2.5 Commercial Package Policy, Businessowners Policy & Equipment Breakdown
Key Takeaways
A Commercial Package Policy combines Common Policy Declarations, Common Policy Conditions and two or more coverage parts, such as commercial property and general liability; one coverage part alone is a monoline policy.
The ISO Businessowners Policy packages property and liability for eligible small and mid-size businesses; property is written on a replacement cost basis without a coinsurance clause.
BOP business income pays actual loss sustained for up to 12 months with no separate dollar limit, subject to a 72-hour waiting period.
Commercial property causes of loss forms exclude mechanical breakdown and steam boiler explosion; equipment breakdown coverage insures sudden and accidental breakdown of covered equipment.
Equipment breakdown insurers inspect objects and may immediately suspend coverage on a dangerous object by written notice, and the insured's property and breakdown insurers can share a disputed loss under a joint or disputed loss agreement.
2.5 Commercial Package Policy, Businessowners Policy & Equipment Breakdown
Section I.B of the Hawaii adjuster outline lists four commercial property topics: the building and personal property form with its causes of loss and business income forms (taught in 2.3), the Commercial Package Policy (CPP), boiler and machinery coverage, and the Businessowners Policy (BOP). An adjuster assigned a commercial claim must first identify which of these structures the insured bought. The coverage, limits and conditions change with the answer.
The Commercial Package Policy (CPP)
The ISO commercial lines program is modular. Every commercial policy is assembled from:
- Common Policy Declarations — the named insured, mailing address, policy period, coverage parts included, and premium.
- Common Policy Conditions (IL 00 17) — cancellation, changes, examination of books and records, inspections and surveys, premiums, and transfer of rights and duties. These apply to every coverage part (see 3.3).
- One or more coverage parts, each with its own declarations, coverage forms, conditions and endorsements.
Coverage parts available in the ISO program include commercial property, commercial general liability, commercial crime, commercial inland marine, equipment breakdown, commercial auto, and farm. Two rules matter:
- A policy with two or more coverage parts is a Commercial Package Policy. Insurers commonly give a package modification (a premium credit) because they write multiple lines for the same account.
- A policy with only one coverage part is a monoline policy.
Adjuster Checklist for a CPP File
- Confirm which coverage part responds. A theft of tools from a contractor's truck could fall under inland marine (contractors equipment), crime, or commercial auto, depending on the parts purchased.
- Read the coverage part's own conditions together with the Common Policy Conditions. The Commercial Property Conditions (CP 00 90) add concealment, control of property, legal action, other insurance, policy period and territory, and transfer of rights of recovery.
- Apply the declarations limits and deductibles for that part only. Separate parts do not share one limit.
The Businessowners Policy (BOP)
The Businessowners Policy is a prepackaged policy for eligible small and mid-size businesses. The ISO Businessowners Coverage Form (BP 00 03) combines property and liability in one form instead of separate coverage parts. Eligibility rules are set by the insurer's rating manual and usually screen by:
- class of business — offices, apartments, retail stores, small wholesalers, and some service and contracting risks are typical;
- size — limits on floor area, building height, and annual gross sales;
- hazard — bars, auto dealers and repair operations, banks, large manufacturers and other higher-hazard risks are normally ineligible and are written on a CPP.
The exact size thresholds vary by insurer. Learn the concept: a BOP is for homogeneous, lower-hazard risks.
BOP Property Features
| Feature | BOP treatment | Contrast with CPP property |
|---|---|---|
| Causes of loss | Open perils (special form) in the current ISO form | Insured chooses Basic, Broad or Special |
| Valuation | Replacement cost on buildings and business personal property | ACV unless replacement cost is selected |
| Coinsurance | None | 80% coinsurance common |
| Seasonal increase | Business personal property limit automatically increases by 25% for peak seasons, provided the limit is at least 100% of the average monthly values for the prior 12 months | Requires a peak season endorsement |
| Business income and extra expense | Included; actual loss sustained for up to 12 months, no separate dollar limit, 72-hour waiting period | Must be bought with its own limit |
The BOP also includes small built-in coverages such as accounts receivable, valuable papers, fire department service charge, and money and securities (amounts vary by form and insurer).
BOP Liability
BOP business liability resembles the CGL (see 3.2). It covers bodily injury, property damage, and personal and advertising injury on an occurrence basis, plus medical expenses. It shares the CGL's major exclusions — expected or intended injury, contractual liability (except insured contracts), workers' compensation, pollution, and owned autos. Professional services are excluded. A CPA firm's BOP does not respond to an audit-error claim, which belongs under an errors and omissions policy (3.8). Hired and non-owned auto liability can be added by endorsement.
