4.2 Other Insurance, Limits & Reinstatement, Vacancy, Assignment, Liberalization, Mortgage and Loss Payable Clauses, Bailees & Certificates of Insurance
Key Takeaways
- Pro rata liability splits a loss in proportion to each policy's limit; contribution by equal shares has each insurer pay equally until the smallest limit is exhausted.
- Under the Standard Fire Policy, coverage is suspended while a described building is vacant or unoccupied beyond 60 consecutive days.
- The ISO commercial property vacancy condition excludes vandalism, sprinkler leakage, glass breakage, water damage, and theft after 60 consecutive days of vacancy, and reduces other covered losses by 15%.
- Liberalization automatically extends a broadened form revision to existing policies without extra premium — within 60 days before or during the policy period in ISO homeowners forms, 45 days in commercial property.
- A standard (union) mortgage clause protects the mortgagee from the insured's acts, while a simple loss payable clause gives the payee no better rights than the insured.
Other Insurance
When two or more policies cover the same property against the same peril, the other insurance provisions decide how the loss is shared. The indemnity principle forbids collecting more than the loss.
| Method | How it works |
|---|---|
| Primary | Pays first, up to its limit, as if no other insurance existed |
| Excess | Pays only after the primary (or other) insurance is exhausted |
| Pro rata by limits | Each insurer pays the share that its limit bears to the total of all applicable limits. This is the Standard Fire Policy's "pro rata liability" clause. |
| Contribution by equal shares | Each insurer pays an equal amount until one policy's limit is exhausted; the remaining insurers continue in equal shares |
| Nonconcurrency | Policies covering the same property with different terms (different perils, locations, or coinsurance). This creates apportionment disputes and possible coverage gaps. |
Worked Example: Pro Rata vs. Equal Shares
A $60,000 fire loss is covered by Policy A ($100,000 limit) and Policy B ($200,000 limit).
- Pro rata: A pays 100/300 × $60,000 = $20,000; B pays 200/300 × $60,000 = $40,000.
- Equal shares: each pays $30,000. Neither limit is reached, so the shares stay equal.
If the loss were $240,000, then under equal shares each pays $100,000 until A's limit is exhausted, and B pays the remaining $40,000 (B pays $140,000 in total).
Policy Limits and Reinstatement
- Per-occurrence limits cap payment for any one loss. Aggregate limits cap payment for all losses in a period (more common in liability and some specialty coverages).
- Sublimits (special limits of liability) cap particular property types within a larger limit.
- Reinstatement: most property limits are restored automatically after a loss is paid, so a second fire later in the year has the full limit available. Some coverages, such as those subject to an annual aggregate, are reduced by payments until renewal. An adjuster confirms which rule applies before assuming remaining limits.
Coinsurance
Commercial property forms (and the homeowners replacement cost condition) penalize underinsurance on partial losses. The formula and the adjuster's strategies are covered in Section 10.2.
Vacancy and Unoccupancy
- Vacant generally means empty of people and contents. Unoccupied means furnished but not lived in or used.
- Standard Fire Policy: the insurer is not liable for loss occurring while a described building is vacant or unoccupied beyond 60 consecutive days, unless otherwise provided in writing.
- ISO commercial property (CP 00 10): if the building has been vacant more than 60 consecutive days before the loss, the insurer will not pay for vandalism, sprinkler leakage (unless the system was protected against freezing), building glass breakage, water damage, theft, or attempted theft. Other covered losses are reduced by 15%. For a tenant, the building is vacant unless it contains enough business personal property to conduct customary operations. For an owner, it is vacant unless at least 31% of its square footage is rented and used, or used by the owner, for customary operations.
- Homeowners forms: vandalism and glass-breakage coverage are withheld once the dwelling has been vacant more than 60 consecutive days. A dwelling under construction is not considered vacant.
Assignment
The Standard Fire Policy states that assignment of the policy is not valid without the insurer's written consent. The insurer chose to insure a particular owner, and a new owner is a new risk. After a loss has occurred, however, the insured's claim to payment is a money right. It is generally assignable without the insurer's consent under ordinary contract principles, although New York practice routes payment through the policy's payee and mortgagee provisions and the Regulation 10 direction-to-pay rules.
Liberalization
If the insurer adopts a revision that broadens coverage without an additional premium, the broader terms automatically apply to existing policies. In ISO homeowners forms, the revision must be adopted within 60 days before or during the policy period. In the commercial property conditions (CP 00 90) the window is 45 days before or during the policy period. Adjusters check for liberalization when a newer edition of a form is broader than the edition on the declarations.
Third-Party Provisions
Standard (Union) Mortgage Clause
The standard mortgage clause makes the insurer's promise to the mortgagee an independent agreement. The mortgagee's recovery is not defeated by the owner's acts, such as arson, fraud, or failure to file a proof of loss. In exchange, the mortgagee must pay premium on demand if the owner does not, file a proof of loss within 60 days after notice that the owner failed to, and report changes in ownership, occupancy, or substantial change in risk that it learns of. When the insurer pays the mortgagee but denies the owner, it is subrogated to the mortgagee's rights. The Standard Fire Policy's own mortgagee paragraph supplies the 10-day cancellation notice, the 60-day mortgagee proof of loss, and the subrogation right (Section 11.3).
Open (Simple) Mortgage or Loss Payable Clause
A loss payable clause simply names another party to receive payment "as interest may appear." The payee's rights are no better than the insured's: if the insured's claim is barred, the payee's claim fails too. For personal property, commercial forms distinguish a loss payable clause from a lender's loss payable clause. The lender's version gives mortgage-clause style protections to a secured lender.
No Benefit to Bailee
Property forms state that the insurance does not benefit any person or organization caring for or handling property for a fee. A dry cleaner, warehouse, or moving company holding the insured's goods cannot use the owner's policy to escape its own liability. After paying the owner, the insurer can subrogate against the negligent bailee.
Certificates of Insurance (N.Y. Ins. Law §§ 501-504)
New York's certificate-of-insurance statute treats a certificate as evidence of coverage, not as a policy. It prohibits preparing, issuing, or requesting a certificate that alters, amends, or extends the coverage of the underlying policy or conveys rights beyond it. Certificates must be on forms promulgated by recognized standard-setting organizations or approved by the Superintendent. For an adjuster, a certificate held by a contractor or landlord never replaces reading the actual policy and endorsements.
A $90,000 covered loss is insured by Policy A with a $150,000 limit and Policy B with a $300,000 limit. Both policies contain pro rata liability clauses. How much does Policy A pay?
Under the ISO commercial property coverage form, the insured building was vacant for 75 consecutive days before a fire caused by a covered peril. How does the vacancy condition affect a covered fire loss?
The named insured deliberately burns the mortgaged building. The policy contains a standard (union) mortgage clause. What happens to the mortgagee's claim?