war, breakage, repairing, infidelity of the insured’s employee, and mysterious disappearance. Fine Arts Insurance policies are written on a scheduled basis with damaged or destroyed items being indemnified on a valued basis. The same type of coverage for fine arts is available through a “Fine Arts Endorsement” for a “Special Multiperil Insurance” policy.

Breakage of fragile property may be excluded unless the loss is caused by specific perils (wind, fire, theft, etc.).

Limits of insurance pertain to property at the insured’s premises, property in transit and property at locations other than the insured’s. The latter allows coverage while property is on exhibition, sent to a customer on approval or property that is being repaired or restored.

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Valuation for unsold property is the amount that is carried on the insured’s inventory, but actual cash value or fair market value can be used, although the latter can be difficult to ascertain with some fine arts.

Premiums can be a flat premium or they can be on a reporting basis if the inventory fluctuates considerably. There is a 100% coinsurance clause for fixed premium policies.

Fine Arts Dealers insurance is rated by starting with the fire contents rate and then graduated loadings for various exposures can be added. The primary exposures are fire, theft, breakage and transportation. Deductibles are generally used for breakage claims.

STAMP AND COIN DEALERS

Stamp and Coin Dealers insurance provides coverage on an All-Risks basis with exclusions for wear and tear, war, loss resulting from delay, loss of market, infidelity of the insured’s employees, loss due to rain, sleet, snow or flood (except while the stamps or coins are in transit). This is a special Inland Marine insurance coverage designed specifically for dealers.

This policy can be written either on a blanket basis, or with a schedule of the more valuable items, or by blocks of stamps or coins. Named Perils form may be used on a rare occasion.

Other exclusions commonly used are for loss due to fading, creasing, tearing, thinning, transfer of colors, moths, vermin, inherent vice, extremes of temperature, gradual deterioration and damage sustained during handling, as well as unexplained disappearance and shortage discovered during inventory. Shipment by mail may be excluded also, or restricted just to registered USPS mail.

Those dealers who sell directly to the public have an unusual exposure because of the values of some of their goods. Therefore, the policy may warrant what property can be kept outside of safe when the store is closed.

FURRIER’S BLOCK

(Do not confuse Furrier’s Block insurance with Furrier’s Customer Policy, discussed earlier, although some coverages are available with either policy.)

Furrier’s Block Insurance provides coverage for furs owned by a furrier or by others in the fur trade for which the insured is liable. Coverage is on an All-Risks basis except those

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specifically excluded, (such as) wear and tear, war, delay, loss of market, flood, earthquake, loss or damage while furs are being work by the insured or his or her representatives, loss resulting from infidelity of any person under the car/custody/control of the insured, damage of destruction of the furs after they leave the care/custody/control of the insured that has been sold under an installment contract, and mysterious disappearance.

The Insurance Service Office no longer files a Furrier’s Block policy, and may be written on whatever form the insurer find appropriate, although many companies continue to use the provisions of the form formerly filed by the ISO.

The Furrier’s Block (and the Jeweler’s Block) policies require that a proposal be made before a policy can be issued, and the insured must warrant that the information contained therein is complete and accurate.

The policy covers the furrier’s “stock in trade” and has the same restrictions for department stores that appear in similar policies.

Furs accepted for storage by the insured, are excluded.

Note that this exclusion delineates the principal difference between Furrier’s Block insurance, and Furrier’s Customers insurance.

Property that is sold on the installment plan after it has been delivered to the customer, is excluded also. A unique exclusion is animals, furs, pelts, skins, or parts thereof, on the premises of ranchers, breeders, growers or trappers. Another exclusion applies to property that is worn by the insured or anyone else that is engaged in the fur trade, including but not limited to employees, members of the insured’s family, relatives, etc.

Other exclusions include the unattended vehicle exclusion and loss or damage caused by theft by cutting or breaking show windows, as discussed in the description of Jewelers Block insurance.

There can be 6 different limits of insurance in the policy covering property1. at premises described in the policy;2. in transit by contract or common carrier, or registered mail;3. in the custody of a merchants’ parcel delivery service;4. at the premises of sales agents, dealers, processors, or similar custodians;5. owned by the insured while in storage at the premises of custodians other than those

shown immediately above; 6. located elsewhere and not included in the above property locations, or limited by policy

provisions otherwise.

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FLOOR PLAN

Floor Plan insurance provides coverage for a lender who has accepted property on the floor of a merchant as security for a loan. If the merchandise is damaged or destroyed, the lender is indemnified.

This type of coverage is not a “dealer” situation in the strictest sense, but the concept is quite similar. Under the Definition, the dealer must have borrowed money from a lending institution to pay for the merchandise, and the merchandise must be specifically identifiable. The dealer cannot sell or dispose of the merchandise in any way, without first receiving a release by the bank or lending institution.

It may be written to insure the interests of the dealer only, the lending institution only, or both. If the dealers or lending institution are insured solely, only the outstanding balance is shown. If both are insured, then the full value of the property is reported.

The exclusions are those used by the ISO (three-level as discussed earlier in the text) with some exceptions.

The insurance company will not pay for loss or damage caused by or resulting from bankruptcy foreclosures (or similar proceedings).

Excluded are loss to property caused by or resulting from “Rain, hail, sleet, snow or freezing with respect to property in the open. Property insured in the policy could possibly be stored in the open, subjecting it to additional risks.

A breakage exclusion is applicable, covering glass and fragile property unless the breakage is caused directly by fire, lightning, explosion, etc.

Loss by a short circuit or other electrical disturbance is excluded if the disturbance is the result of an artificially generated current.

Dishonesty and Trick or Device exclusions also will apply. Loss by delay or loss of market, “wear and tear, any quality in the property that causes it

to damage or destroy itself, hidden of latent defect, gradual deterioration or mechanical breakdown” are also excluded.

VALUATION

The Commercial Inland Marine form to which this form is attached, has an actual cash value provision, but it does not work well with the coverages of the Floor Plan insurance as there are different conditions for property that is not sold, and property that has been sold. For instance, the value of property that has not been sold is the least of (a) the cost of restoring the property to its original condition prior to loss, (b) the replacement cost, or (c) the price the dealer paid for the property.

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The policy contains a provision called “Loss Limit – Single Interest” which states that the insurer will pay only the portion of the loss in proportion to the amount of interest the insured has in the property bears to the value of the property.

CONSUMER APPLICATIONBernie’s Tools is covered by a Floor Plan insurance policy, as Bernie deals in special tools

for professional craftsmen and his stock is financed by a bank. The policy only covers Bernie’s interest in the stock.

During a summer storm, a lightning bolt came through the roof of the building and “fried” a professional floor sander, valued at $3,000. Bernie has paid $500 on this amount, with an outstanding balance of $2,500. Since the sander suffers $2,000 in damage, the insurer would pay: $500/$3,000 (.1666) X $2,000 = $333.33.

(If there were a single interest policy in the name of the lender, the insurer would pay the lender: $2500/$3,000 (.8333) X $2,000 = $1,666.67)

There is also a records and inventory provision which demands that accurate and complete records be kept of all inventory, and property of others in the custody of the insured, outstanding balances, and payments made & values at risk.

STUDY QUESTIONS

1. Only those dealers who _________________________ are covered under Inland Marine provisions.

1. sell, wholesale, or manufacture certain valuable goods2. sell to the general public3. handle money or securities as part of their business4. are specifically mentioned in the Nation-Wide Marine Definitions

2. Which of the following statements is true? Jewelers Block insuranceA. covers not only the goods that the insured has for sale during the normal course of

business, but also covers any personal property of the insured.B. covers property owned by the insured only.C. only covers property of others in the care and custody of the insured.D. is available only to retail jewelers.

3. Under a Jewelers Block, which of the following is NOT excluded (is covered)?A. Jewelry work done by an employee.B. A necklace that the jeweler has for sale and is displayed inside the store.C. A necklace that the jeweler has for sale in a showcase at an exhibition hall.D. A diamond broach that has been sold under a deferred payment plan.

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4. Under a Camera and Musical Instrument Dealers policy, which of the following is not covered?A. a Stradivarius violinB. a rare Philco radioC. sheet musicD. reeds for clarinets and saxophones

5. Bert & Mary have an “Antique” store, selling antique furniture, paintings, weavings, statuary, and books. They have discovered that some of their antiques are quite valuable. What kind of insurance should they consider in addition to their Commercial Property policy to protect their valuable stock?

A. Fine Arts Dealers (Inland Marine) insurance.B. Fire and Extended coverage.C. Fine Arts Dealers Liability insurance.D. Commercial Crime coverage.

6. Which of the following persons would be eligible for Stamp & Coin Dealers insurance?A. Bill has collected Indian Head pennies and has one of the finest collections in the

country, which he will not sell.B. Rod collects rare stamps from Asian countries which he exhibits at fairs.C. Sam collects various types of stamps, particularly those that have misprinted, and which

he sells from a small store he has on Main Street.D. Ruby collects new coins, presently gathering all of the newly minted quarters, which she

then gives to her grandchildren when the collection is complete.

7. Franks Furriers sells, repairs, and cleans fur and fur-trimmed garments. What kind of inland Marine policy that will cover the furs that he owns and also those of others that he repairs or cleans, should he be considering?A. Furrier’s Customer Policy.B. Furriers Block Insurance.C. Commercial Furriers Theft and Liability coverage.D. Commercial Crime policy.

8. Which of the following is NOT an exclusion (is covered) to the Furriers Block Insurance?A. Furs belonging to others in the fur trade that are in the custody or control of the Furrier.B. Animal hides on a mink ranch.C. Property that is worn by an employee or the insured.D. Theft by breaking or cutting a show window.

9. To qualify for Floor Plan insurance, the dealerA. must first apply to an organization representing his occupation, for their group coverage

first.B. must have borrowed money from a lending institution to pay for the merchandise.C. must sell the merchandise at a retail price as stated in the policy conditions.D. is the only person/organization/firm that can apply for coverage.

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10. The Floor Plan insurance, which is attached to a Commercial Inland Marine Form, contains a provision, called “Loss Limit – Single Interest. What does this provision do?A. It states that the policy will only pay the limit of only one loss, regardless of the amount.B. It provides for a multiple of Loss Limits, but each Loss Limit must be expressed as a

percentage of the Maximum Aggregate Loss Limit.C. It means that the amount of any loss must be either the cash value, or the price the dealer

paid for the property.D. It states that insured will pay only the portion of the loss in proportion to the amount of

interest the insured has in the property, bears to the value of the property.

ANSWERS TO STUDY QUESTIONS

1B 2A 3B 4B 5A 6C 7B 8A 9B 10D

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CHAPTER TWELVE - OTHER COMMERCIAL COVERAGESCHAPTER TWELVE - OTHER COMMERCIAL COVERAGES

Under Section “F” of the Nation-Wide Marine Definition, “Commercial Property Floater Risks” are several different kinds of commercial Inland Marine forms, some of which have been discussed earlier in this text. The forms discussed in this chapter are those that the ISO and/or the AAIS have filed forms, rule and rates. The next chapter will discuss nonfiled forms.

Care should be taken when referring to these various forms, that some property that may be covered under the filed forms, may instead be a nonfiled class. An example would be billboards that are not covered under the “Signs” form.

ACCOUNTS RECEIVABLE

Accounts Receivable insurance provides coverage when business records are destroyed by an insured peril and the business cannot collect money owed. The policy covers these uncollectable sums plus the expense of record reconstruction and extra collection fees. It does not insure the physical value of the records themselves, such as the paper or computer disks and tapes.

Accounts Receivable insurance differs from most other types of Inland Marine insurance as it provides coverage for a type of consequential loss, i.e. insurance that comes in directly from the main event. Simply put, if the insured’s records of accounts receivable (amounts owed the insured by other persons/businesses) are damaged to the point that that the insured cannot collect what is owed to him, then the insurance company will pay whatever the insured is unable to collect, including interest charges on any loan that is needed to offset the loss plus collection expenses and other reasonable expenses that the insured incurs in their efforts to reconstruct the records.

A legitimate question might be, “Why buy insurance? Why not just keep duplicate records at another location as many businesses do?” The answer would be that many businesses do just that, but there is still an expense to get the records up and running again, and the cost of this insurance is quite reasonable.

This form insures against risks of direct physical loss for damage, except for those listed in the exclusions. The exclusions are the first category discussed earlier (governmental action, nuclear hazards, war and military exclusion), plus the second category exclusions of employee dishonesty exclusion, truck/device exclusion, and the unauthorized instructions exclusion.

The most applicable exclusions are those losses caused by or resulting from dishonest acts by the insured, employees, authorized others, etc., or anyone entrusted with the accounts receivable during hours of employment (does not exclude carriers for hire). Excluded also are losses resulting from alteration, falsification, concealment or destruction of records of accounts receivable done to conceal the wrongful giving, taking or withholding of money, securities, or other property. Also, bookkeeping, accounting or billing errors or omissions; electrical or

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magnetic injury; disturbance or erasure of electronic records (will pay for direct loss by lightning); and further, they will not pay for any loss that requires any audit of records or any inventory computation to prove its factual existence.

The policy will not pay for any loss caused by or resulting from the following (unless the loss is caused by a “Covered” Cause of Loss): Weather conditions, acts or decisions of any person, group, organization or governmental body, or faulty, inadequate, or defective planning, zoning development, design, materials or maintenance.

There is a coverage extension, much like that offered in other plans, that covers the insured property (records of accounts receivable in this case) while away from the insured’s premises or in transit to another place or returning.

DETERMINATION OF RECEIVABLES

Unique to this form is the replacement of General Condition E, Valuation in the Commercial Inland Marine Conditions with statements to the effect that if the amount of accounts receivable outstanding at the time of loss cannot be accurately determined, the following method will be used:

(1) Determine the total of the average monthly amounts of accounts receivable for the preceding 12 months immediately preceding the month in which the loss occurs, and

(2) adjust that total for any normal fluctuations in the amount of accounts receivable for the month in which the loss occurred or for any demonstrated variance from the average for that month.

Further, the following will be deducted from the total amount of accounts receivable (regardless of how that amount is established):

(1) The amount of the accounts for which there is no loss;(2) The amount of the accounts that can be re-established or collected;(3) An amount to allow for probable bad debts normally uncollectable; and(4) All unearned interest and service charges.

CONSUMER APPLICATIONThe Woman’s Clinic in South Florida performs a large number of abortions, many from

women who live in Central or South America and come to this country for an abortion, most of them from wealthy families. Most of the abortions are performed on lower and middle income U.S. residents, and very few are submitted to insurance companies for coverage. Therefore, a process has been established where the Clinic bills the patients and frequently set up monthly payments. They are known to be quite expensive, but that is “what the traffic will bear” in that area. Not infrequently, women who have had abortions complain bitterly about the high cost.

Over a weekend, when the clinic was closed, someone entered the offices, stole nearly all of the billing records, and crashed the computer program. The policy believed it to be someone who was protesting against the costs and probably could not pay the bill, so they destroyed all of the bills that they could find. (Continued on next page)

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The Clinic had Accounts Receivable coverage. The difficulty was (as in most of these types of claims) in determining how much the actual Accounts Receivable the clinic had.

The Clinic has been in business for only 2 years, with much more income during the second years (as they became better known). During the last year, they averaged between $100,000 and $175,000 a month in billing. While the amount fluctuated monthly, since the loss was in September, they looked at the previous September, which was $135,000.

Assuming the insurance company accepted the $135,000 as the average, from this amount they would subtract:

Any insurance claims, as they knew whom the insurers were and could get copies of the records.

Any payments by known lenders. Although the Clinic carried most of the debt themselves, in some cases other lending institutions might become involved, however infrequently.

Any person references from the staff who would have a personal memory of a particular patient.

Any bad debts. From the previous tax returns, it appears that their bad debt ratio runs about 12%

From banking records, they can obtain records of deposits and should be able to determine the accounts for which there were no losses.

From their inventory and from bills from suppliers they can determine about how many procedures they have had over the past several weeks, which would help to determine their lost income.

(The losses by vandalism would be covered under the typical policy of this type. Whether the vandal committed the act because of personal indebtedness would have no affect, as discussed earlier in this text.)