Note
Because the BOP has no coinsurance clause, an underinsured BOP property loss is paid up to the limit without a proportional penalty. On a CPP form with 80% coinsurance, the same underinsurance would reduce a partial loss payment (see 2.4).
Equipment Breakdown (Boiler and Machinery)
The Gap It Fills
Commercial property causes of loss forms exclude:
- mechanical breakdown, including rupture or bursting caused by centrifugal force;
- artificially generated electrical current that damages electrical devices (any resulting fire is covered);
- explosion of steam boilers, steam pipes, steam engines or steam turbines owned, leased or operated by the insured (any resulting fire or combustion explosion is covered).
Those excluded events are the core of equipment breakdown coverage, historically called boiler and machinery.
What Equipment Breakdown Covers
The coverage applies to direct damage to covered property caused by a sudden and accidental breakdown of covered equipment, such as boilers and pressure vessels, air conditioning and refrigeration systems, electrical panels and transformers, production machinery, and communication or computer equipment. Common coverages in the package include:
- property damage to the equipment itself and to other covered property damaged by the breakdown;
- expediting expenses — the reasonable extra cost of temporary repairs and of speeding up permanent repairs (overtime, air freight of parts);
- spoilage of perishable goods caused by loss of refrigeration;
- utility interruption, business income and extra expense when the form or declarations include them;
- data restoration, ammonia contamination, and hazardous substance cleanup, usually with sublimits.
Wear and tear, gradual deterioration, and testing losses are excluded. A breakdown must be sudden and accidental.
Inspection and the Suspension Condition
Equipment breakdown insurers maintain engineering staff who inspect boilers and pressure vessels. In many jurisdictions, these inspections also satisfy the owner's legal inspection requirement. The suspension condition lets the insurer immediately suspend coverage on a covered object found in a dangerous condition. It does this by delivering or mailing written notice to the insured. Coverage on other objects continues. If a suspended boiler later explodes, the loss is not covered until coverage is reinstated in writing.
Joint or Disputed Loss
When a loss could fall under either the property policy (fire) or the equipment breakdown policy (breakdown), the two insurers may disagree about cause. A joint or disputed loss agreement has each insurer pay the amount it agrees it owes plus one-half of the amount in dispute, and the insurers then resolve the disputed share between themselves, usually by arbitration. The insured is not left unpaid during the argument. This only works when both policies contain a matching agreement.
Hawaii Claim Scenario
A Wailea resort's walk-in freezer compressor seizes overnight, and $18,000 of seafood spoils. The resort carries a CPP with commercial property (special form) and an equipment breakdown coverage part. The adjuster reads the property causes of loss form first. Mechanical breakdown is excluded, and spoilage from a mechanical failure is not a covered cause of loss. Next, the adjuster reviews the equipment breakdown part. The compressor is covered equipment, and the breakdown was sudden and accidental, so spoilage and expediting expenses (air-freighting a replacement compressor from the mainland) respond under that coverage part, subject to its deductible and spoilage sublimit.
A contractor's policy contains Common Policy Declarations, the Common Policy Conditions, a commercial property coverage part and a commercial general liability coverage part. How is this policy classified?
A Commercial Package Policy, because it contains two or more coverage parts
A surplus lines policy, because liability is written on a separate form
A monoline commercial property policy with a liability endorsement
A Businessowners Policy, because it combines property and liability
A retailer insured under a Businessowners Policy suffers a covered fire and must close for nine months. The policy shows no separate business income limit. How does business income respond?
It pays a flat 25% of the building limit regardless of the actual income lost
It pays nothing, because business income requires its own declared limit
It pays only extra expense, because lost income is excluded from package policies
It pays actual loss sustained for up to 12 months, after a 72-hour waiting period
During an inspection, an equipment breakdown insurer's engineer finds a dangerously corroded pressure vessel at a bakery and has written notice of suspension delivered that day. Two weeks later the vessel ruptures. What is the most likely coverage outcome?
Covered in full, because the policy period had not expired
Not covered under the breakdown policy, because coverage on that object was suspended by written notice
Covered at 50% under the joint or disputed loss agreement
Covered by the property policy, because steam explosions are a named peril on every causes of loss form
Sections you finish are checked off in the contents.