2.3 Commercial Property Forms, Causes of Loss & Endorsements

Commercial Property Forms, Causes of Loss & Endorsements

Quick Summary: The ISO Commercial Property program utilizes a modular architecture to insure commercial enterprises. The foundation of commercial direct physical damage coverage is the Building and Personal Property Coverage Form (CP 00 10). Policyholders attach one of three Causes of Loss forms—Basic (CP 10 10), Broad (CP 10 20), or Special (CP 10 30)—and augment coverage with time-element protections like Business Income and Extra Expense (CP 00 30).

---

Structure of the ISO Commercial Property Policy

A commercial property policy is assembled using standardized ISO modular components:

1. Common Policy Declarations: Identifies the named insured, policy period, premium, and business description.
2. Common Policy Conditions: Mandatory provisions applying to all commercial lines (e.g., cancellation, changes, examination of books and records, inspections and surveys, transfer of rights).
3. Commercial Property Declarations: Details the specific premises, coverage limits, coinsurance percentages, deductibles, and applicable causes of loss forms.
4. Commercial Property Conditions: Governing rules specific to property claims (e.g., concealment, misrepresentation, control of property, legal action against the insurer, appraisal, valuation, other insurance).
5. Commercial Property Coverage Forms: Defines the property covered, additional coverages, and coverage extensions (most notably CP 00 10).
6. Causes of Loss Forms: Establishes which perils are insured (Basic, Broad, or Special).

---

Building and Personal Property Coverage Form (CP 00 10)

The CP 00 10 coverage form establishes three separate insurable categories, each requiring its own designated limit of insurance on the declarations page:

+-------------------------------------------------------------------------+
|          BUILDING AND PERSONAL PROPERTY COVERAGE FORM (CP 00 10)        |
+-------------------------------------------------------------------------+
| 1. BUILDING COVERAGE:                                                   |
|    - Structures, completed additions, permanent fixtures                |
|    - Maintenance machinery, appliances for cooking/refrigerating        |
|                                                                         |
| 2. YOUR BUSINESS PERSONAL PROPERTY (YBPP):                              |
|    - Furniture, machinery, stock, tenant improvements & betterments     |
|    - Located in building or in open/vehicle WITHIN 100 FEET OF PREMISES |
|                                                                         |
| 3. PERSONAL PROPERTY OF OTHERS (PPO):                                   |
|    - Property of clients/vendors in insured's care, custody, or control |
|    - Located in building or WITHIN 100 FEET OF PREMISES                 |
+-------------------------------------------------------------------------+

1. Building Coverage

Insures the commercial building or structure described in the declarations, including:

• Completed additions.
• Fixtures, including outdoor fixtures (e.g., exterior lighting, permanent signage attached to the building).
• Permanently installed machinery and equipment (e.g., commercial boilers, HVAC units, freight elevators).
• Personal property owned by the insured used to maintain or service the building or its premises (e.g., fire extinguishing equipment, outdoor furniture, floor coverings, appliances used for refrigerating, ventilating, cooking, dishwashing, or laundering).
• Additions under construction, alterations, and repairs to the building, including materials, equipment, and supplies located within 100 feet of the described premises used in making additions or alterations.

2. Your Business Personal Property (YBPP)

Covers personal property owned by the named insured and used in the enterprise. YBPP consists of seven categories:

1. Furniture and fixtures.
2. Machinery and equipment (not permanently installed).
3. Stock: Merchandise held in storage or for sale, raw materials, goods in process, and finished goods, including packaging materials.
4. All other personal property owned by the insured and used in the business.
5. Labor, materials, or services furnished or arranged by the insured on personal property of others.
6. Improvements and Betterments: Fixtures, alterations, installations, or additions made to the building by an insured tenant at their own expense, which cannot be legally removed when vacating (e.g., custom display cases, restaurant booth seating, specialized flooring).
7. Leased personal property for which the insured has a contractual responsibility to insure.