COINSURANCE

This form requires at least an 80% coinsurance except for items in transit.

PROTECTION OF RECORDS

When the business is not open for business and except when the records are actually being used, all records of accounts receivables must be kept in “receptacles” that are described on the Declarations page.

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VALUABLE PAPERS AND RECORDS

Valuable Papers (Records) Insurance provides coverage in the event that papers of intrinsic value are damaged or destroyed. Coverage is on an All-Risks basis. Limits of coverage can be quite high, but the insurance company will not pay an amount in excess of the actual cash value of the loss, or the amount necessary to repair or replace the damaged or destroyed papers. The papers must be kept under lock and key.

The definition of “Valuable papers and records” is “inscribed, printed, or written documents, manuscripts or records, including abstracts, books, deeds, drawings, films, maps or mortgages. But valuable papers and records does not mean money or securities, converted data, programs or instructions used in the data processing operations, including the materials on which the data is recorded.”

PROPERTY NOT COVERED

There are four areas of property that is not covered:1. Property not specifically declared and described in the Declarations, if the property

cannot be replaced with other property of like kind and quality.2. Property held as samples or held for delivery after it has been sold.3. Property held in storage away from the designated premises.4. Contraband or property in the course of illegal transportation or trade.

COLLAPSE

Collapse will be covered if caused by the usual means, such as fire, windstorm, hail, explosion, etc, and also includes hidden decay, insect or vermin damage, weight of people or personal property, weight of rain on the roof, and use of defective materials or method in construction, etc.

COVERED PERILS

As an All-Risks policy, it insures against risks of direct physical loss or damage, except the causes of loss listed in exclusions. The exclusions are the typical three categories of exclusions, except that the second category would include

loss caused by or resulting from errors or omissions in processing or copying (unless the loss is caused by resulting fire or explosion),

loss caused by or resulting from, electrical or magnetic injury, disturbance, or erasure of electronic recordings (does not apply to losses caused by lightning).

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ADDITIONAL CONDITIONS

There are four additional conditions:1. Property is covered while in the US, Puerto Rico or Canada, within the premises, or away

from the premises while in transit or within premises of others.2. The limit of insurance for specifically declared items is the value of the property that is

specifically declared and described in the Declarations.3. When the covered papers and records are not being used, they must be kept in the

“receptacles” as described the Declarations.4. If after there has been a loss settlement and any property has been recovered either by the

company or by the insured, then the loss will be so adjusted.

LIBRARIES ENDORSEMENT

When Libraries are covered, property away from the premises while in the care, control, or custody of any borrower or renter, is not covered. Specifically excluded are

losses caused by or resulting from failure of any borrower or renter to return the property to the library; and vandalism of mutilation by anyone using the property within the insured’s premises; or unexplained disappearances, or

losses that depends on an audit of records of an inventory computation to prove its factual existence, however these procedures may be used to support the determination of a loss that the company would otherwise pay.

PHYSICIANS AND SURGEONS EQUIPMENT

Physicians and Surgeons Equipment Insurance provides coverage for equipment normally carried from location to location by a physician or surgeon; written on an All-Risks basis to include supplies and scientific books used in medical practice.

COVERED PROPERTY

The insurance will pay for loss to covered property from any of the covered causes of loss. Covered Property means

medical and dental equipment, materials, supplies and books usual to the medical or dental profession, and can also cover similar property of others if used by the insured in his/her profession;

the insured’s office equipment, including furniture and fixtures, while at the “premises;

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the insured’s interest in improvements and betterments, if the insured does not own the building in which the premises is located.

Property NOT covered includes radium and contraband or property being illegally transported.

EXCLUSIONS

The typical first category of exclusions consist of governmental action, nuclear hazard and war and military action. The second category is typical, with addition of false pretense and unauthorized instruction, plus

marring, scratching, exposure to light breakage of tubes, bulbs, lamps or articles made largely of glass (except lenses);

processing or work upon the property; artificially generated current creating a short circuit or other electrical discharge with a

covered article.These exclusions (above) will be paid if they are caused by causes of loss that is covered under the coverage, such as fire, and explosion, etc.

COVERAGE EXTENSION

The available extension covers damage caused directly by theft or attempted theft to any part of the building that contains covered property, or to equipment used to service the building. This applies only if the building is owned or leased by the insured.

VALUATION

Valuation for improvements and betterments are unique in this policy. If the insured repairs or replaces damaged property, actual cash value at time of loss determines the loss amount. If the improvements or betterments are not repaired or replaced, the value is determined by using a percentage of the original cost representing their unamortized value, which is done by dividing the number of days remaining on the insured’s current rental agreement by the number of days from when the property was installed, until the rental agreement expires.

CONSUMERS APPLICATIONDr. Singh moves into larger quarters with a 5 year lease. The waiting room was remodeled at

a total cost of $5,000. Two years later, fire destroys the waiting room. The actual cash value of the waiting room was now $4,000. If Dr. Singh elects to repair the waiting room, he will receive the entire $4,000.

However, Dr. Singh’s practice has continued to grow, so he decides that he will take this opportunity to move to another location and not to replace the destroyed improvements and

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betterments. Therefore, he would only receive $3,000 for the loss. In effect, he is collecting the unamortized value ($5,000 spread over the 5 year term of the lease, equals $1,000 per year). Since he has 3 years remaining on the lease, the settlement would be for 3/5 of the total cost, or 3/5 of $5,000, equals $3,000.

COINSURANCE

The coinsurance percentage is 80%, except for goods in transit.

PROTECTIVE SAFEGUARDS

The insurance required the insured to maintain the protective safeguards that were in effect at the time of the original policy date. If these safeguards are not effective and not in working condition at a location and in operation when the business is closed for business, coverage is suspended until the equipment or services are back in operation.

UNDERWRITING

This form requires unique underwriting because of the possibility of theft of drugs for those doctors who have drugs or other narcotics on the premises. Some physicians may have sophisticated (read expensive!) electronic equipment in the office for diagnostic or treatment purposes. This equipment is subject to the same problems as electronic data equipment, such as fluctuations of current and explains why there is an exclusion of electrical disturbance caused by artificially generated current (the exclusions does not apply to natural causes, such as lightning).

SIGNS

The 1976 Definition includes coverage for “Signs and Street Clock policies, including neon signs, automatic or mechanical signs, and street clocks, as such.” Those that are not included in the filings, can be insured on a nonfiled basis and could include such as billboards, ordinary fixed signs, plastic-faced signs and other signs not specifically mentioned.

This is a rather simple form, with coverage of signs belonging to or in the custody of the insured, including coverage by collapse by all of the usual causes. Exclusions are the usual three category exclusions, plus breakage when in transport or installation, repairing or dismantling; and loss caused by artificially generated current creating a short circuit or electrical disturbance. Also excluded is loss caused by weather conditions, or faulty, inadequate or defective maintenance.

Coinsurance, including property in transit, must be insured for full value.174

FILM

The 1976 Definition Section F.5, lists “Film Floaters, including builders' risk during the production and coverage on completed negatives and positives and sound records.” It has been noted that the ISO form considers Covered Property as “(a) exposed motion picture film and its sound track or other sound record and (b) property recorded magnetic or video tape and its sound track or other sound record. Tape is considered to be properly recorded if it has been replaced and checked after recording.” This is less coverage than that stated in the Definition, as it does not cover erections of sets or structures involved in film production. It, however, does cover exposed motion picture film and its sound track, and magnetic and videotape and its sound track(s).

A Film Floater can be written to cover film in transit to and from a theatre or school or other place that rents or borrows the covered films/tapes, and conversely, the borrower/renter can obtain coverage of the tape while it is in their custody.

Film covered is identified by the production as shown in the Declarations, so additional productions must be reported to the insurer. Note that the coverage only applies to commercial production and recording. Coverage can be obtained on an open basis where all productions are automatically covered, however there are underwriting concerns for this type of coverage.

The termination of the policy is rather unique and calls for coverage until one of the following occurs:

a. the full quota of positive prints or films has been made;b. the insured’s interest in the property has ceased;c. the policy period has ended; ord. the coverage is cancelled - whichever comes first.

PROPERTY NOT COVERED

Covered property does not include cut-outs; unused footage; positive prints or films; library stock; or contraband, or property in the course of illegal transportation or trade.

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EXCLUSIONS

In addition to the normal three categories or exclusions, (except earthquake and water exclusions do not apply) the following additional exclusions will apply:

deterioration, atmospheric dampness or changes in temperatures; exposure of negative film to light; use of developing chemicals; developing, cutting or printing of film or other laboratory work; electrical or magnetic injury, disturbance or erasure of electronic recordings or video

tapes (except for direct loss caused by lightning.

VALUATION

The valuation of the Film Form is necessarily unique, and it replaces the standard Inland Marine valuation condition. In case of loss, the value will be the cost of reproducing the lost or damaged property, plus the value of the reduction of undamaged parts of a production. The insured must reduce the value of the loss by using any available property or methods of production. The cost of the story, scenario, music rights, continuity, permanent sets, owned wardrobes and props, are not includible in the valuation of the covered property.

NOTE: This form is not usually used by movie studios, as they need coverage for the cast, property, sets, wardrobes, etc. This form is used generally for insuring education, training and promotional films.

The value of the film is the cost of remaking the picture, therefore the underwriter should be aware of all inherent costs and take them all into consideration.

THEATRICAL PROPERTY

The Definition describes this coverage as “Theatrical Floaters, excluding building and their improvements and betters, and furniture and fixtures that do not travel about with theatrical troupes.” However, the forms filed by both ISO and AAIS include scenery, customers and theatrical property whether or not they travel with the “theatrical troupes.” It should be noted that the filed rules do not apply to carnivals, circuses, rodeos, costume rental companies or theatrical supply houses.

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COVERED PROPERTY

Simply, the form covers scenery, costumes and other theatrical property owned by the insured, however, the property must be used, or used in the past, as part of one of the scheduled productions.

Property not covered are buildings or their improvements and betterments; vehicles unless actually used on the site in the covered production; jewelry comprised of precious or semi- precious stones, gold, silver, platinum, or of other

precious metals or alloys; accounts, bills, currency, deeds, money, documents, transportation or admission tickets,

notes, securities and evidences of debt; animals; contraband or property in the course of illegal transportation or trade.

Exclusions are those normally found in commercial policies, all three categories.

LIVESTOCK

Livestock insurance is a filed class (both ISO and AAIS) covering cattle, sheep, swine, horses, mules and goats from loss by death or destruction directly resulting from or made necessary by specified perils and is part of the ISO Farm program. These coverages under this form do not apply to livestock insured by mortality policies, which cover death or destruction due to natural causes (as well as other stated perils).

This form is not applicable to the following categories: range animals of the beef type and range sheep while on ranges; horse, mules, or donkeys used exclusively for racing, show, or delivery including

breeding therefor; livestock while being transported to or from or while in stockyards or commercial feed

lots; insureds conducting sales or auctions, covering livestock or others for public sales; livestock of circus, carnival, or theatrical enterprises; livestock on winter range; or veterinarians and humane societies covering livestock of others in their custody or control

for professional purposes.

DETERMINING AMOUNT OF INSURANCE ON LIVESTOCK

There are two different methods for determining the amount of insurance:

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Listing the six eligible classes of livestock, i.e. cattle, sheep, swine, horses, mules and goats, then the limit of liability per animal and total amount of insurance for each class insured. This is subject to an 80% coinsurance applied to the total value of all covered animals.

An option would be to schedule individual animals with a separate amount of insurance to each, or to provide insurance on a blanket basis by class and type of animal, with separate amounts of insurance for each class/type. The amount under the blanket basis is either $1,000, the actual cash value of the animal, or 120% of the amount when the total insurance on each class/type is divided by the number of animals of the class and type owned by the insured at the time of loss.

The second method provides that if an animal is newly acquired, it will be insured for up to 25% of the total amount of insurance, but the acquisition must be reported within 30 days.

COVERED PERILS

This form uses the Named Perils approach, with the following Named Perils:1. Death or destruction, directly resulting from or made necessary by

A. fire and lightning;B. windstorm, cyclone, tornado, hail, explosion, riot attending a strike, civil

commotion, aircraft and objects falling therefrom and smoke;C. earthquake, flood, collapse of bridges or culverts;D. collision, or derailment or overturn of a vehicle on which the insured property is

being transported;E. collision with vehicles except those owned or operated by the insured or by any

tenant of the insured;F. stranding, sinking, burning or collision of vessels, including general average and

salvage charges incurred.

2. Theft, excluding escape or mysterious disappearance.

EXCLUSIONS

Losses caused directly or indirectly by snow or sleet, whether driven by wind or not, are excluded. Also excluded is loss due to acceptance of counterfeit money, fraudulent post office or express money orders, or checks or promissory notes that are not paid upon presentation – plus usual exclusions of infidelity, war, nuclear explosions. Since the provisions of any policy, and in particular the exclusions, are based upon actual or expected losses, the exclusions of negotiable instruments would indicate that those who raise livestock are prey to swindlers and to fraud.

The death or destruction of livestock made necessary by certain optional perils, may be insured for additional premium.

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accidental shooting (except by the insured or member of the insured’s family, employees of the insured or tenants of the farm premises);

drowning from external causes (except drowning of swine under 30 days old); artificial electricity; attack by dogs or wild animals; or collapse of building.

Note: Under this form, the common cause of loss is lightning. The addition of the optional perils is particularly significant when sheep are insured as they are particularly susceptible to attacks by dogs or wild animals, and to drowning.

Note also insurance for livestock that cannot be covered under this form, may be available with a nonfiled form, as discussed in the following chapter.

CONSUMER APPLICATIONThe Lazy-B cattle ranch purchased 10 purebred beef cattle from the King Ranch in Texas,

consisting of 2 older bulls, a young bull, and 7 heifers. They do not allow the cattle to become “range cattle”, but are kept in barns and feed lots. They also use the bulls to service purebred cattle belonging to others.

They insure the cattle under a Livestock policy, with scheduled values of $40,000 for each bull, and $15,000 for each heifer. They value the bulls at $50,000 today, and the heifers at $20,000. The value fluctuates with the cattle market, the popularity of the breed, the age of the animals, and other such factors.

They purchased coverage (as an option), for attack by dogs or wild animals, as the government has released wolves into their area and the packs are getting larger and destroying more livestock as time goes by.

A very severe thunderstorm hits the ranch in the Spring, bringing large hail and very strong gusts of wind and rain. The cattle are in the main corral, and since they cannot get into the barn, they huddle together at the corner of the fence. A lightning bolt hits the fence, killing a bull and a heifer, tearing down the fence. The remaining cattle stampede away from the ranch, and before they can be recovered, a wolf pack takes down 2 more heifers.

The rancher makes claim for the limit for the bull, and for the 3 heifers. The coinsurance provision is 80%. The value of the bull is $50,000, insured for $40,000, This satisfies the 80% coinsurance, so the ranch will receive $40,000 for the bull.

For the heifers, they are worth $20,000 each, for total of $60,000. They are insured for $45,000, or 75% of the value. Therefore, the ranch will receive only $33,750 for the heifers.

MOBILE AGRICULTURAL EQUIPMENT

This form is also part of the ISO filed farm program and is designed to cover mobile agricultural machinery and equipment. Not eligible for this coverage are self-propelled

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harvester-thresher combines, and mechanical cotton pickers used for hire, portable sawmills, irrigation equipment, and lug boxes.

COVERED PROPERTY

The property covered under this form would be as indicated in the Declaration, and includes accessories, tools and spare parts for the equipment. Coverage is provided while the machinery and equipment is within 100 miles or where it is stored when it is not being used. It may be insured either under a blanket amount, or under a both scheduled and blanket insurance.

Under the blanket coverage, the insured property is described as all unscheduled mobile agricultural machinery and equipment. The second type of coverage shows a separate amount of insurance for each type, but not exceeding $250 on any one item. The amount of insurance is limited to $5,000 or 10% of the scheduled property, whichever is less. Combines and cotton-pickers are not eligible for coverage under the pure blanket coverage, but are eligible under the second approach IF NOT USED FOR HIRE. (They maybe insured under a nonfiled class, as there is considerable exposure if they are transported to jobs, frequently many miles apart.)

