7.2 Causes of Loss Forms (Basic, Broad, Special), Business Income & Extra Expense

Causes of Loss Forms (Basic, Broad, Special), Business Income & Extra Expense

Exam Focus: On the New York Series 17-70 exam, property adjusters must clearly differentiate between the three ISO Causes of Loss forms, identifying which perils are added under Broad vs. Special, and the specific limitations placed on water damage, theft, and volcanic action. Furthermore, candidates must master the Business Income (CP 00 30) insuring agreement, the Period of Restoration timeline (including the 72-hour waiting period and 60-day Extended Business Income), and the percentage schedules governing Extra Expense (CP 00 50) settlements.

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Comparative Analysis of Causes of Loss Forms

In the ISO Commercial Property Program, the property coverage form (such as the BPP) establishes what property is covered, while the Causes of Loss Form establishes which perils trigger coverage.

┌────────────────────────────────────────────────────────────────────────┐
│                        CAUSES OF LOSS HIERARCHY                        │
├────────────────────────────────┬───────────────────────────────────────┤
│ Basic Form (CP 10 10)          │ 11 Named Perils                       │
├────────────────────────────────┼───────────────────────────────────────┤
│ Broad Form (CP 10 20)          │ 11 Basic + 3 Broad Perils + Collapse  │
├────────────────────────────────┼───────────────────────────────────────┤
│ Special Form (CP 10 30)        │ Open Perils (Direct Physical Loss)    │
└────────────────────────────────┴───────────────────────────────────────┘

1. Causes of Loss — Basic Form (CP 10 10)

The Basic Form is a named perils contract insuring against direct physical loss caused by 11 specified perils:

1. Fire: Hostile fires only (a fire burning outside its intended container or area).
2. Lightning: Naturally generated atmospheric electrical discharge.
3. Explosion: Includes gas or dust explosions; excludes rupture of steam boilers, steam pipes, or rotating machinery (which requires Equipment Breakdown coverage).
4. Windstorm or Hail: Damage to the interior of a building or personal property inside is covered only if the exterior roof or walls first sustain damage from wind or hail, creating an opening through which rain, snow, sand, or dust enters.
5. Smoke: Sudden and accidental smoke damage; strictly excludes smoke from agricultural smudging or industrial operations.
6. Aircraft or Vehicles: Physical contact by aircraft, spacecraft, or land vehicles. Excludes damage caused by vehicles owned, leased, or operated by the named insured in the course of business.
7. Riot or Civil Commotion: Includes acts of striking employees and looting during a riot.
8. Vandalism: Willful and malicious damage or destruction of property; strictly excludes theft (or damage caused by burglars, other than physical damage to the building during entry or exit).
9. Sprinkler Leakage: Leakage or discharge of water or other substance from an automatic fire suppression system, including system collapse.
10. Sinkhole Collapse: Settlement or collapse into subterranean cavities created by the action of water on limestone or dolomite rock formations; strictly excludes the cost of filling the sinkhole, the value of the land, and general ground subsidence or earthquakes.
11. Volcanic Action: Direct airborne damage from volcanic blast, airborne shock waves, ash, dust, pumice, or lava flow.

    [!NOTE] The 168-Hour Aggregation Rule: All volcanic eruptions, emissions, and blasts that occur within any 168-hour (7-day) period are legally deemed to constitute a single volcanic occurrence, subjecting the loss to a single deductible. Volcanic action excludes earthquakes, land tremors, or subterranean volcanic movement.

2. Causes of Loss — Broad Form (CP 10 20)

The Broad Form encompasses all 11 Basic perils, plus three additional named perils and an Additional Coverage for Collapse: 12. Falling Objects: Excludes damage to personal property in the open. Interior damage to the building or contents is covered only if the falling object first breaches and penetrates the exterior roof or walls. Damage to the falling object itself is not covered. 13. Weight of Snow, Ice, or Sleet: Structural damage to buildings or contents caused by the weight of accumulated snow, ice, or sleet. Excludes damage to outdoor property such as gutters, downspouts, fences, pavements, patios, and swimming pools. 14. Water Damage: Accidental discharge or leakage of water or steam as the direct result of the breaking apart or cracking of a plumbing, heating, air conditioning, or refrigerating system located on the described premises. > [!IMPORTANT] > Critical Water Damage Limitations:
> - Covers the cost to tear out and replace any part of the building necessary to repair the broken system.
> - Strictly excludes the cost to repair or replace the defect or appliance that caused the leak (e.g., pays for water-damaged drywall and flooring, but will not pay to purchase a new water heater or replace the cracked pipe elbow).
> - Excludes continuous or repeated seepage or leakage of water that occurs over a period of 14 days or more.
> - Excludes flood, surface water, sewer backup, and hydrostatic pressure (subsurface water).

Additional Coverage — Collapse (Broad Form): Covers the abrupt falling down or caving in of a building or any part of a building with the result that the building cannot be occupied for its intended purpose. The collapse must be caused by:

• Any of the specified Basic or Broad causes of loss;
• Hidden decay (unless known to an insured prior to collapse);
• Hidden insect or vermin damage;
• Weight of people or personal property;
• Weight of rain that collects on a roof;
• Defective methods or materials used in construction, remodeling, or renovation, if the collapse occurs during the course of construction.

3. Causes of Loss — Special Form (CP 10 30)

The Special Form provides open perils (formerly termed "all-risk") coverage. Rather than listing covered perils, it covers direct physical loss unless the loss is physically excluded or limited in the form.