The 100-Foot Perimeter Rule

For coverage to attach under YBPP, the property must be located:

• In or on the described building; OR
• In the open, or in a vehicle, within 100 feet of the described building or premises (e.g., raw materials resting on a loading dock or inventory inside a delivery truck parked 50 feet away).

3. Personal Property of Others (PPO)

Insures property belonging to third parties (clients, customers, vendors) that is in the care, custody, or control of the insured, while located in or on the described building or within 100 feet of the premises. This is vital for bailee exposures like repair shops, dry cleaners, or warehouses. Payment is made on behalf of the owner of the property, regardless of whether the insured was legally liable for the damage.

---

Additional Coverages vs. Coverage Extensions

Claims adjusters must distinguish between Additional Coverages (built into every CP 00 10 policy automatically) and Coverage Extensions (which attach only under specific coinsurance conditions).

Additional Coverages (Built-In Automatically)

1. Debris Removal: Pays the cost to remove debris of covered property caused by a covered cause of loss. Payment is limited to 25% of the amount paid for direct physical loss plus the deductible. If the direct loss plus debris removal exceeds the limit of insurance, or if debris removal expense exceeds the 25% limitation, the current CP 00 10 provides up to an additional $25,000 for debris removal (older editions used $10,000).
2. Preservation of Property: If it is necessary to move covered property from the premises to protect it from damage by a covered peril, the policy covers that property in transit and at the temporary location on an open perils basis for up to 30 days.
3. Fire Department Service Charge: Pays up to $1,000 for service charges incurred when a fire department is called to save or protect covered property under municipal contract or ordinance. No deductible applies.
4. Pollutant Clean-up and Removal: Pays up to $10,000 annual aggregate for costs to extract pollutants from land or water at the described premises if the discharge is caused by a covered cause of loss. The expense must be reported in writing within 180 days of the loss date.
5. Increased Cost of Construction: Applies only to buildings settled on a replacement cost basis. Pays up to $10,000 or 5% of the building limit, whichever is less, for increased costs incurred to comply with enforcement of building ordinances or codes.
6. Electronic Data: Pays up to $2,500 aggregate per year to replace or restore destroyed electronic data resulting from covered perils.

Coverage Extensions (Earned by Coinsurance)

Coverage Extensions apply only if the declarations show a coinsurance percentage of 80% or more or a value reporting period symbol. Extensions act as additional insurance:

• Newly Acquired or Constructed Property:
  • Buildings: Up to $250,000 per building for new buildings under construction on the premises or newly acquired buildings at other locations intended for similar use. Coverage lasts for 30 days (or until the policy expires or values are reported).
  • Business Personal Property: Up to $100,000 at newly acquired locations for up to 30 days.
• Personal Effects and Property of Others: Up to $2,500 at each described premises for personal effects owned by the insured, officers, partners, or employees, and property of others in the insured's care.
• Valuable Papers and Records (Cost of Research): Up to $2,500 per location to research, replace, or restore lost information on destroyed business records.
• Property Off-Premises: Up to $10,000 for covered property temporarily at a location the insured does not own, lease, or operate (e.g., trade shows, exhibitions, or storage facilities).
• Outdoor Property: Up to $1,000 total, with no more than $250 for any one tree, shrub, or plant. Applies strictly to specified perils: fire, lightning, explosion, riot, civil commotion, and aircraft (windstorm and hail are excluded!).
• Non-Owned Detached Trailers: Up to $5,000 for leased trailers used in the business while located on the premises.

---

Commercial Causes of Loss Forms: Basic, Broad, and Special

The insured selects one of three Causes of Loss forms to determine which perils attach to CP 00 10:

Basic Form (CP 10 10)

A named perils form insuring against 11 causes of loss: Fire, Lightning, Explosion, Windstorm or Hail, Smoke, Aircraft or Vehicles, Riot or Civil Commotion, Vandalism, Sprinkler Leakage, Sinkhole Collapse, and Volcanic Action.