EXCLUSIONSExcluded from coverage are automobiles, motor trucks, motorcycles, aircraft, watercraft, and

vehicles designed for highway use, other than those, which have been designed for farming and are used principally on the premises. Irrigation equipment and crops are excluded also, as are tires and tubes (unless the loss caused by fire, windstorm or theft or coincides with another loss).

Mechanical or electrical breakdown is excluded, and any loss by wear and tear, dampness of atmosphere, or extremes of temperature, and the usual dishonesty-war-nuclear explosions are excluded.

RADIUM FLOATERUnder the Definition, Section F.1, “Radium Floaters” is listed with no additional description.

The only Radium Form filed is filed by AAIS that is used to cover radium is used only for medical purposes, ordinarily contained in small tubes or needles. Any other insurance on Radium would be on a nonfiled basis.

Property shipped by mail is not covered. The only stated exclusion is that of loss that results from a process to repair, adjust, service of maintain covered property. Of course the exclusions in AAIS Inland Marine general terms apply, which relate to wear and tear, gradual deterioration, intrinsic fault of weakness, insects or vermin, delay, loss of market, loss of use or business interruption, obsolescence or deterioration, wear, civil authority and nuclear hazard.

A unique provision is that the use of the covered property (radium) must be under the supervision of a person who is specially qualified to handle it.

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Rates are based on full coverage – the equivalent of a 100% coinsurance applies to each scheduled item.

COMMERCIAL ARTICLES COVERAGE FORMThe ISO form insuring cameras and musical instruments in the stock of dealers of these

properties was discussed earlier. Both ISO and AAIS file another form for insuring cameras and musical instruments used for commercial purposes, but not held for sale by dealers.

COVERED PROPERTYUnder this form, covered property consists of cameras, projection machines, films and

related equipment and accessories; musical instruments and related equipment and accessories; and similar property or others that is in the care, custody or control of the insured.

Each item can be insured separately and all items can be insured on a blanket basis. Blanket coverage is subject to a 100% coinsurance clause, and therefore the additional acquired property provision will be eliminated. Otherwise, the additional acquired property clause will pay the lesser of 25% of the total limit of insurance shown in Declarations, or $10,000.

Exclusions are the three category exclusions with no unusual exclusions.

UNDERWRITINGFor cameras there are two rating classes, cameras and equipment of motion picture

producers, and cameras and equipment of everyone else. (A little higher rate for motion picture producers).

Cameras used in a studio have less exposure that those used outside of a studio. Television equipment is not eligible for this form, but commercial television equipment may be underwritten on a nonfiled class. Underwriters must be aware of where the television equipment is used, for example if used in a van to cover news events, the exposure will be considerably more than if only used in the studio.

For musical instruments, there are different rates for individual professional musicians, insureds that are not individuals and organs that are not mobile. Musicians that are not individuals are classified as either dance bands and orchestras, and all other bands (including orchestras, chamber music ensembles and similar groups, and boards of education or municipalities).

For non-mobile organs, rates start with 100% fire and extended coverage contents rate for the building in which the organ is located, and rates are for the first $10,000 of coverage, another (lower) rate for the next $40,000, and then another (even lower) rate for $50,000.

Professional musicians, as a general rule, take great care of their instruments (excluding some of the rock bands who may destroy every instrument on the stage every performance) but

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there can be a rather serious exposure while the instrument is in transit. Bands and orchestras usually travel en masse so the exposure of the instruments will depend upon supervision.

STUDY QUESTIONS

1. What will Accounts Receivable insurance pay when business records are destroyed by an insured peril and the business cannot collect money owed?A. Uncollectable sums plus expense of record reconstruction and extra collection fees.B. Uncollectable sums plus physical value of the records themselves.C. Uncollectable sums only.D. The total cost of reconstructing the accounts receivable records plus collection fees.

2. If the amount of accounts receivable cannot be accurately determined at time of loss, what action is taken to determine the loss amount?

A. The replacement value of the losses will be paid.B. A method that uses the average monthly amount of account receivable , adjusted for

fluctuations, and reduced by certain factors that would normally not be an account receivable.

C. A method of averaging the past 12 months of accounts receivable amounts, dividing by 12, then adding 12% for additional fluctuations.

D. A panel of appraisers, consisting of 3 CPA’s who will estimate the loss amount based on experiences of companies of like size and like kind.

3. Which of the following would not be covered under Valuable Papers (Records)Insurance?A. Printed documents containing the firms business plan and financing methods.B. Legal documents pertaining to the ownership of the firm, incorporation, etc.C. Securities and money that is part of the company’s assets.D. Copies of geological maps used by the company, an oil drilling firm.

4. Under a Physicians and Surgeons Equipment Insurance policy, the policy will pay for loss to covered property from any of the covered causes of loss. Covered property may includeA. Radium used as part of a diagnostic procedure.B. Processing of X-ray films.C. Crack cocaine used in a psychiatric experiment by a psychiatrist.D. A diagnostic machine used for diagnosing plaque in certain arteries.

5. Which of the following is not insurable under a filed Sign and Street Clock policy.A. Neon signs.B. A sign with a mechanically operated arm pointing to the business location.C. Removable signs that attach to the door of a company-owned car.D. A clock at the corner of Oak and Main that strikes the hour.

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6. Which of the following is covered under a (filed) Film Floater?A. Unused footage of a movie.B. Positive prints.C. Exposed Motion Picture Film and its sound track.D. Pornographic Motion Picture Film featuring sex with children.

7. Which of the following would be covered by a Theatrical Floater?A. Scenery of a show of “Cats” performed by various Dinner Theatres.B. Scenery of a Sideshow used in a travelling carnival.C. Saddles, Ropes, Halters and other such material used for Rodeo horses.D. Calliope used by the Strainje Brothers Circus.

8. Which of the following livestock would be insured under the (filed) Livestock Floater?A. A flock of sheep grazing on the range on a ranch in Montana.B. A thoroughbred racehorse grazing in a pasture in Kentucky.C. A Brahma bull used for breeding purposes by a ranch in Florida, kept in a barn and

corral and breeding pen.D. A Brahma bull with a herd of Brahma heifers grazing on clover on a ranch in Texas.

9. George has a farm in Iowa. Which of the following farm equipment would not be eligible for coverage under the (filed) Mobile Agricultural Equipment Floater (scheduled)?

A. Combination harvester-thresher (known as “Combine”) not used for hire.B. A Dodge Ram 4x4 pickup used on the farm, licensed for highway also.C. George’s Tractor that he uses for plowing and other farm work, including pulling

wagons of grain produced by his combine.D. Portable irrigation pumps and sprinklers used during dry weather.

10. Modelpic, Inc., is a photo studio specializing nearly exclusively in photographing clothing models for magazines, calendars, and for private purposes, such as a model’s “portfolio” of pictures. They have many very expensive cameras, some in the studio and some are used for location shots. What type of policy would they need to cover the exposures of the cameras and equipment, both in the studio and on location?A. Commercial Articles Coverage Form.B. Camera and Musical Instrument Dealers.C. Camera and Photographic Materials Floater.D. Model and Cameramen’s Liability policy.

ANSWERS TO STUDY QUESTIONS

1A 2B 3C 4D 5C 6C 7A 8C 9D 10A

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CHAPTER THIRTEEN - MISCELLANEOUS NONFILEDCHAPTER THIRTEEN - MISCELLANEOUS NONFILED COMMERCIAL COVERAGESCOMMERCIAL COVERAGES

The previous discussions about Inland Marine insurance has been generally about those forms that have been filed by the ISO and the AAIS. Some of the forms, it has been noted, can be modified by using nonfiled forms in order to cover exposures that cannot be covered by the filed forms. This chapter will be concerned about some of the more common nonfiled forms.

SALESMEN’S SAMPLES

Salesman Samples Floater covers sample merchandise while in the possession of a salesperson. Under the Definition, article F.6 refers simply to “Salesmen’s Samples Floaters.” In addition to “samples,” any property being shipped to and from the salespeople is also covered.

This form may be written with a schedule of individuals, each with a limit of insurance pertaining to the samples they carry; or it can cover a number (number must be stated) of sales representatives with a statement as to the insurance amount which applies to each one. In addition, there is a catastrophe coverage if losses involve more than one salesperson.

The form frequently excludes jewelry and furs, as they can be insured under a Jewelers Block or Furriers’ Block policy. The property that is to be insured is usually named in the policy and is provided while the goods are in the United States or Canada.

COVERED PERILS

Coverage can be either on an All-Risks basis, or on a Named Perils basis. If it is on an All-Risks basis, the following exclusions normally will apply:

wear and tear, moths, vermin, gradual deterioration, inherent vice, delay or loss or market;

mysterious disappearance, miscounting, misplacing or shortages; employee dishonesty; war; nuclear risks.Theft of property from an unattended vehicle, excluding property in the custody of a

common carrier, may be one of the exclusions, but it can be replaced by a requirement that the vehicle either have an alarm system, or it has a fully enclosed body with windows and doors locked.

Generally, losses occur by theft from automobiles or from hotel/motel rooms.

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LIVE ANIMAL FLOATERS

Under Definition Article F.8, “Live Animal Floaters” are considered as an Inland Marine class of business. This floater is nonfiled, whereas the Livestock Floater discussed earlier is a filed class. Animals that do not qualify for the filed Livestock Floater is eligible for coverage under this Floater.

Coverage is on death or destruction of animals because of particular perils (Named Perils) or it can be used to provide death or destruction from any cause. Usually, the few companies that write this coverage will use the Named Perils approach.

During the discussion of the filed Livestock Floater it was noted that coverage under that plan did not apply to livestock on winter range. Winter range feeding is common in Colorado, Nebraska, Kansas, New Mexico, and Oklahoma, and cattle and sheep being fed on winter range can be covered under this nonfiled form.

The application is rather extensive and requires detail as to the number and type of animals to be insured, the location of the livestock, average height and weight and where they were raised. In addition, the insurer must know the number of full-time and part-time employees working with the cattle, and the experience the insured has in winter feeding the livestock.

Death, caused by Named Perils is covered, and the Named Perils are very similar to those in the Livestock Floater. Frequently there will be additional coverages, such as death by freezing and death by suffocation as a result of a Named Peril. In the Midwest and the Great Plains, during winter blizzards, livestock will “bunch up” for collective warmth and the winds can cause them to drift into a fence corner or similar area, where the weight of the snow and ice can cause the livestock to die by suffocation as much as from freezing.

Death by disease is usually excluded and death must occur within a specified time, such as 15 days, from a named peril. Animals are not covered at birth, and usually there is a waiting period of around 60 days. Sheep usually are required to have a 60-day fleece. The company will usually not pay more than 75% of the cash value of the livestock involved in a loss, or the limit of insurance, whichever is less.

Besides Winter Range cattle, cattle on feedlots are not covered under the filed form, but may be covered under the nonfiled form. Cattle on feedlots can be either All-Risks or Named Perils. Under the Named Perils form, coverage is only for death resulting from :

fire and lightning; windstorm; accidental shooting; drowning; collapse of buildings or structures;

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attacks by wild animals or wild dogs; artificial electricity; vandalism; malicious mischief; suffocation or freezing caused by snowstorm or blizzard; collision by a vehicle; loss by theft, (excludes escape and mysterious disappearance).

Note: death by disease is not covered, even if a consequence of a covered peril. (Remember the hoof and mouth disease?)

However, the All-Risks form covers death by any cause, including disease. Exclusions are loss by escape, mysterious disappearance, improper medical veterinarian treatment, and action on the part of officials to prevent the spread of a disease (foot and mouth disease again).

There is usually a deductible, which can be expressed as a percentage of the value of one or more animals.

HORSES

The Horses Floater pertains to Racehorses and Show horses, as they cannot be covered under the filed Livestock Floater. This particular form seems to be where the applicant lets the insurer know what coverages they need, and the insurer will the make an offer. Under a Named Perils form, the exclusions are very similar to the Live Animal Floater described previously, except that since these animals are frequently trailered for long distances, collision, upset or overturn of the conveyance is covered.

Generally, while the covered animals are at a show, racetrack, fairgrounds, etc., they are not covered. However this can be an extremely important coverage for many applicants, so usually they will provide coverage for an added premium.

Since the value of these animals vary considerably, the insured animals are usually scheduled with an individual amount of insurance applying to each animal. The form can be modified to include the tack and similar equipment.

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VETERINARIAN COVERAGE

A veterinarian or kennel owner can obtain coverage for the liability they have when animals are in their custody. The Named Perils form cover the death or destruction caused by the covered perils, which are very similar to those covering racehorses and show horses. Usually there is a limit of insurance on each animal, with a catastrophe limit also.

POULTRY

For insurance purposes, there are two classes of poultry:1. Layers and 2. broilers, fryers, and roasters.

LAYERS

When layers are covered, the owner of the layers is named as the insured in nearly all cases. Layers are usually insured on a flat premiums basis. There is a limit of insurance per bird and for each brooder house.

BROILERS, FRYERS AND ROASTERS

With broilers, fryers and roasters, the insured may be either the individual grower or the dealer or feed company that farms out the birds; or in some cases, both. They are usually written on a reporting basis, and each flock is reported when acquired and premiums are for the flock during the full growing period – usually from 8 to 12 weeks.

Usually there is a separate valuation agreement with birds under a certain age, and those over that age. The valuation of the younger birds is determined by their invoice worth when acquired, plus the expenses for feed, medicine, litter and fuel at the date of loss. For the older birds, the market value prevails. Broilers, fryers and roasters have a limit of insurance per bird, per brooder house, or both. There are special limits for those policies covering feed companies, as there would be a limit of insurance in transit, as well as one per bird when the bird is on another party’s premises.

Coverage is death or destruction due to the usual perils (fire, lightning, windstorm, etc.) and death must be within 48 hours of the loss.

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Exclusions include loss by freezing, huddling or piling (turkeys, in particular, frequently suffer death or destruction by huddling), temperature or humidity change, stampede (just like cattle, except they are much easier to control), fright (birds can die of fright), and any loss caused by the failure or defect in any heating unit unless fire outside the unit ensues.

ANIMALS RAISED FOR FUR

This would provide coverage for such animals as minks and chinchillas and like other animals discussed here, this is a nonfiled class. There is little call for this type of coverage, so there are no standard forms. Generally there are large deductibles. An unusual feature in these policies is death by cannibalism. When one mink tells another that they look “good enough to eat”, they aren’t kidding.

ANIMAL LIFE INSURANCE

More technically known as “mortality” insurance, this form provides against death only. Death by “intentional destruction for humane purposes,” can also be covered. It is used mostly by boarding &/or breeding farms, veterinarians, and trainers, and usually is purchased to cover racehorses and show horses, and other animals and livestock in the custody and care of these farms or individuals.

If the animal is intentionally destroyed, it must be under the supervision of a veterinarian appointed by the insurance company. Death by surgery or inoculation is excluded unless it was performed by a qualified veterinary surgeon who certifies that the destruction was caused solely by accident, disease, or illness. Death or confiscation by a government authority is also excluded

This form is similar to Term life insurance on an individual and the animal is subject to underwriting standards and physical examinations to make sure they are in good physical condition before they are accepted by the insurance company.

INSTALLMENT SALES AND LEASED PROPERTY

The 1976 Marine-Wide Definitions, under article F.12, states:“Installment Sales and Leased Property Policies covering property pertaining to a household and sold under conditional contract of sale, partial payment contract or installment sales contract or leased, but excluding motor vehicles designed for highway

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use. Such policies must cover in transit but shall not extend beyond the termination of the seller's or lessor's interest.”

It should be noted that there must be a sales or lease contract in effect. Anything that is sold on an open account is not subject for installment sales coverage. Generally both forms are nonfiled.

INSTALLMENT SALES

This form protects goods against loss during the time that it has been for sale on an installment basis, and therefore, can protect the manufacturer of the property, the sales organization or retail store that sells the property, and also the financial institution that finances the installment sale of the property. It fills the gap between the time that the property is sold, and the time that it is fully paid for and title to the property passes to the purchaser without encumbrances.