The Burden of Proof Shift:

• Under Basic (CP 10 10) and Broad (CP 10 20) named peril forms, the insured bears the legal burden of proving that a loss was caused by an enumerated covered peril.
• Under Special Form (CP 10 30), the insured must prove only that direct physical loss occurred during the policy term; the insurer bears the legal burden of proving that an exclusion applies.

Key Specific Exclusions & Limitations under CP 10 30:

• Wear and tear, gradual deterioration, rust, corrosion, fungus, decay, and smog.
• Settling, cracking, shrinking, or expansion of foundations, walls, floors, roofs, or pavements.
• Nesting, infestation, or discharge of waste products by insects, birds, rodents, or other animals.
• Mechanical breakdown, electrical arcing, and artificial electrical currents.
• Voluntary parting with any property by the insured or anyone entrusted with the property if induced by trick, scheme, fraud, or false pretense.
• Rain, snow, ice, or sleet damage to personal property in the open.
• Inventory shortages or unexplained, mysterious disappearance.

Theft Sublimits under Special Form: While the Special Form covers theft, it imposes strict sublimits per occurrence:

• $2,500 for furs, fur garments, and garments trimmed with fur;
• $2,500 for jewelry, watches, watch movements, jewels, pearls, precious and semi-precious stones, gold, silver, platinum, and other precious alloys;
• $2,500 for patterns, dies, molds, and forms;
• $250 for stamps, tickets, including lottery tickets held for sale.

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Business Income Coverage Form (CP 00 30)

When a commercial building suffers physical damage, physical repair costs represent only half the financial impact. The business faces a complete cessation of revenue while fixed operating expenses continue. Form CP 00 30 (Business Income Coverage Form) covers this consequential, time-element financial loss.

Definition of Business Income

Under ISO form CP 00 30, Business Income is defined as the sum of:

1. Net Income: Net profit or loss before federal, state, and local income taxes that would have been earned had no physical loss occurred; and
2. Continuing Normal Operating Expenses: Necessary operating expenses incurred that continue during the period of suspension, including payroll.

Coverage Trigger

To trigger Business Income coverage, four legal criteria must be satisfied:

1. Direct physical loss of or damage to property at the described premises;
2. Caused by or resulting from a covered cause of loss;
3. Causing a necessary suspension of operations (a partial slowdown or complete cessation); and
4. Occurring during the defined Period of Restoration.

The Period of Restoration Timeline

Adjusters must meticulously calculate the Period of Restoration:

• Commencement:
  • For Business Income, coverage begins 72 hours after the time of direct physical damage (functioning as a time deductible). The 72-hour waiting period can be eliminated or reduced to 24 hours by endorsement.
  • For Extra Expense, coverage begins immediately at the exact time of direct physical loss.
• Termination: The Period of Restoration terminates on the date when the damaged property should be repaired, rebuilt, or replaced with reasonable speed and similar quality, or when business is permanently resumed at a new location (whichever is earlier). It does not end merely because the policy expires or available limits are exhausted.

Date of Loss
 │
 ├──► 0 to 72 Hours: Waiting Period (No Business Income paid; Extra Expense attaches at 0 hrs)
 │
 ├──► 72 Hours to Reopening: Period of Restoration (Business Income + Extra Expense paid)
 │
 └──► Reopening Date to 60 Days: Extended Business Income (EBI) Window

Extended Business Income (EBI)

Once the physical premises are fully rebuilt and the business reopens its doors, customers do not return immediately. Form CP 00 30 automatically includes Extended Business Income (EBI):

• Begins on the date the property is actually repaired and operations are resumed.
• Ends when the business returns to the financial level of operations that would have existed had no loss occurred, or after 60 consecutive days, whichever is earlier (can be endorsed to 120, 180, or 365 days).

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Extra Expense Coverage Form (CP 00 50)

Certain critical businesses cannot afford to shut down after a loss; they must maintain continuous operations regardless of cost to avoid losing permanent market share or regulatory licenses (e.g., banks, data centers, medical clinics, dairies, newspapers).

The Extra Expense Coverage Form (CP 00 50) covers necessary expenditures incurred during the Period of Restoration that the business would not have incurred had there been no physical damage, specifically to:

1. Avoid or minimize the suspension of business and continue operations at the described premises or a temporary replacement location; or
2. Minimize the suspension of business if operations cannot be continued.

Limits of Loss Payment Percentages

Unlike standard indemnity forms, Extra Expense coverage is commonly subject to a three-tier percentage recovery schedule on the declarations, such as 40% / 80% / 100%:

• First 30 Days or Less: Insurer pays up to the first percentage (e.g., 40%) of the total limit of insurance.
• 31 to 60 Days: Insurer pays up to the second percentage (e.g., 80%) of the limit of insurance.
• Over 60 Days: Insurer pays up to 100% of the limit of insurance.

Claim Settlement Example

A financial printing firm carries CP 00 50 with a $100,000 limit and 40% / 80% / 100% loss payment percentages. A fire disables the pressroom, requiring the insured to lease outside printing facilities for 28 days, incurring $50,000 in overtime and rental expenses.

• Because the restoration period was 30 days or less, the maximum recovery is capped at 40% of $100,000 = $40,000.
• The remaining $10,000 must be borne by the insured. Had the restoration taken 35 days, the cap would have expanded to $80,000 (80%), allowing full reimbursement of the $50,000 expense.