• Volcanic Action in Hawaii: In volcanic regions like Hawaii, adjusters must know that "Volcanic Action" covers direct physical damage from airborne volcanic blast or shockwaves, ash, dust, particulate matter, and lava flow. It specifically excludes earth movement, earthquakes, volcanic tremor, or ground subsidence (which must be purchased under an earthquake endorsement). All volcanic eruptions within a 168-hour period are treated as a single occurrence, and the cost to remove ash, dust or particulate matter that has not caused direct physical loss is not covered.

Broad Form (CP 10 20)

Includes all 11 Basic perils plus three additional broad perils: Falling Objects, Weight of Snow, Ice, or Sleet, and Water Damage (accidental discharge or leakage of water or steam as the direct result of breaking apart or cracking of a plumbing, heating, or air conditioning system). Also includes an Additional Coverage for Collapse.

Special Form (CP 10 30)

The Special Form provides Open Perils coverage, insuring against direct physical loss unless the cause of loss is explicitly excluded or limited.

• Theft Included: Unlike the Basic and Broad forms, CP 10 30 covers Theft. However, it imposes special limitations: $2,500 for furs and fur garments; $2,500 for jewelry, watches, precious stones, and metals; $2,500 for patterns, dies, molds, and forms; and $250 for stamps, tickets, and letters of credit.
• Burden of Proof: Under CP 10 30, the policyholder only needs to establish that direct physical damage occurred to covered property during the policy period. The burden of proof shifts to the insurance company to demonstrate that an exclusionary clause applies.
• Key Exclusions: Ordinance or Law, Earth Movement, Governmental Action, Nuclear Hazard, Utility Services (off-premises failure of power, water, or communications), War and Military Action, Water (flood, surface water, waves, tidal water, sewer/drain backup), Fungus/Wet Rot/Dry Rot (subject to a limited $15,000 annual aggregate extension), Wear and Tear, Smog, Settling/Cracking, and Dishonest Acts by employees (covered under commercial crime).

---

Time Element Coverages: Business Income & Extra Expense (CP 00 30)

Commercial property losses often produce catastrophic indirect losses: while physical repairs are underway, business revenue stops while fixed expenses continue. Time Element coverage compensates for this operational downtime.

+-------------------------------------------------------------------------+
|               BUSINESS INCOME CLAIM CALCULATION                         |
+-------------------------------------------------------------------------+
| Net Income (Net Profit or Loss before income taxes that would have been |
| earned had no physical loss occurred)                                   |
|                                  +                                      |
| Continuing Normal Operating Expenses (including payroll necessary to    |
| resume operations)                                                      |
+-------------------------------------------------------------------------+

Business Income Coverage

Compensates the insured for the actual loss of Business Income sustained due to the necessary "suspension" of operations during the "period of restoration" caused by direct physical loss to property at the described premises from a covered cause of loss.

Extra Expense Coverage

Reimburses necessary expenses incurred during the "period of restoration" that the insured would not have incurred had there been no physical damage. Extra Expense aims to avoid or minimize the suspension of business (e.g., renting temporary warehouse space, leasing substitute machinery, paying employee overtime, or contracting out emergency operations).

The Period of Restoration

A central concept in adjusting time-element claims:

• Start Time: For Business Income, the period of restoration begins 72 hours after the time of direct physical damage (functioning as a time-based deductible). For Extra Expense, coverage begins immediately at the time of loss (zero waiting period).
• End Time: Concludes on the date when the damaged property at the described premises should be repaired, rebuilt, or replaced with reasonable speed and similar quality, or when business is resumed at a new permanent location.
• Note: Expiration of the insurance policy does not cut short the period of restoration. If a fire occurs two days before policy expiration, Business Income continues through the entire 6-month reconstruction period.

Civil Authority Coverage

Extends Business Income and Extra Expense when access to the insured's described premises is prohibited by order of civil authority (e.g., police blocking streets due to an unstable burning building nearby). Requirements:

• The civil authority action must result from direct physical damage to property other than at the described premises.
• The damaged property must be located within one mile of the described premises.
• The damage must be caused by a covered cause of loss under the insured's policy.
• Subject to a 72-hour waiting period for Business Income; coverage applies for up to four consecutive weeks.