CONSUMER APPLICATIONBright Inc. sells electronic equipment. Charles purchases a large screen TV and Surround-

Sound audio system on the installment plan. Since the purchase price is under $5,000, Bright finances the purchase through their subsidiary Bright Financial, with payments over a 2 year period.

Six months after purchase, vandals broke into Charles’ house and destroyed the TV screen and destroyed the audio system. Charles, who actually went over his head financially when he bought the system, told Bright they could come and get the system as he had no more use for it. He was reminded that he was still liable for the payments, but indications were that Charles simply was not going to pay.

If Bright had an installment sales policy that covered the purchased property, then the policy would pay the remaining balance. If the policy were of dual interest (described below) then Charles would receive enough to purchase a new audio system if he wished, i.e. much of the money that he has already paid in installments would be refunded to him.

The policies can be written to protect the interest of the seller, or (dual interest) of the seller and the purchaser also. Some states allow the insurer to issue “certificates” of insurance to the purchasers of goods under the dual interest policy, setting forth the goods to be covered, the location, premium, and a scale of benefit payments, terminating when the seller’s interest in the property ceases.

This policy may be issued on an All-Risks basis, or Named Perils. Usual exclusions apply, with generally electrical damage and wear and tear specifically excluded. Covered property is excluded if it is on the premises of the seller – such as performing repair or service work.

Notice, also, that motor vehicles designed for highway use are not insurable under this policy. Other than that, most any property can be insured under this policy, including household

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goods, jewelry, musical instruments, contractors property and equipment, medical and high-tech equipment – in effect anything that is sold on an installment basis.

LEASED PROPERTY

The Leased Property coverage is quite similar in respect to underwriting, as the Installment Sales policy. The Leased Property policy must depend upon the basic instrument involved, the lease itself, for details as to how coverage can be constructed. Therefore, a copy of the lease must be submitted with the application and any changes must be filed with the insurer.

Many leases require that the lessee purchase and maintain certain insurance coverages on the property, such as fire, lightning, theft, and other hazards spelled out in the lease (or there could be a statement requiring the lessee to maintain a “comprehensive” coverage, or words to that effect). Usually the insurance will apply only if the lessee complied with all provisions of the lease, such as purchasing other insurance or if the insurance was simply not sufficient.

This form is another “tailor-made” form, as each situation is different. For instance, if a firm leases equipment of all types and manufacturers, to be used for different purposes (such as a heavy equipment leasing company), the description of the insured property must be quite detailed (and probably “wordy”), whereas if the property leased is of a single type, or performs a single service, or manufactured by one company, etc., the description would be minimal.

As with the Installment Sales policy, only motor vehicles designed for highway use cannot purchase this coverage, leaving a wide field of commercial, business, industrial, medical, etc., equipment that can be leased, as a market for this coverage.

One of the underwriting problems is that there are many items that are leased where it is not possible to specify the location of the property at any one time. In those cases, the premiums will obviously be higher than comparable equipment that is not mobile.

WOOL GROWERS

This policy covers wool, mohair and sheep pelts while it (they) are in a specified location, or in transit from the shearing houses, ranches or corrals where shearing occurs, to any place in the U.S. or Canada. While it is in bales, bags or other methods or containers used for shipping, it is covered for fire, lightning, flood or explosion, plus the unusual peril of “cloudburst.” While in transit, then it is also covered for collision, collision-overturn-upset of the conveyance, or bridges collapsing. Coverage can also be extended to include theft, riots, civil commotion, etc.

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TANKS AND CONTENTS OF TANKS

The Definitions (F.21) states “Domestic Bulk Liquids Policies, covering tanks and domestic bulk liquids stored therein” can be covered under an Inland Marine form. This is a nonfiled class.

TANKS

For the purpose of this coverage, Tanks do not have to be metal (or other material) containers, but can also be storage areas underground, such as old salt mines, old oil wells, or underground caverns. It can be either on a completed structure basis, or on a Builders Risk basis. It can also cover the pipelines that feed into or from the tanks, including the pumps, filters and other such equipment. Coverage can either be All-Risks or Named Perils. Exclusions are the usual wear and tear, rust, corrosion, deterioration, inherent vice, etc.

CONTENTS OF TANKS

The content coverage can apply to either the owner of the material being stored, or it can be written on a bailee basis whose concern is the safety of the material being kept for the bailor. It can be written either on an All-Risks basis or a Named Perils basis. Named perils are leakage, rupture and collapse. Exclusions are the usual wear & tear, mechanical breakdown, etc., with the addition of excluding any work that is done on the property, theft, shortage at inventory, etc.

The underwriting of Tanks and Contents can be “fraught with danger” and tough guidelines have been developed by Associations and trade organizations, particularly those in the petroleum business. This is a specialized field, but the underwriting hazards that may be present are interesting. A few underwriting concerns are as follows:

Whether the storage tanks are adequate in size, thickness, capacity, and age, to contain the particular volume, viscosity, and other characteristics of the material to be stored.

The foundation of the tank is as important, as the shifting of the foundation can easily rupture a storage tank.

The closeness and movement of nearby bodies of water. The vegetation and other growth around the tanks. Are the tanks moved by vehicle? What precautions are taken while loading, unloading? The possibility of overloading and resulting spillage are always dangerous, as fire,

explosion or release of noxious fumes can be the result. Is the removal of debris from the tank when “empty” to be covered? This can be a very

costly process, and dangerous, particularly if the tank is near a body of water.

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ELECTRONIC DATA PROCESSING POLICIES

Pursuant to F.23 of the Nation-Wide Marine Definitions, coverage can be provided to Electronic Data Processing policies. It is interesting to note that because of the newness of this now-very-important field, it is the last of the classes under the 1976 Definition. As with anything this new and this “high-tech” and continually evolving field, there has been a lot of interest in this area. It is also interesting to note that this Definition, when written in 1976, did not cover (or contemplate, probably) the high-tech explosion into mini and microcomputers, but was designed to insure the large mainframe computers. It is safe to say that the processing power in a 1976 mainframe would encompass an entire floor in a business building, and still not be able to compete with the PC that was used to write this text, in speed or capacity. An individually owned PC today has more processing power than the computers that operated during the first moon landing, according to many sources.

If this class was to cover large, permanently-installed mainframes, then obviously the policies were written in the property departments of insurance companies, with Inland Marine coverage for equipment, machinery, etc., in transit. Therefore, there has been little change from the property coverages reflected in the Inland Marine policies. Today, there are many types of policies, some covering only the large mainframe computers located in large businesses or in data centers, laboratories, etc., others that cover just the minicomputers or microcomputers (generally called “Personal Computers today – or PCs), and some cover both.

It is difficult to present an all-encompassing discussion of these important policies as there are so many different coverages, and the coverages change as the industry changes. The discussions here will cover EDP policies that are owned by, leased to, or rented by, the insured, including property of others in the custody of the insured. Also, the equipment would be used only at the insured’s premises. Other coverage, such as leased equipment or equipment purchased on an installment plan, equipment in transit, etc., are covered under other types of policies, most, if not all, discussed elsewhere in this text.

COVERAGE

Coverage is also necessarily broad in scope, as it can cover not only equipment, but also data, extra expense and business interruption can also be covered. Sometimes the policies will provide separate coverages for each, and sometimes they are combined into one policy, except for business interruption which has to be a separate policy by its very nature.

Mainframe equipment, such as in a data-processing center, is usually scheduled with a list of options, whereas those covering PCs are more encompassing. Those policies that cover both can cover the items under an automatic coverage, with options to purchase additional insurance. The question arises as to what is “mainframe” and what is micro-minicomputers? If a company offers separate policies for each, they will usually pick a value (such as $250,000) to make that determination.

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The particular property that is insured needs some definition. Equipment, such as the computers, printers, scanners, monitors, etc., is considered as “hardware.” Equipment may be insured either on a blanket basis, or on a schedule.

“Data” has been defined as “facts, concepts, or instructions converted to a form useable in data processing operation, including computer programs.” (Inland Marine Insurance, Vol.II, McNamara, Laurence, Wood) Programs are referred to as “software.” Items such as flowcharts, reports, etc., are not considered as “data” unless they are transferred into the computer format. Any material (“hardcopy”) such as bills or other documents, would be covered under another Inland Marine form.

“Media” is usually defined as the material upon which data are recorded (discs, CDs, magnetic tapes, and even the “old-fashioned” paper tapes and punch cards).

The difficulty in determining what can be covered with Data or Media is that data or media that cannot be replaced are usually not covered. However, a predetermined amount can be so stated, and that amount would be paid in case the data/media could not be replaced. Otherwise, the cost of reproducing the lost or damaged data is covered, and the replacement cost of the media is covered.

EXTRA EXPENSE AND BUSINESS INTERRUPTION

The extra expense provision covers the expenses that are “extra” to the usual operation or replacement, or repair. For instance, if the air conditioning is not working, the EDP equipment (in particular, the large mainframes) cannot operate until the air conditioning is working.

CONSUMER APPLICATIONKeller Computer Services (KCS) is a programming and data storage company, using a large

“Supercomputer” with several PCs. Their company is next to a Marine Recruiting Station. A group of protesters bombs a Marine truck sitting nearby in the parking lot, with the result that no one could enter the building until it was inspected and declared structurally sound. The extra expense provision on the EDP policy would cover unexpected expenses as a result of the temporary shutdown.

Business Interruption (described below) would apply to the mainframe not being able to operate during this period of time and would cover the income loss because of the situation.

BUSINESS INTERRUPTION

Business interruption usually only applies where there is a large mainframe in operation in a data center, and provides for loss of income because of the business not being able to use the computer for its normal business operations, either full-time or part-time. It usually has an overall limit.

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COVERED PERILSUnder the EDP policy, perils covered are risks of direct physical loss or damage.

Exclusions vary, and can vary widely, depending upon what coverage is needed. Some of those exclusions in general use, are

wear & tear, gradual deterioration, depreciation, insects, vermin, etc. dishonest, fraudulent or criminal acts of the employer, officers of the firm, or employees.

(Note: Even the newest employee, or the one with the lowest salary, may, and probably will, operate expensive EDP equipment. Think of the damage that one disgruntled employee can cause. Therefore, while other Inland Marine policies similar in scope will exclude dishonesty, etc., by employees, the EDP policy generally does not make this exclusion.)

programming error (this can be specified in different ways, such as faulty instructions to a computer, etc. Nearly all programs have “bugs” when they are first developed, but it has to be extremely difficult to underwrite this risk as the underwriter would have to go “into the programmers mind”, so to speak).

war, nuclear risks, mechanical breakdown, faulty construction, etc. short circuit or electrical disturbances – caused by OTHER than lightning. Of course any

(if not all) EDP operations have Voltage Surge Protectors all over the shop, including expensive models that will run the computers if there is a sudden surge that would otherwise shut the computer down.

processing or work upon the property covered.

The last three exclusions may be deleted from the policy, and a substitute provision, called a “breakdown coverage” would be included. In essence, the breakdown coverage insures both data and media against electrical injury, including those that might erase or otherwise disturb, processed data from electrical problems or power failure within or near to the insured’s premises. Often the breakdown coverage will insured damage caused by corrosion, rust or change in humidity/temperature if caused by air conditioning failure.

Coinsurance is usually required, ranging from 80% to 100%, and does not apply to data or media (too difficult to establish a value). Equipment is usually covered for the cash value or replacement value. A unique valuation for EDP policies is that it may also be valued at the “up-graded” value, which means it can be replaced with new “state-of-the-art” equipment that performs the same operation. With the ever improving advance in technology in this field, this is a valuation worthy of consideration.

EDP policies will contain deductibles, with separate deductibles for equipment, for data & media and for extra expense. Business interruption may have a waiting period of a number of days.

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PLUGGING THE HOLES

Note: Accounts Receivable, Valuable Papers and Records, can be written in conjunction with the EDP policy to cover those records and data that is not covered under the policy otherwise, such as information that will be entered into the computer system, or from which data is derived to be entered into the system, or used for programming purposes.

In respect to damage caused by employees or others, such as fraudulent entry into a computer database, either by employees or by outside “hackers”, Computer Fraud insurance is available that covers fraudulent data input or fraudulent destruction of data in the system. Unauthorized Computer Access insurance not only covers fraudulent access, but also accidental access and access by hackers. These policies cover insured and the liability of the insured to third parties.

There are a small number of companies that will write Errors and Omissions on EDP operations. It protects the insured against any liability that occurs as a result of the negligence of the insured, or negligent acts, errors or omissions while performing data processing services for others. Note, however, it does not provide coverage for errors and omissions resulting in a loss to the insured.

Underwriting is highly technical and is quite difficult. The underwriting of a mainframe is quite different from underwriting an operation that is partially or entirely of PCs and their peripherals. For instance, the location and environment of a mainframe is of considerable importance, whereas it is not of so much consequence for the PC operations. Fires and electrical problems vary widely also. Most large corporations that depend heavily upon their EDP department for their day-to-day operation (which is most of the companies), have “Disaster Recovery Plans” established that will help to recover from any type of disaster, which include such items as off-site backup computers (owned or leased), time-sharing or reciprocity with other firms. Off site storage of critical data is another important part of such a plan. For instance, many insurance companies store duplicate records of all important papers and data, in old salt mines in Kansas where the humidity and temperature are perfect for eternal storage.

STUDY QUESTIONS

1. Bill is a travelling salesman. He is insured under a Salesmen’s Samples Floater. Which of the following is true regarding this coverage.

A. The policy does not cover his material or samples while it is being shipped to him.B. The policy would (usually) provide coverage for jewelry if he was a jewelry salesman.C. The policy may require that the car he uses in his business has a state-of-the-art alarm

system.D. If some of Bill’s samples need to be replaced periodically, they are not covered while

being shipped back to his main office.

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2. The principal difference between the Live Animal Floater and the (Named Perils) Livestock Floater is

A. The Live Animal Floater does not cover horses and cattle.B. The livestock grazing on the range is not covered under the Life Animal Floater.C. The beef cattle grazing on the range are not covered under the Livestock Floater.D. The Live Animal Floater would not cover Angora Sheep.

3. Which of the following could be covered under a Horse Floater because they could not be covered under the filed Livestock Floater?

A. Betty’s horse Brandy, a Palomino mare used for pleasure riding.B. Brutus, a bay Quarterhorse that is used for racing.C. Pal, a working cowpony owned by the foreman of the ZX Ranch.D. A Guernsey dairy cow used for milk for the ranch personnel.

4. Barron’s Rentals leases television sets, computers and electronic equipment, radios/stereos and furniture. They carry an Installment Sales and Leased Property policy. If they know the people to whom they are leasing or selling under an installment purchase, they make verbal agreements with them and allow them to make payments depending upon what they can afford over the period of time that they have agreed to. If they do not know the people, then they have a regular lease or installment contract. Which is true?

A. In any event, the policy will cover any property leased or sold on an installment plan from the store.

B. The policy will only cover those items that are fully covered by contract, not verbal agreements.

C. The policy will only cover those items that are covered by the verbal agreements only.D. Only the property that is not subject to rapid depreciation is covered.

5. Under the “Tanks” covered under Domestic Bulk Liquid Policies in the Marine Definitions, A. all of the tanks must be made of stainless steel.B. pipelines cannot be covered under this type of policy.C. tanks do not have to be metal, but can also be underground storage.D. does not cover materials stored in old salt mines.

6. The Wool Growers policy coversA. all personal and business property located on a sheep ranch.B. wool, mohair and sheep pelts.C. sheep while grazing on the range.D. liability of sheep ranchers.

7. The original purpose of the Electronic Data Processing (EDP) policies was to coverA. large mainframe computers.B. micro-computers.C. advanced adding machines.D. liability arising from misuse of EDP cards.

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8. A data processing firm has both large mainframes and numerous “PC’s” and want to cover them all with the EDP policy.

A. The policy will probably schedule the mainframes, and provide blanket coverage for the PC’s and peripheral equipment.B. It is not possible to cover both mainframes and PC’s in the same policy.C. All of the equipment will need to be scheduled.D. Peripheral equipment, such as printers and scanners, must always be scheduled.

9. The “Extra Expense” coverage of an EDP policy, coversA. the expense of installing EDP equipment, such as networking computers and other EDP

equipment, purchasing and installing software to operate a system, etc.B. any income lost because of a large mainframe going down and the business thereby loses

income.C. replacing hard copy data with software.D. extra expenses that arise and are “extra” to the usual operation of the business, such as a

breakdown of the air conditioning equipment used with a large mainframe.

10. The DataLink is a data processing and actuarial firm that handles EDP work for several large insurance companies. They are concerned that hackers will get into their system and obtain information about confidential information injurious to their clients or to themselves. What can they do?A. They can purchase either Computer Fraud insurance or Computer Access insurance,

depending upon whether they want to also insure against accidental access.B. The Electronic Data Processing Policies cover these situations.C. There really is nothing that Datalink can do, but their clients can obtain coverage that

protects their information while in the hands of DataLink.D. They can purchase Computer Fraud insurance, however that only covers data that has

been inputted by an employee and during normal working hours.

ANSWERS TO STUDY QUESTIONS

1C 2C 3B 4B 5C 6B 7A 8A 9D 10A

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CHAPTER FOURTEEN - PERSONAL ARTICLES & WATERCRAFTCHAPTER FOURTEEN - PERSONAL ARTICLES & WATERCRAFT

In The 1976 Nation-Wide Marine Definition, Article E., several classes of Inland Marine coverages are listed:

E. Personal Property Floater Risks covering individuals and/or generally1. Personal Effects Floater Policies.2. The Personal Property Floater.3. Government Service Floaters.4. Personal Fur Floaters.5. Personal Jewelry Floaters.6. Wedding Presents Floaters for not exceeding 90 (ninety) days after the day of the

wedding.7. Silverware Floaters.8. Fine Arts Floaters covering paintings, etchings, pictures, tapestries, art glass windows,

and other bonafide works of art of rarity, historical value or artistic merit.9. Stamp and Coin Floaters.10. Musical Instrument Floaters. Radios, televisions, record players and combinations

thereof are not deemed musical instruments.11. Mobile Articles, Machinery and Equipment Floaters (excluding motor vehicles

designed for highway use and auto homes, trailers and semi-trailers except when hauled by tractors not designed for highway use) covering identified property of a mobile or floating nature pertaining to or usual to a household. Such policies shall not cover furniture and fixtures not customarily used away from premises where such property is usually kept.

12. Installment Sales and Leased Property Policies covering property pertaining to a household and sold under conditional contract of sale, partial payment contract or installment sales contract or leased, but excluding motor vehicles designed for highway use. Such policies must cover in transit but shall not extend beyond the termination of the seller's or lessor's interest.

13. Live Animal Floaters.

There are also several other types of property that can be insured as personal Inland Marine insurance, such as cameras, outboard boats and outboard motors, personal computers and equipment, antique autos, and many other items, including collections, such as personal collections of stamps, coins, antiques, crystal, etc. These are not listed in the Definition as quoted above, but the Definition states in the beginning that the classes listed in the Definition are not all-encompassing.

Personal Inland Marine coverage can be provided through the Personal Articles Floater, the Personal Effects Floater and the Personal Property Floater. The Personal Articles Floater is the principal form used, therefore it will be discussed first.

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THE PERSONAL ARTICLES FLOATER

The Personal Articles Floater provides coverage for all types of personal property, whether inside or outside the home, which includes jewelry, musical instruments, cameras, fine arts, and precious stones. The policy is issued separately as an Inland Marine insurance policy, or as an endorsement to a homeowners policy. Protection is on an All-Risks basis, subjects to exclusions of wear and tear, war and nuclear disaster. Each piece of jewelry and other expensive items must be specifically listed in the policy.

The Personal Articles Floater (PAF) covers 9 classes of Personal Property against risks of Direct Physical Loss. Coverage is worldwide except for fine arts. The following 9 classes of Personal Property can be insured:

1. jewelry, 2. furs, 3. cameras, 4. musical instruments, 5. silverware, 6. golfing equipment, 7. fine arts, 8. postage stamps, 9. rare and current coins.

Certain classes of newly acquired property, such as jewelry, furs, cameras and musical instruments, are automatically covered for 30 days if the insurance is already written on that particular class of property. The amount of insurance on newly acquired property is limited to 25% of the amount of insurance for that class of property or $10,000, whichever is lower. The property must be reported to the company within 30 days after acquiring it to continue the coverage, and an additional premium must be paid from the date of acquisition.

Jewelry: Any article of jewelry may be insured. The policy also covers silverware, plateware, pewterware, toilet articles, cigarette cases and trophies. Jewelry may be insured separately or together with furs. Each item of jewelry must be scheduled and a specific amount of insurance shown for it. Insurance on jewelry is carefully underwritten because of the moral hazard. Original bills of sale, or a signed appraisal may be required before the jewelry is insured.

Furs: Any article of fur, or article trimmed with fur, in which fur represents the principal value (fur rugs and imitation furs). Each item must be listed separately and a specific amount of insurance shown for it. Furs also are carefully underwritten because of the moral hazard. If, during the terns of the policy, the insured purchases additional furs, the newly purchased property is covered automatically. The insured must notify the company within 30 days of its' purchase subject to the following condition: The insurer is not liable for more than 25% of the amount of insurance already covered on that class of property or $10,000 covered under the policy.

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Cameras and Camera Equipment: Cameras, films, telescopes, binoculars, microscopes and projectors used in photography. Additional insurance can be purchased to cover the Blanket Insurance, but such insurance may not exceed 10% of the total amount on the scheduled items. This insurance is used to cover filters, sun-shades, meters and like smaller items. Not covered would be TV cameras and equipment, coin operated devices, area and radar cameras, camera property. Professional use is covered by endorsement and additional premium.

Musical Instruments: Musical instruments, instrument cases, sound and amplifying equipment and similar equipment can be insured under the Personal Articles Floater. Musical instruments played for pay during the policy period are not covered unless an Endorsement is added and a higher premium paid. Radios, televisions and stereos are not eligible for insurance under this policy.

Silverware: Silver and goldware can also be insured under the Personal Articles Floater, however, pens, pencils, flasks, smoking implements, or jewelry can be insured as silverware. These types of property may be insured as jewelry.

Golfing Equipment: Golfing equipment, including golf clothes, can be insured under the Personal Articles Floater. Other clothing contained in a locker while the insured is playing golf is also covered. Golf balls, however, are covered for loss only by fire and burglary if there are visible marks of forcible entry into the building, room or locker.

Fine Arts: Fine arts include private collection of paintings, antique furniture, rare books, rare glass, manuscripts and bric-a-brac. Fine arts are insured on a valued basis. If a valuable painting is stolen, the amount of insurance stated in the Schedule for that item is the amount paid. Newly acquired fine arts are automatically insured for 90 days, however, the insured is required to notify the insurer of the purchase within 90 days and pay the additional premium. The limit of such property is 25% of the total insurance.

Fine Arts Coverage has 3 major exclusions:1. loss to property on exhibition at fairgrounds, or at national/international expositions

unless the premises are covered by the policy.2. breakage of art glass windows, glassware, statuary, marble, bric-a-brac, porcelain and

similar fragile articles are also excluded. The exclusion does not apply if the breakage is caused by fire, lightning, explosion, aircraft, collision, windstorm, earthquake, flood, malicious damage or theft, and derailment or overturn.

3. damage as a result of repairing, restoration or retouching process.

Stamp and Coin Collection: Valuable Stamp and Coin Collections are also insured under the PAF. The stamps and coins can be insured on either a Scheduled or Blanket Basis. If the items are valuable, the property should be scheduled so that each item is listed and insured. If the property is insured on a Blanket Basis, each item is not separately listed and the insurance applies to the entire collection.

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Loss Settlement: If a loss occurs to a scheduled item, the amount paid is the lowest of the following accounts:

1. Actual Cash Value;2. The amount for which the property could reasonably be expected to be repaired;3. The amount for which the property could reasonably expected to be replaced; or4. The amount of insurance.

If the stamps or coins are covered on a Blanket Basis, the amount paid is the Cash Market Value at the time of loss. There is a $ 1,000 maximum limit of any unscheduled coin collected and a $250 maximum limit on any single stamp, coin or individual article, or any single pair, block, series, sheet, cover, frame or card.

Another limit also applies if the stamps or coins are insured on a Blanket Basis, and it has the effect of a 100% Coinsurance Clause. The insurance company is not liable for a greater proportion of any loss than the amount of insurance on Blanket Property bears to the Cash Market Value at the time of loss.

EXCLUSIONS

The following exclusions apply to Stamps and Coin Collections:

theft from any unattended automobile (unless shipped as registered mail); loss to property not part of a Stamp or Coin Collection; loss to property in the custody of transport companies; damage from being handled or worked on; mysterious disappearance unless the item is scheduled or specifically insured, or is

mounted in a volume and the page to which it is attached is also lost; transfer of colors, inherent defect, dampness, extremes of temperature, or depreciation; damage from fading, creasing, denting, scratching, tearing or thinning.

PERSONAL PROPERTY FLOATER

A Personal Property Floater provides coverage for all personal property, regardless of location, of an insured and household residents, including children away at school. It is written on an All-Risks basis, subject to excluded perils such as war, wear and tear, mechanical breakdown, vermin, and nuclear disaster. “Personal Property” includes clothing, television, musical instruments, cameras, jewelry, watches, furs, furniture, radios and appliances. Coverage can be extended to damage of real property as the result of theft of personal property.

The Personal Property Floater (PPF) provides an insured with extensive coverage on Unscheduled Personal Property. Usually the property is kept at the insured's property but there

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is Worldwide Coverage when the property is temporarily away from the insured's residence. The insured property is insured on a Risk of Direct Physical Loss ("All-Risks ") Basis.

PERSONAL PROPERTY COVERED There are 13 classes of Unscheduled Personal Property that the Personal Property Floater may insure. A separate amount of insurance will be applied to each of the following classes:

1. silverware, goldware and pewterware,2. clothing,3. rugs and draperies,4. musical instruments and electronic equipment,5. paintings and other art objects,6. china and glassware,7. cameras and photographic equipment,8. guns and other sports equipment,9. major appliances,10. bedding and linens,11. furniture,12. all other Personal Property and professional books and equipment while in the residence;13. building additions and alterations

The total amount of insurance in every category is the maximum limit of recovery for any single loss to property in that particular category. The total amount for all 13 categories is the Total Policy Limit. A $100 deductible applies to each loss. Obviously, a higher deductible is also available with a corresponding reduction in premium.

NEWLY ACQUIRED PROPERTY

Newly acquired property is automatically covered up to 100% of the total amount of insurance or $2,500, whichever is lower. The insurance on newly acquired property can be applied to any of the 13 classes. Keep in mind that the total amount of insurance is not increased.

If property is located at a newly acquired principal residence, coverage is for 30 days from the time the property has been moved to the new residence.

PROPERTY NOT COVERED

The PPF does not cover the following types of Personal Property:

animals, fish or birds,

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boats, aircraft, trailers and campers, motor vehicles (including motorcycles and motorized bicycles) designed for

transportation or recreational use, equipment and furnishings for the above vehicles unless they are removed from the

vehicle and are at the insured's residence, owned property pertaining to a business, profession, or occupation (however,

professional books, instruments and equipment are covered while in the insured's residence),

property normally kept other than at the insured's residence throughout the year.

The PPF also has specific limits on certain types of property. There is a $100 limit on money, a $500 limit on securities, notes, stamps, passports, tickets and similar property; and a $500 limit on jewelry, watches and furs.

EXCLUSIONS

Losses caused by the following are excluded: types of water damage excluded elsewhere in the policy; acts or decisions of any person, group, organization or governmental body; any work on covered property (other than furs, watches and jewelry); animals owned or kept by the insured; dampness or extreme changes of temperature (except if caused by rain, snow, sleet, hail

or bursting of pipes or apparatus; wear and tear, deterioration, or inherent vice; mechanical or structural breakdown (except by fire); marring or scratching of property, breakage of eye glasses, glassware and other fragile

articles (but not if the loss is caused by fire, lightning, theft, vandalism or malicious mischief, and several other causes of loss specifically named in the policy); or

insects or vermin.

PERSONAL EFFECTS FLOATER

Personal effects insurance provides coverage outside an insured’s home for personal items usually carried or worn while traveling. Protection is for personal property (apparel and jewelry), not for real property or property not usually carried by the traveler (e.g.,a piano, household goods, etc.).

The Personal Effects Floater (PEF) was designed for use by tourists who wish coverage on their personal articles while traveling. The Personal Effects Floater provides "All Risks" Coverage on the Personal Property of tourists and travelers anywhere in the world, but only while the covered property is not on the residence premises. Coverage will apply to the named

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insured, his/her spouse and any unmarried children who permanently reside with the named insured.

COVERAGE OF PERSONAL EFFECTS

Personal Effects refer to Personal Property normally worn or carried by an individual. The Personal Effects Floater is designed to cover the insured's Personal Effects, such as cameras, sports equipment, luggage and clothes, while the insured is traveling or on vacation.

PROPERTY NOT COVERED

The PEF will exclude coverage for certain types of property even though the article may be carried or used by travelers. The following property is excluded:

contact lenses and artificial teeth or limbs, merchandise for sale or exhibition, theatrical property, and property specifically insured, automobiles, motorcycles, bicycles, boats, other conveyances and their accessories, accounts, bills, currency, deeds, evidences of debt and letters of credit, passports, documents, money, notes, securities and transportation of other tickets, household furniture and animals, automobile equipment, salesperson's samples, physician's and surgeon's equipment.

In addition to the requirement that the property must be worn or used by the insured, the article must belong to the insured. If the insured rents or borrows property, the coverage does not apply.

COVERAGE

Personal Effects are covered on an "All-Risks" Basis. Therefore, all Direct Physical Losses are covered except for certain losses that are specifically excluded. The following losses are excluded:

breakage of brittle articles unless caused by a theft, fire, or accident to a conveyance, damage to Personal Effects from wear and tear, gradual deterioration, insects, vermin,

inherent vice, or any damage while the property is being repaired.

OTHER EXCLUSIONS

The Personal Effects Floater has the following limitations on coverage: Personal Effects in the custody of students while at school are not covered except for loss

by fire.

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Property storage is not covered. There is coverage of the property at points and places enroute during travel. If the insured stores his/her luggage in a locker at an airport, train station or bus terminal while out on a sightseeing tour, the exclusion would not apply.

Personal Effects are not covered while on the named insured's residence premises.

LIMITATIONS ON CERTAIN PERSONAL EFFECTS

Furs, watches and jewelry are subject to certain special limits. Coverage on any single article is limited to 100% of the total amount of insurance with a maximum of $100.

Theft of Personal Effects from an unattended automobile is also excluded. There would be coverage, however, if the automobile is locked. and there are visible marks of forcible entry. The amount paid is limited to a maximum of 10% of the total amount of insurance or $250, whichever is lower.

SCHEDULED PERSONAL PROPERTY ENDORSEMENT

A scheduled Personal Property Endorsement is an addition to a Homeowners Policy (or other personal or business property policy) to provide extra coverage for listed articles. These standard policies have dollar limits on certain items, such as jewelry, furs, art or guns. This Endorsement allows a policyholder to purchase additional coverage for specific items of property, with each items or group of items, and the amount of coverages, listed.

When discussing Personal Inland Marine Floaters, the question arises - when is it economical to schedule property? "Scheduling" refers to describing and listing separately on another policy or on an Endorsement, particular items that must be listed separately.

ENDORSEMENT

The Scheduled Personal Property Endorsement is used to provide coverage for Risks of Direct Loss for certain classes of Scheduled Property. Scheduled Coverage may be provided for jewelry, furs, cameras, musical instruments, silverware, golfing equipment, fine arts, postage stamps, rare and current coins. The rating for this coverage is based on Standard Inland Marine Rating Procedures. A different rate per $100 of value applies to each category of property. The question will usually be asked - "Doesn't my Homeowners Policy cover it? Why do I need a separate endorsement?” Thus, the question remains: "When should Personal Property be scheduled?"

An Unendorsed Homeowners Policy covers Unscheduled Personal Property on a Named Perils Basis; however, many clients own valuable Personal Property that should be scheduled and specifically insured under a Floater Policy. It is generally agreed that, in addition to high

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value property such as diamond rings and fur coats, the following types of Personal Property may be appropriate for Scheduled Coverage:

Unique Objects - This includes works of art, rare antiques, paintings and collections of unusual property, such as a valuable Stamp or Rare Coin Collection. The value of the property should be established in advance to avoid the problem of proving its value after the loss occurs.

Business or professional Equipment - The Homeowners Policy provides only limited coverage for Business or Professional Equipment. Business or Professional Property is covered only for a maximum of $2,500 while on the residence premises and $250 away from the residence premises. Business and professional property can be more adequately insured-by scheduling the property with a stated amount of insurance shown for it.

Portable Property - Certain types of Portable Property (cameras and equipment, musical instruments, or sports equipment) can be scheduled and specifically insured under a Floater Policy.

Fragile Articles - Certain Fragile Articles with high value could be scheduled and specifically insured, such as glassware, statuary, scientific instruments, typewriters, or home computers.

HAZARDS OF SCHEDULING PERSONAL PROPERTY

Standard Homeowners Policies exclude Personal Property that is separately described and specifically insured by any other insurance.

The amount of insurance under a Floater Policy must be sufficient to pay for losses to Covered Property in full, since the exclusion rules out any contribution by the Homeowners Policy. In addition, Unscheduled Personal Property under the Homeowners Policy may be insured on a Replacement Cost Basis by adding the Homeowners HO-04-90 Endorsement. Replacement Cost Insurance on Personal Property that is scheduled and specifically insured, generally is available only under the HO-04-61 Scheduled Personal Property Endorsement when the underlying Homeowners Policy also is endorsed to provide Replacement Cost Coverage. Thus, the advantage of Risks of Direct Loss Coverage under the Personal Property Floaters must be carefully weighed against the possibility of being underinsured at the time of loss.

COMPARISON OF THE PERSONAL PROPERTY FLOATER AND THE HOMEOWNERS (03) POLICY

The question often arises - "Why do I need a Personal Property Floater when we have a Homeowner's Policy?” Using the Homeowners Form 03 as comparison, the following specific areas of coverage should be considered when answering this particular inquiry:

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With a Personal Property Floater, Risks of Direct Physical Loss Coverage are on Unscheduled Personal Property, while under a HO-03 Policy there is Named-Perils Coverage on Unscheduled Personal Property.

Under the Personal Property Floater there is a $500 limit on securities, evidences of debt, valuable papers, passports, and tickets and stamp collection. Under the HO-03, the limit is $1,000 for such coverage.

With the Personal Property Floater, there is a $500 aggregate limit on watches, jewelry and furs. With a HO-03 Policy, the aggregate limit is $1,000.

Under Personal Property Floaters, there is an exclusion on property located at other than the insured's residence throughout the year. HO-03 has no such exclusion.

With a Personal Property Floater, there are 13 categories of Property, with a specific limit of insurance for each category. The HO-03 has no such provision.

With a Personal Property Floater, there is a $100 limit on money while the HO-03 has a $200 limit.

COMPARISON OF THE PERSONAL EFFECTS FLOATER AND THE HOME OWNERS POLICY

These coverages may be compared under eight specific areas:

1. Under the PEF. “All-Risks” coverage is included, while the HO-03 has Named Perils coverage.

2. The PEF has coverage only while Personal Effects are off the residence premises while the HO-03 has coverage on and off residence premises.

3. The PEF has no coverage property of students while at school (except for fire) while the HO-03 covers the risk.

4. With the PEF, only Personal Effects are covered which is narrow, but with the HO-03 Unscheduled Personal Property is covered which offers broader coverage.

5. With the PEF, there is no coverage on passports, tickets, securities, or valuable paper. The HO-03 has a $ 1,000 limit.

6. Under the PEF there is no coverage on money while the HO-03 has a $200 limit.

7. With the PEF there is no coverage for borrowed property while the HO-03 offers coverage for Borrowed Personal Property.

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8. The PEF has a limit of 10% of the amount of insurance up to $100 on any single article. The HO-03 will cover jewelry, watches and fur up to $1,000.

WATERCRAFT INSURANCE

INTRODUCTION

Insurance on Pleasure Boats is not subject to filing except that in some states, any boat 16 feet or under may require filing. Generally, boats with inboard motors, and sailboats, have been insured under Marine insurance forms, and are referred to as Yacht policies. Physical damage for smaller boats and outboard motorboats usually are written as Inland Marine insurance. The Nation-Wide Marine Definition makes no distinction between Marine and Inland Marine insurance regarding boats. Some states require filings for outboard motor boats of 16 feet or less (as indicated above). In general, small outboard motor boats are covered under Inland Marine insurance, and all other boats are covered under Marine insurance.

Because they are a nonfiled class in most states, there is a wide variety of forms used to insure the smaller boats, and in most cases, they use Floaters that provide physical damage on the insured boat, and also provides for a limited amount of property damage liability. Some insurers offer Boatowners (or Watercraft) Insurance policies, package policies that resemble automobile insurance, and which include bodily injury and property damage coverage, medical payments coverage, physical damage coverage and many offer uninsured boaters insurance.

Recreational Watercrafts include: yachts, houseboats, speedboats, sailboats, outboard and inboard motorboats, canoes, rowboats and dinghies. This text will discuss the Loss Exposures from the ownership and operation of watercraft and insurance contracts for insuring these recreational watercraft. There are different ways to insure pleasure boats, so the various methods will be discussed.

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HULL AND TRAILER LOSS EXPOSURES

Watercraft and its equipment, furnishings and trailers are all exposed to a wide array of physical damage and theft losses. Some Examples would be:

an explosion causes serious damage to a boat, a storm causes a boat to sink, boat trailer is stolen while a boat is out on a lake, an outboard motor falls into a lake, a speedboat collides with another boat, a strong wind overturns a sailboat, a houseboat hits a sandbar, (anyone who has ever owned a boat can probably add a couple more to this list).

THE HOMEOWNERS POLICY AND PHYSICAL DAMAGE COVERAGE

Watercraft (and boat trailers) can be insured under Homeowners policies, but this is perhaps the least desirable method because of the following four important limitations:

1. Watercraft is covered only for a limited number of Named Perils. Risks of Direct Loss, ("All-Risks") Coverage is not available.

2. Theft of watercraft, trailers, furnishings, equipment and outboard motors away from the residence is excluded.

3. Coverage on watercraft including trailers, furnishings and equipment is limited to a maximum of $ 1,000.

4. Direct Loss to watercraft, trailers, furnishings, equipment and outboard motors from windstorm or hail is covered only if the property is inside a fully enclosed building.

The coverage available under homeowners policies is obviously designed for those small boats with the only real protection provided while the boat is garaged. Those with larger boats (if a 17-foot boat can be considered as “large”) will look elsewhere for more comprehensive coverage.

PHYSICAL DAMAGE COVERAGE UNDER THE PERSONAL AUTO POLICY

Under the Personal Auto Policy, only a boat trailer can be insured for Physical Damage Loss. The trailer must be described in the declaration.

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LIABILITY LOSS EXPOSURES

Owners and operators of watercraft face numerous Liability Loss Exposures – some of which can be devastating. A few Examples:

A boat operator forgets to give a child a life preserver and the child falls overboard and drowns.

A speedboat creates a huge wave and causes another boat to overturn. A boat collides with another boat and several occupants are critically injured. A water skier is injured due to a high rate of speed. A boat runs into and injures several swimmers.

OUT-BOARD MOTOR AND BOAT INSURANCE

This coverage is basically designed for those boat owners who already have adequate Liability Insurance and desire to broaden the Physical Damage Coverage on the boat. The coverage is usually provided by an Inland Marine Floater, which can take a variety of forms, but there are common features such as Covered Property, Covered Perils and Exclusions.

COVERED PROPERTY

When outboard motorboats are written as Inland Marine, insurance normally applies to the following property, provided the property is owned by an individual and is used only for pleasure and recreational purposes:

rowboats, canoes, boats not exceeding 16 feet in length, and designed to be propelled by outboard motor(s).

outboard motors, including peripheral equipment (tanks, lines, etc.). boat trailers, boat carriers, and other such equipment designed or used with the above.

The coverage is written on an Actual Cash Value Basis and usually contains deductibles ranging from $25 to $250 or more. The property must be scheduled, except auxiliary equipment can be written on a blanket basis, subject to separate limit of insurance.

COVERED PERILS

The Floater is extremely flexible as it can be written to cover Named Perils or Risk of Direct Loss (“All-Risks" Coverage). The majority of floaters are written on an "All-Risks" Basis and will cover all Direct Physical Losses except those that are excluded.

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Typically excluded are the customary ones of wear and tear, latent defect, mechanical or electrical breakdown, war and nuclear hazards. Some policies will also exclude coverage for damages resulting from repair or servicing (unless covered under the fire or explosion provision), freezing or ice, and dishonesty of persons that have legal custody of the property. The “dishonesty of persons” may be written so that carriers for hire or marina operators are not excluded.

Many motorboat policies exclude coverage during any organized race or speed test. Fortunately for Bass fishermen in particular, this exclusion is not considered to apply to an informal or unorganized race. (Bass fishermen during tournaments, go as fast as their “sometimes overpowered” boats will take them, to get to their preferred fishing spot).

When motorboats are insured for Named Perils, they will generally be insured for damage or losses caused by fire, explosion, lightning, windstorm (sometimes restricted to only those storms while the boat is on land), collision, theft and loss of the motor from marine perils. (The term “marine perils” may be defined as the “perils of the sea” that is in Marine policies. The most obvious example would be losing equipment overboard).

LIABILITY COVERAGE

Typically, liability coverage is usually limited to property damage liability. The coverage will not include Liability Insurance for bodily injury, loss of life, or illness. It is always assumed that the insured will have adequate Personal Liability Insurance under a Homeowners or Personal Liability policy, to cover third-party claims. The Floater may be used to provide Collision Damage Liability Insurance that will protect the insured from a claim for property damage from the owner of another boat if the insured's boat collided with another boat while afloat.

Protection and Indemnity (P&I) coverage for small boats is offered by many companies. The coverage is quite broad and can pay for damages that the insured may have to pay, including damage to property others, loss of life, and personal injury. Some policies provide coverage for the expense of raising, destroying, or removing a wreck if the insured’s boat sinks and has to be removed.

MEDICAL PAYMENTS COVERAGE

Usually offered in conjunction with P&I coverage, it is quite similar to the Medical Payments Coverage in the Personal Auto Policy. Medical Payments Coverage pays the necessary medical expenses incurred or medically attributable within 1-3 years from the date of a watercraft accident that causes bodily injury to a covered person. A covered person is defined as the insured or a family member, or any person occupying the covered boat. Medical expenses are the reasonable charges for medical, surgical, x-ray, dentist, ambulance, hospital, professional nursing and funeral services. Prosthetic devices would also be covered. Example: if occupants

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in a covered boat are injured in a collision with another boat, the medical expenses are paid up to the Medical Payments limits of the policy.

EXCLUSIONS

The Exclusions for this type of insurance will vary according to the insurer. Three common exclusions are:

1. Business Pursuits - There is no coverage if the boat is used as a public vessel for carrying passengers for compensation. Also, there would be no coverage if the boat is rented to others or if the covered property is being operated in any official race or speed contest. The Policy is meant to cover the boat for pleasure purposes and obviously not for business purposes.

2. Repair or Services - Loss or damage from refinishing, renovating, or repair is not covered. The person repairing the boat or equipment should be responsible for any damage.

3. General Risks of Direct Loss - there is no coverage for loss or damage from wear and tear, gradual deterioration, vermin and marine life, rust and corrosion, inherent vice, latent defect, mechanical breakdown and extremes of temperature.

CONSUMER APPLICATIONRob loves to fish so he bought a 16-foot open outboard motor boat designed for fishing in

shallow salt water, better known as a “flats boat.” A flats boat has a shallow draft, but as usual, it was a little overpowered with a 125 hp motor. His wife objected strenuously to his buying a boat unless he (and she) was fully protected by insurance. He thought about putting it under his Homeowners policy, but after discussing it with other fishermen, he decided to purchase a Boatowners policy which covered not only property damage to his boat or to other boats, but also liability and medical payments.

Rob’s theory of fishing was to go to the best spot, and there is no sense in going anywhere unless you can go fast. On an early Saturday morning, Rob went under a bridge at a high rate of speed. On the other side of the bridge, where Rod couldn’t see, and running parallel to the bridge, was another boat, also moving fast. They never saw each other until it was too late. Both boats were destroyed, and both sunk. Rob was injured, as was the other fisherman and his companion.

Is Rob happy that he bought the insurance? He was able to keep from losing everything he owned because of the insurance. Not only did it make medical payments to the other fisherman and his friend; it also replaced the boat. Rob’s private medical insurance took care of his hospital bills. Since the other boat approached from the left of Rob, and since both boats were exceeding the speed limit in this area (which happened to be a “no wake” zone), the threat of a huge lawsuit went away. Anyway, Rob was able to replace his fishing boat too. However, he felt that if he had been going a little faster, he would not have hit the other person at that time, so he got a comparable boat, but with a 150 hp motor.

(If you go out in your boat on a Saturday morning, and you see a blue flats boat ignoring “no-wake” zones, try not to go under a bridge if it is in the area…)

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PERSONAL YACHT INSURANCE

Personal Yacht Insurance refers to larger boats such as yachts, inboard motorboats, cabin cruisers and all boats more than 26 feet in length. The following Coverages are available

HULL INSURANCE: This refers to Physical Damage Insurance on the boat. This coverage applies to the boat,

sails, tackle, machinery, furniture and other equipment and may be written on a Named Perils Basis or an "All -Risks" Basis. A deductible will apply to all Physical Damage Losses.

PROTECTION AND INDEMNITY COVERAGE

This coverage is a form of Marine Liability Insurance. The owner of the boat is covered for Bodily Injury and Property Damage on an Indemnity Basis. Example: if the boat owner falls asleep at the wheel and negligently crashes into a marina and injures a number of people, the loss to the dock and any Bodily Injury Claims would be covered.

OPTIONAL COVERAGES

There are several optional coverages that are available that can be added to the Personal Yacht Policy:

Boat Trailer Insurance, Water Skiing Clause that provides Liability Protection if the boat is used for water skiing, Land Transportation Insurance that extends the insurance to cover the insured vessel

while being transported by land conveyance, Medical Payments Insurance for covered persons, Possible liability of the insured to maritime workers injured in the course of employment

who are covered under the United States Longshore and Harbors Workers Compensation Act.

WARRANTIES

Personal Yacht Insurance contains several warranties (better known as 'promises'). If a warranty is violated, higher premiums will be charged or the coverages will not apply. The major warranties are:

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Lay-up Warranty - the insured promises when the vessel will not be in operation during certain periods, such as winter months.

Navigational Limits - the vessel will be used only in the territorial waters described in the declarations.

Seaworthiness - insured warrants that the vessel is in seaworthy condition. Private Pleasure Warranty - the insured promises that the vessel will be used only for

Private Pleasure purposes and will not be hired or chartered unless the insurance company approves.

UNINSURED BOATERS COVERAGE

Uninsured Boaters Coverage is quite similar to the Uninsured Motorists Coverage in the Personal Auto Policy. The insurer agrees to pay the damages that a covered person is legally entitled to recover from an uninsured boat owner or operator because of bodily injury the covered person sustained on a boating accident. However, the Uninsured Owner or "Operators Liability" for the damage must arise out of the ownership, maintenance or use of a watercraft.

The Uninsured Boaters Coverage contains several exclusions. Bodily injuries from the following are excluded:

using or occupying watercraft without reasonable belief that one is entitled to do so if the Bodily Injury Claim is settled without the insured's consent;

while occupying or struck by a watercraft owned by the insured or by any family member not insured under the policy;

when occupying a covered watercraft when it is being used to carry persons or property for a fee or is rented to others.

There is an arbitration provision that states that if there is disagreement about whether a covered person is legally entitled to recover damages from the uninsured boat owner or on the amount of damages, then arbitration is used. Each party selects an arbitrator. If they cannot agree within 30 days, a Judge in a Court of Law appoints the arbitrator. A decision by any 2 of the 3 parties is binding on all.

STUDY QUESTIONS

1. Which of the following is not an Inland Marine coverage that is used to insured personal items?A. Personal Articles Floater.B. Stamp and Coin Floater.C. Personal Effects Floater.D. Personal Property Floater.

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2. Which type of personal Inland Marine coverage is used to insure jewelry, furs, cameras and musical instruments, inside or outside of the home?A. Home Owners insurance.B. Jewelry Floater.C. Personal Effects Floater.D. Personal Articles Floater.

3. Which of the following articles would not be covered under the Personal Articles Floater without adding an Endorsement?A. A painting done by a famous French impressionist.B. A silver cornet used by the insured who is a member of a philharmonic orchestra.C. A necklace of gold and rubies, once owned by Queen Mary of England.D. A set of Men & Women’s Ping golf clubs.

4. Bill leases an apartment and purchases a 62-inch screen television set, complete with sound-around stereo system. He wants to insure his personal property in the apartment. Which type of Inland Marine insurance will provide him with the coverage he wants?A. Personal Effects Floater.B. Personal Articles Floater.C. Personal Property Floater.D. Electronic Equipment Floater.

5. The Smythes have a Personal Effects Floater policy as they travel frequently and they have a rather expensive array of jewelry and watches that they take with them. Which of the following would NOT be covered under this Floater?A. A 4-carat diamond ring which Mrs. Smythe frequently exchanges with a Zircon ring that

is identical with the diamond, except for the stone.B. An antique gold pocket watch that Mr. Smythe wears most of the time.C. A necklace of gold, diamonds and rubies, formerly belonging to a queen, that the

Smythe’s daughter has with her in college as it is her favorite piece of jewelry to wear.D. A matched set of alligator hide luggage.

6. Janet has Homeowners insurance and it sufficiently covers her personal items in the home. She inherits a small Swarovski crystal collection, and continue to add to it – a lot of new pieces were given as birthday and Christmas presents, etc. She soon has a value of over $25,000 in crystal. Her Homeowners policy has a limit of $1,000 on the crystal. She wants an All-Risks coverage as she will sometimes sell or give away a crystal piece, or purchase an expensive piece, and does not want the hassle of having to do paperwork all the time.A. She should purchase a Personal Articles Floater.B. She should purchase a Personal Property Floater.C. She should purchase a Scheduled Personal Property Endorsement to her Homeowners

policy covering the crystal.D. She should purchase a Personal Effects Floater.

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7. Insurance on pleasure boats usually is not subject to filing, however in some states A. any boat over 26 feet may require filing.B. any boat under 16 feet may require filing.C. all boats require filing.D. only inboard or inboard/outboard boats require filing.

8. When outboard motorboats are written as Inland Marine, insurance does not usually apply toA. 22 foot flats fishing boats with outboard motors.B. gas tanks and lines that provide fuel for an outboard motor.C. a 4 wheel boat trailer of stainless steel, used for carrying a 15 foot ski boat on long trips.D. a fiberglass canoe of 15 foot, with oars and carrier.

9. The “Whirligig” is a 46 foot yacht covered by Personal Yacht insurance. The new owner panics while attempting to berth the yacht at an unfamiliar marina, and crashes into a waterfront restaurant, injuring 3 people.A. The Yacht insurance will only cover the injured people up to a pre-determined amount as

stated in the policy. B. The insurance will cover the damage to the boat (Hull insurance provision), damage to

the marina and restaurant (Property Damage), and any bodily injury claims (Bodily Injury).

C. The insurance is not designed to cover any liability, and the owner of the yacht should have personal liability insurance to cover any such situations.

D. The Yacht insurance will cover damage to the boat but not to the marine, and will cover any bodily damage to the injured parties.

10. John is concerned about pleasure boats berthed at the marine where he keeps his yacht whose owners do not really know how to operate their boats and do not carry insurance, so he purchases Uninsured Boaters coverage. Later, his 20-year old dependent son is driving his own speedboat, when he loses control and crashes into the yacht, inflicting considerable damage to the hull of the yacht. John’s son did not have insurance on the speedboat as when John gave it to him, the son was to purchase the insurance with his own money, and he just had not gotten around to getting the insurance.

A. Not to worry. The yacht insurance will cover the damage under the Uninsured Boaters coverage – that is why John bought it.

B. The Uninsured Boaters coverage will not cover the damage to the yacht.C. The basic yacht insurance will cover the speedboat also since the speedboat is owned by a

dependent of the owner who has had the boat for only 6 months.D. If the insurance company does not agree with John, then John can take it to court where

he will probably win a suit.

ANSWERS TO STUDY QUESTIONS

1B 2D 3B 4C 5C 6B 7B 8A 9B 10B

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ETHICAL ISSUES CHAPTER FIFTEEN

Without a doubt, the most important duty that an insurance professional has is to look out for the welfare of his/her clients. Even though an insurance agent technically is an agent of the insurance company, serving the best interests of the policy-owner does go hand-in-hand. These interests arenot in conflict. By recommending the various products offered by the insurance company along with the promotion of the various needs-based selling, the policy-owner is best served by both parties, the agent and the insurance company.

Before an individual becomes a policy-owner, he/she is a prospect. To convert the prospect to a policy-owner and then to a client entails three basic steps. First, the client must be sold to his/her needs, and not what the agent or insurance company desires to sell. Second, the agent must approach his/her profession as one of being more than a job, thus additional education is needed for the agent to be a true professional. Third, the agent must provide quality service after the sale in order to convert the policy-owner into a client.

In reality, the insurance professionals and agents have a lot to do with the projection of a certain image toward the public. Mainly because the insurance professional initiates contact with a prospect, determines the prospect's need for insurance, recommends and then implements the proposed plan. The first impression is always the most lasting. Coupled with the opportunity for a long-lasting relationship with the client, the first impression becomes that much more critical.

The insurance professional represents an industry that is loaded with technical information. Public perception will be severely hampered by unethical agents. The insurance professional has two basic ethical responsibilities to the public:

1. To inform the public about insurance with the utmost, highest level of professional integrity; and

2. To strive for the highest level of professionalism in all public contacts in order to create and maintain a strong positive image of the industry.

THE APPLICATION PROCESS –PROPERTY AND CASUALTY

The application process is an important first step in the selling of property and casualty insurance. All of the information submitted on an insurance application has a direct bearing on whether the policy will be issued as requested, whether the application will be rejected or whether another policy will be offered by the insurer.

Consider for example, a situation in which an agent does not disclose that the applicant for a homeowners policy is a retired bear trainer who kept a bear as a pet. The agent knows that if

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this information were revealed, the insurer would surely decline to issue the policy, leaving the prospect uninsured. Believing that it is in the prospect’s best interest to have the insurance, the agent completes the application without noting the bear’s existence. The agent explains to the prospect that omitting this “small detail” will keep the premium down and the applicant gratefully signs the application. Coverage is issued as a standard homeowner policy.

Six months later, a neighbor is attacked and injured by the bear. In all probability, the insurer will deny the claim, citing concealment. Rather than receiving protection under the policy, the homeowner is likely to receive a cancellation notice. What benefit did the policy provide? What service did the agent render?

This example illustrates the need for precision and accuracy in completing the application. It is vital that an agent understands this, and explains the need for full disclosure to a prospective insured.

ISSUING BINDERS

An agent who has been given binding authority may immediately bind the insurer on the risk. A binder is a written or oral acknowledgement that immediate coverage is temporarily in effect pending issuance of the policy. It has the full force and effect of the policy.

The binder will contain a time limit, the name of the insurer, the amount of insurance, the perils insured against, the type of insurance, a list of exclusions and so on. A copy of the binder should be sent to the insurance company immediately so there is no misunderstanding by either the insurer or the insured as to when coverage takes effect.

FIELD UNDERWRITING

Every agent or broker needs to engage in some type of field underwriting, the process of screening, the process of screening out unacceptable risks.

Some agents have the authority to issue policies for the risks they have underwritten. Copies of the application, binder of insurance and the policy are sent to the insurer. Even though a policy has been issued, the insurance company underwriter may send a notice of cancellation if he/she finds that the risk was poorly underwritten and does not meet company guidelines.

Agents can build a higher quality book of business and establish sound relationships with insurers by engaging in responsible field underwriting. This involves analyzing risks and exposures, taking steps to avoid or reduce risks, considering loss control efforts and submitting risks to the proper markets. However, the agent cannot perform all the needed underwriting services. The insurer is in a better position to check financial information and driving records of applicants, for example.

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COMPANY UNDERWRITING AND RATING

As stated earlier, when a risk is submitted to an insurance company underwriter, he/she makes a final decision whether to accept or reject the risk. In order to do this; a number of factors must be evaluated. One of the most basic and important factors is whether the applicant has an insurable interest in the property to be insured. Insurable interest exists only when a person or an institution can suffer a financial loss if that property is damaged or destroyed.

There must be a greater interest in preserving the property then destroying it. If there is not an insurable interest, buying insurance is similar to gambling, and the contract of insurance becomes unenforceable in the courts.

Once insurable interest has been established, company underwriters consider a number of factors when evaluating a risk. They examine the nature of risk; what hazards are present? What outside factors might affect the risk and what past losses have occurred?

Some risks are class rated, which means that the loss history of a class of risk have similar characteristics (i.e., female drivers, age 23, jointed masonry building in a particular urban area, etc.) was used to develop the premium rate. Class rates may readily be applied to most dwelling and some mercantile establishments because of their similarity of construction and use. Underwriters usually have the option of applying rate modifications, based on the loss history or special characteristics of a risk. For example, risks may be experienced rated, which means the insured’s actual past loss experience plays a major role in the development of the rate. When an underwriter is familiar with a certain type of risk, he/she may use judgement rates, based largely on the underwriters knowledge and experience.

Unlike homeowners risks which are class rated, commercial risks, whether mercantile, manufacturing or mining, and institutional risks generally do not share similar characteristics. Because of this, specific rates are applied to business, establishments, and public buildings by using schedules to determine the relative risk involved. The individual risk is inspected and measured against a theoretical average, receiving credits for factors that exceed the average and surcharges for factors that fall below the average. Various items that contribute to risk of loss from fire or other perils are weighed by an established standard to determine a rate of premium. These items include the building:

Type of construction

Location

Occupancy or use

Amount and types of fire protection; and

Exposure or hazards from surrounding buildings

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For example, it is logical that occupancy as a cabinet making enterprise in an unprotected frame (wood) building would represent a different degree of risk that occupancy as a metal file cabinet manufacturer in a non combustible building and would, therefore, generate a different rate.

SELLING TO NEEDS

An insurance professional has one reason for calling on a prospect; to offer a needed product or service that will benefit the prospect. The obstacle that the agent faces is to find the need and then offer a solution. No one ever profits if the prospect is "bullied" or coerced into a buying decision. Misleading a prospect not only creates bad impressions but can also lead to legal problems. Chances are these types of prospects will lapse their policies and be sure to recommend to associates and friend not to do business with the agent.

Fortunately, most agents recognize that selling to fit needs is the best approach to offering valuable services and products to prospective clients. They know that specific types of insurance policies are designed to meet specific needs. Matching these policies to individual needs is the cornerstone of any successful insurance practice. Needs selling also involve the skills of problem analysis, action planning, and product recommendations and plan implementation.

The first step (after the prospecting phase) in needs selling is to use a thorough fact finder that will help determine the client's risk tolerance. Naturally, some clients will accept more risk in planning for their insurance coverages than others. By determining needs, goals and risk tolerance the insurance professional is provided with the valuable information necessary to make a recommendation. The insurance professional must remember one critical precept: not all clients will need the same product or service.

The bottom line in selling to the client's needs is to find out what those needs might be. Once again, the importance of a thorough fact finder cannot be emphasized enough.

In addition, it would be wise to back up the fact finder with a series of checklists. These checklists will help to uncover information not divulged on the fact finder, but, information that is needed to assist the insurance professional to make accurate and precise recommendation.

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PROPERTY AND CASUALTY INSURANCE COVERAGE

Property casualty insurance is usually classified by several major lines of insurance: fire insurance and allied lines, marine insurance, casualty insurance, multiple line insurance and fidelity and surety bonds. Property insurance, such as fire or homeowners policies, covers the loss or damage to real estate or personal property from fire, lighting or other covered perils. Marine insurance (also called transportation insurance) covers goods in transit against pure risks related to transportation, whether those goods are shipped over land (inland marine) or water (ocean marine).

A broad field of insurance called casualty insurance encompasses almost everything not covered by fire or marine insurance: automobile insurance, general liability, burglary and theft, worker’s compensation, glass coverage and other miscellaneous lines

The agent may also sell multiple-line or package policies that combine property and liability coverages. Finally, an agent may sell fidelity and surety bonds that provide the insured with protection against losses caused by the dishonest or fraudulent acts of employees or that provide monetary compensation in the case of a bonded person’s inability to perform certain acts, such as the completion of the construction of a building.

PROPERTY – CASUALTY INSURANCE MARKETING SYSTEMS

Property and casualty insurance is marketed by independent agents, exclusive agents or captive agents, and brokers. Exclusive agents sometimes offer insurance from the insurer as a lower cost, due to lower commissions and reduced expenses resulting from centralization of underwriting, policy issuance and claims processing in the direct writing systems. Independent agents and brokers offer insurance consumers the most options, because they work with multiple insurers. The agents have a wider choice of coverages, prices and services for their policyholders. Historically, independent agents have been the predominant producers in this field.

INDEPENDENT AGENCY SYSTEMS

Many agents belong to a marketing system known as the Independent (American) Agency system (sometimes called the “Big I”). The Independent Insurance Agents of America (IIAA) has helped consumers become familiar with the “Big I” through advertisements that tout the value of the independent agent as the “more than one company agent.” The independent agent may represent any number of insurance companies on a commission or fee basis for the business produced. These agents are not employed by the insurance companies they represent. They are independent business people who represent several insurance companies, pay all their own agency expenses and make all decisions about how their agency operates.

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Consumers who purchase insurance through independent agents are considered by both agents and insurers to be the agents customers rather than those of the insurer, and the insurance company does not generally deal directly with the insured.

EXCLUSIVE AGENTS

The exclusive agency system is prominent among large property-casualty insurance companies, exclusive or captive agents represent one insurance company or group of companies only. These agents are paid a salary, commission or a combination of both. Under restrictions imposed by the insurer, the insured is considered to be the company’s client rather than the agent’s. Companies using captive agents own and control the account, policy records and renewals. If the agent relationship or employment of a captive agent terminates, the agent loses all rights and interest in the renewal business and related commissions.

DIRECT WRITERS

A direct writer is an insurance company that sells its policies through employees or agents who represent it exclusively. These agents usually receive a salary, or a salary plus commission for the business they produce. Some insurers, such as specialty fire insurance companies that emphasize loss prevention in insuring large, well established industrial and institutional properties, negotiate their contracts primarily through salaried representatives in direct contact with executives of the business being insured. A direct writer maintains complete control and ownership of its policies and renewals.

ROLE OF INSURANCE IN SOCIETY

Without reviewing the staggering dollar amounts that the insurance industry collects each year it is important for all insurance professionals to realize that insurance plays a major role in the lives of most people in the United States.

Life insurance attempts to protect the breadwinner of the family in case of a premature death of the breadwinner. Disability insurance protects the "money machine" in case of a living death. Property insurance protects homes and provides a cushion against economic disaster, but in many instances helps speedy recoveries because patient's can focus on getting better and not paying expensive bills.

The uniqueness of the insurance industry is that, although insurance affects so many people, very few really know that much about it. It is this unawareness that has caused many consumers to become negative when it comes to insurance. By being ignorant as to insurance, consumers have

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"left the door open" to those unethical insurance agents who take advantage of people by simply inducing them to buy policies that are either unnecessary or do not live up to the agent “hype.”

In a way, this activity is a two-edge sword for the insurance professional. On one hand, the professional, since she/he works in the same industry, must be able to answer for the "sins" of their brethren; on the other hand, the professional insurance agent, by offering the public an honest and fair explanation of the policies and services that he/she represents, will certainly distinguish (and distance) themselves from the unethical agent. As the old saying goes "the cream always rises to the top!”

There are two types of ethical problems that have been prevalent in the industry:

1. Deceptive use of advertising material, and2. deceptive sales presentations.

DECEPTIVE ADVERTISING MATERIAL

Two facts cannot be denied about the insurance industry and the general public:

1. As noted, the average insurance buyer knows very little about insurance and relies on the advice and recommendation by an insurance agent.

2. By the time a consumer realizes that a policy does not quite live up to its advance billing, it could be too late to change.

The potential for deceptive advertising by both companies and agents is significant, with severe consequences to the consumer.

The states have enacted laws regulating insurance advertising. The foundation for many of these state’s laws is the NAIC Model "Unfair Trade Practices Act" which cites false advertising as an unfair trade practice and it is strictly forbidden. Advertising, includes print and radio material, descriptive literature, sales aides, slide shows, brochures, sales illustrations, policy illustrations, TV adds, etc. Any kind of communication or presentation used to promote the sale of an insurance policy would be included.

The purpose of the NAIC Model Act was to establish some badly needed guidelines to ensure that both insurance companies and their agents promote their products properly and accurately, without outlandish exaggerations. The act forbids any misrepresentations of the benefits, terms, conditions or features of any insurance policy, including dividends. It also bars any misrepresentation of an insurer's financial condition or its legal reserve system. It also prohibits the names or titles of insurance that do not represent their true character. Life insurance advertising cannot use the terms "investment,” "savings" or "profit" in a misleading way. Health

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insurance advertising must disclose provisions regarding renewability, cancellation, termination or modification of benefits.

The burden of compliance with state insurance advertising law falls on insurance companies, since most advertisements or promotional pieces, regardless of the writer or presenter, are considered the responsibility of the insurer whose policies are being advertised. In reality, most of the advertising and sales literature an agent uses is prepared by the insurer with the legal department's input. The ethical issue is not the material issue itself, but how the material is used.

The fact remains that many unethical agents still prepare there own promotional or advertising copy and use it in the marketplace. With the advent of sophisticated computer and printing systems, one can imagine the copy that is being used on the public. From the agent's standpoint,most home offices tend to be institutionalized, with little “sizzle”, therefore making insurer promotions useless. Also, when agents submit their own advertisements to the insurer, long time delays occur. As noted, the agent is under pressure for some level of production and thereforeattempts to gain a competitive edge using his/her own devices. The fact remains that with the litigious society we all live in today, it is best to act ethically and use home office copy when marketing.

NAIC Guidelines for Insurance Advertising

1. All insurance advertisements must be truthful and not misleading in fact or implication. Words or phrases that are clear only through familiarity with insurance terminology cannot be used.

2. All information required to be disclosed (i.e., exceptions, limitations of benefits and exclusions from coverage) must be printed conspicuously next to the statements to which the information relates and displayed in such prominence that it is not minimized, confusing or misleading (in short, no fine print).

3. Deceptive words, phrases or illustrations may not be used to describe a policy, it’s benefits, the losses to be covered or premiums payable.

4. Testimonials must be genuine, represent the current opinion of the author, be applicable to the policy advertised and be accurately reproduced.

5. Disparaging remarks or statements about another insurer, agency or agent of

another insurer, their products and services may not be used in any advertisement.4. .

6. The identity of the insurer most be clear in all advertisements, as well as the name, address and phone number of the agent placing the advertisement.

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DECEPTIVE SALES PRESENTATIONS

Deceptive sales presentations and bogus use of sales illustrations have created numerous problems for the industry.

The question remains. What constitutes a deceptive sales presentation? Any presentation that gives a prospect or client the wrong impression about any aspect of an insurance policy is considered deceptive. Of course, with such a definition, it is difficult for the presenter to anticipate the impressions one will receive with a particular presentation. The fact remains that an ethical insurance professional will implement the golden rule when making a presentation.

Probably the best way to determine if a presentation is deceptive is if full disclosure is not made. Any presentation that includes misleading or inconclusive product comparisons is considered deceptive. Deceptive sales presentations can be quite outlandish. For example, a comparison of a term policy and a whole life policy based on premium rates is misleading and incomplete. An example of a common deception would be explaining life insurance as a "tax shelter. Yes, the cash values will accumulate tax deferred, but failing to mention that premiums are not tax deductible leads to deception.

The health insurance policy that is presented by failing to explain conditions under which the policy is canceled and the premium increased is a form of deception. A popular form of deception is using a policy illustration that shows excessive projected dividends or totally unrealistic interest rate assumptions or presenting current value as if they were guaranteed. Computerized policy illustrations have led to many deceptive policy illustrations. The easy way in which variables may be utilized appear to be too much temptation for the unethical agent. In general, too many insurance sales are based on pie-in-the-sky numbers and assumptions instead of real needs and benefits.

The ethical agent will always attempt to perform a needs-based evaluation of a client's financial situation before running a series of inflated policy illustrations. When a policy illustration is used, the ethical agent will take the responsibility for knowing the assumptions it contains, and will be sure these values are realistic and credible before they are used in any presentation form.

Because of the growing problems with policy illustrations the American Society of CLU and CHFC developed specific guidelines for such use. The society maintains, and as ethical standards require, deceptive policy illustrations have no place in the insurance industry. The prospective insurance buyer is deceived. Such deception is revealed when that buyer makes a claim for benefits that turn out to be limited or nonexistent.

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RECENT SCANDALS

The past five years has seen numerous insurance scandals. The end result is diminished confidence in the insurance industry as a whole, which makes it very difficult for all to practice insurance. Another effect of such scandals is that increased legal actions by individual clients causes the entire industry to be further scrutinized by government, local state and federal.

In many instances, such scandals could have been avoided through client education.

In other instances problems could have been avoided through the adherence to the professional codes discussed earlier. A major problem in the industry is solvency. With recessionary forces impacting the insurance industry, some companies found it difficult to maintain business as usual.

It seems every night, a picture and interview of retirees losing annuity checks comes into our living rooms. Questions arose concerning the ethics of many agents. Did they use these companies because they paid higher commissions or rewarded such production with luxurious trips? Did the management of these companies invest wisely, or were risky bonds the primary cause of many insurer failures?

The solvency crisis had a profound effect on the public. Policyholders were forced to evaluatethe stability of the insurance industry and the ability of the industry to serve their needs cameinto question.

REPLACEMENT

In some cases replacement has merit but these cases are not usually publicized. The public has heard of the situations where policy replacement was not in the best interest of the

terms become familiar public concerns, twisting, churning and piggybacking stories have been presented to the public. Unethical insurance agents seeking out policyholders who have build up c cash value within older policies only to have the policies “stripped” of their cash values in order o to purchase newer, fully commissionable policies. The result was once was again,

government attention. State regulators are giving closer attention to the replacement issue. . It seems that state governments are telling the insurance industry, "if you cannot police yourself,

we will do it for you”.

PRODUCT MISREPRESENTATION

Insurance agents have recently made the term financial planner popular. Instead of stating they are insurance agents, some have given themselves a promotion to financial planner or retirement representative.

These same agents have a tendency to describe their product as a "savings vehicle" or "retirement plan.

Such practices confuse consumers. These practices have created an onslaught of complaints to insurance departments with crackdowns by state regulators.

IMPROPER LICENSING

Most agents have the proper licenses for the products being sold. However, a few insurance representatives did not when they ventured into a new field, selling stock brokerage limited partnership products. The biggest problem was they did not understand the product they were pushing on an unsuspecting public. Many consumers were sold high-risk products although they preferred low risk investments. One can imagine the results when these investors discovered thatvaluable retirement savings had evaporated. The image of the insurance industry was furthertarnished!

FRAUD

An age-old problem has always been forgery in the industry. Many agents have signed a client's name to some type of document in order to facilitate the approval process. Signing a client's name to a document is never proper. Throughout time, this has been nicknamed "windowing. To say the least, this practice, which has been written about in various newspapers, has done nothing to help the reputation of the insurance industry.

NO NEEDS SELLING

Agents are failing to identify customer needs. Because these needs are not identified, customers are being sold products which just are not suitable for their needs. One of chief reasons for this misdeed is that agents just aren't educated enough. As noted before, education and increased technical skill will "professionalize" an insurance practice.

Another reason for the selling of unsuitable products includes trying to make the easy sale with a particular product simply because it has attractive benefits. Other agents sell unsuitable policies because of the high commission to be gained from such products.

REDLINING

Many insurers argue that they need to control potential losses and they should be permitted to limit coverage or even refuse to write homeowners coverage in areas where losses have been frequent or severe. However, under the provisions of Fair Housing Act, a licensed individual or company may not refuse to provide homeowners or renters insurance solely on the basis of the geographical location of the insured’s property. Rejecting coverage solely because of a risk’s geographical location is known as redlining. The practice of redlining occurs when a company literally “draw a red line” around a specific geographical location and refuses to insure properties located within its boundaries.

When a coverage is issued in a redline area, another form of discrimination takes place that involves charging higher premiums for comparable policies, charging higher rates for inferior policies and refusing to provide replacement cost coverage on the structure and contents of home in minority neighborhoods. Some insurers and their agents justify their refusal to write coverage because the homes in these neighborhoods are too old or their value is too low.

The U.S. Department of Housing and Urban Development (HUD) prosecutes insurance companies that intentionally engage in practices that have the intent and effect of denying, limiting, or restricting home owners insurance for people living in minority neighborhoods throughout the United States.

QUESTIONS OF UNISEX RATING FOR AUTO INSURANCE

As part of its ratemaking process, insurance companies use there past loss experience and industry statistics. For example, in addition to the insurer’s own loss data, industry statistics on hurricanes, tornadoes, fires, crime rates, the cost of living, etc. are also used as part of the data to establish premium rates for a type of insurance. Actuaries in property-casualty insurance have also used gender in determining rates for automobile insurance premiums. They contend that men and women should pay different rates because their loss experiences are different. Based on its statistics, the insurance industry contends that female drivers should payless for their automobile coverage because they have fewer and less expensive claims than male drivers. However, some consumer groups, such as the National Organization for Women see gender-based rating as discriminatory, arguing that under this system women (who generally live about eight years longer then men) will naturally pay more for all forms of insurance over their lifetimes than men. They have proposed that unisex rating, which means that the pooled loss experience of both males and females, is used to calculate the rates charged, be used for all types of insurance.

Unisex rating is now used in many group life and health insurance plans that are experience rated.

BUSINESS DILEMMA: IS IGNORANCE A VIABLE EXCUSE?

Good business practices can be learned. A study of the recent scandals that have beset the insurance industry indicate that many times an agent failed to realize that his/her actions would be considered unethical. For example, a new agent, unfamiliar with the technical requirements, advises a client that a retirement account may be funded with unearned income. Bad advice? Absolutely! Done purposely? Probably not! Net result: The client could be called down for an audit, slapped with a tax bill and has nothing but ill feelings for the agent, insurance company and the industry as a whole. Was this action unethical? Yes. Even though it was not done purposely, it still was incorrect and quite unethical.

The point is that the agent should have called upon the agency or home office technicians for help in this case. Taking a retirement course would have helped also. An agent should recognize that instincts should not be the only guide in balancing customer needs. Agents should be familiar with professional codes and if needed, should seek advice on the application of ethical principles. Ignorance does not make one insulated from being unethical. Ignorance is only an excuse! Education adds to expertise. It also increases ones awareness of ethical questions that will arise in various situations that the insurance profession will encounter while building his/her practice.

PROFESSIONAL OBLIGATIONS

There have been many studies performed by the insurance industry as a whole to determine the proper ways an insurance professional should deal with the public. We have narrowed the results to three basic obligations.

O One. Place the client's interests above self-interest. Professionals are loyal to their clients and a r dedicated to protecting their client's welfare. This means they remain independent and

objective in their judgment and evaluations and recommend plans or policies that most benefit the client. When a policy-owner asks for help or advice, the agent is quick to follow up,embracing client service as an important responsibility.

Two. Being dedicated to the insurance industry and supportive of all its member companies and representatives. A true professional aligns himself/herself with colleagues and Competitors alike, knowing that all represent the same products and services, and that all should share a commitment to the purpose and goals of these products and services.

Three. The insurance professional is obligated to offer quality plans and represent quality companies. A professional agent represents only those companies with solid financial standings

and accurately informs prospects and clients of an insurer's financial position as part of the sales process.

The professional’s obligation is not to make disparaging remarks about the competition, fail to provide prompt, honest answers to client’s questions and fail to provide products and services of the highest quality in the eyes of the customers.

SUMMARYAs we conclude this chapter the insurance professional must remember that building a successful practice takes time. By making a long term commitment to the business and realizing that every business will have “peaks and valleys” the insurance professional will better adapt to the business. It is important to understand that the foundation of the business is the ethical behavior of the principals involved.

The American College’s Charter Life Underwriter (CLU) pledge probably sums up this philosophy best as it states:

“In all my professional relationships, I pledge myself to the following rule of ethical conduct: I shall, in light of all conditions surround those I serve, which I shall make every conscientious effort to ascertain and understand, render that service which, in the same circumstance, I would apply to myself.”

Study Questions

1. The most important duty that an insurance professional has is:

a. Establish a large clienteleb. Look out for welfare of clientsc. Offer legal adviced. Gain technical knowledge

2. All applicants should first be converted to ________ & then ________.

a. Policy-owners/clientsb. Partners/clientsc. Policy-owners/partnersd. Clients/partners

3. All of the following are basic steps to convert a prospect to a client except.

a. Client is sold according to needsb. Client is serviced by an insurance professionalc. Client’s is sold unnecessary products.d. The agent must approve his/her profession as a true professional

4. The underwriter, for Commercial Property Coverage, will consider all of the following EXCEPT:

a. Type of constructionb. Occupancy or usec. Amount & type of fire protectiond. Age of the insured

5. The insurance industry is loaded with:

a. Technical informationb. Unethical agentsc. Captive agentsd. Deceptive advertising material

Answers to Study Questions

1a 2b 3d 4a 5a

BIBLIOGRAPHYBIBLIOGRAPHY

Inland Marine Insurance, Volume IRoderick McNamara, Robert Laurence, Glenn l. WoodInsurance Institute of America, December 1991

Inland Marine Insurance, Volume IIRoderick McNamara, Robert Laurence, Glenn l. WoodInsurance Institute of America, December 1991

FC&S, Commercial Inland MarineNational Underwriter Company’s Fore Casualty & Surety Bulletins Dept.The National Underwriter Company, 1988

Dictionary of Insurance Terms, Third EditionHarvey W. Rubin, Ph.D., CLU, CPCUBarron’s Educational Series

Inland Marine Insurance

Private printingContinuing Education Insurance School

Principles of Insurance Production, Volume 1Kensicki, Smith, Marshall, Wearanch, CloseInsurance Institute of America, 1986

Property and Casualty InsurancePhilip Gordis, CPCU, CLUThe Rough Notes Company, 1991

Black’s Law DictionaryWest Publishing Company, 1995

A Comprehensive Guide to Understanding Your Homeowner’s PolicyGerald J. Curran, Jr.Mellon University Press

Contractors Equipment Guide to Loss PreventionLoss Control CommitteeInland Marine Underwriters Association

Principles of Risk Management and Insurance, Vol. IIWilliams, Head, Horn, GlendenningAmerican Institute for Property and Liability Underwriters, 1981

Commercial Property Risk Management and InsuranceRodda, Trieschmann, Wiening, HedgesAmerican Institute for Property and Liability Underwriters, 1988

Inland Marine Insurance, An Interpretation of the PolicyEarl Applemen (Reference)

Marine Insurance: Ocean and InlandWilliam RoddaAmerican Institute for Property & Liability Underwriters, 1991

Commercial Liability Insurance and Risk ManagementAmerican Institute for Chartered Property & Casualty Underwriters

Commercial Property Insurance and Risk ManagementAmerican Institute for Chartered Property & Casualty Underwriters

References are made to various forms of the Insurance Service Office, forms filed with Department of Insurance, State of Florida

Commercial InsuranceWebb, Flitner, TrupinAmerican Institute for Chartered Property & Casualty Underwriters

Various references from ISO Links for Insurance Research (www/iso.com)and ARIA Library