ISO Commercial Property Changes: Which Coverages Are Unchanged?

The Insurance Services Office’s latest update to its commercial property policy forms and endorsements includes several revisions that are expected to result in no change to some coverages, while others are being reduced, broadened or introduced as a new option.

The forms have an edition date of October 2012 and will be effective in most states on April 1. Not all companies are adopting them, so check with your carriers to find out if they’re using the new forms.

Below are some of the revisions that leave certain coverages unchanged:

Changes in the Policy Form

Earth Movement Exclusion
The policy change adds tremors and aftershocks to the earth movement exclusion. Volcanic eruptions within 168 hours constitute a single occurrence. The exclusion applies whether earth movement is caused by an act of nature or is caused otherwise.

Fire Department Service Charge Coverage
A $1,000 limit or selected higher limit applies to each described premises. The revision clarifies the limit applies, regardless of the number of responders, or the number or type of services performed.

Business Property in Described Structures
Your business personal property and personal property of others covers property when located in a described building. The revision clarifies that is applies to personal property in a structure as well.

Water Damage Exclusion
In response to claims from Hurricane Katrina, the water damage exclusion was revised in 2007 by adding a mandatory CP 10 31 Water Damage Exclusion endorsement. Now the wording is incorporated into the policy. Because of the change, CP 10 32 is withdrawn.

Ordinance or Law Exclusion
The current ordinance or law exclusion applies to requirements to comply with building codes, whether the ordinance or law is enforced in absence of a physical loss or following a physical loss. Building code enforcement, which incorporates code compliance as a necessary element, is typically handled through the permit process in course of construction, repair or renovation.

The wording is revised so the exclusion applies to enforcement of or compliance with any ordinance or law. Also revised are the “additional coverage” of increased cost of construction, the loss payment and valuation conditions and the replacement cost optional coverage and “period of restoration” in the time element forms.

Covered Causes of Loss
The special cause of loss form provides “open perils” coverage, subject to exclusions and limitations. In the current form, covered causes of loss are described as “risks of direct physical loss”. Since the term “risks of” can broaden coverage beyond just a direct physical loss, the phrase is being deleted.

Changes to Endorsements

Exclusion of Loss Due to by-Products of Product or Processing Operations (Rental Properties) (CP 10 34)
A landlord incurs certain business risks associated with renting property and has the ability to enter into a lease that holds the tenant responsible for damage from a variety of causes. The insurance contract is not intended to compensate a landlord for the expected consequences of usage of the premises as intended. For example, if a restaurant leases property, it’s expected that there may be grease damage to the walls from its cooking operation.

Another business risk is the rental of property for an illegal purpose. The situation that is an impetus for this endorsement is using a rental premises as a methamphetamine “cooking” operation, damage from which can be likened to residue from a restaurant’s cooking operation.

The scenario: An insured filed for cleanup expenses after a meth lab damaged his rental house. The carrier denied the loss under the pollution exclusion. The court held for the insured, finding the policy covered the cleanup expenses and stating the damage caused by the meth lab operation is vandalism.

Pollution is excluded, unless discharged by a “specified cause of loss”—vandalism is one of the specified causes. The endorsement is being introduced to reinforce policy intent. It will be attached to policies issued to owners and tenants of rental premises.

There is no change in intended coverage, but may impact individual insurers based on past claims and loss settlement history.

Utility Services–Direct Damage (CP 04 17); Utility Services–Time Element–Overhead Transmission Lines (CP 15 45)
Utility services coverage can be provided by endorsement for both direct losses and business interruption losses. Within the endorsements, utility services are divided into categories: water supply, communication supply (including or not including overhead transmission lines) and power supply (including or not including overhead transmission lines).

In power industry vernacular, the terms “transmission lines” and “distribution lines” have different meanings. The utility services endorsements are being revised to reinforce that reference to transmission lines includes all lines that serve in the transmission of power or communication service, including lines that may be identified as distribution lines.

Payroll Limitation or Exclusion (CP 15 10)
Business income coverage forms provide coverage for continuing normal operating expenses, including payroll. The CP 15 10 Ordinary Payroll Limitation or Exclusion provides the means to limit or exclude payroll relating to all employees, except managerial employees and contract employees. That reduces the amount of insurance needed to meet the coinsurance requirement.

The endorsement is being revised to provide a way to limit or exclude payroll expense of any category of employee or individual employee. Since applicability will no longer be restricted to non-managerial employees, the term “ordinary payroll expense” and its definition are being removed. In addition, the word “ordinary” is being removed from the title of the endorsement.

Building number and premises number entry fields are also being added. As a consequence of removing the term “ordinary payroll expense” from the endorsement, the coinsurance condition in the CP 00 30 and CP 00 32 and business income report/work sheet are being revised to make the same change.

The revised endorsement serves the same function as the previous endorsement, but can be used to address any category or employee on the insured’s payroll.

Protective Safeguards (CP 04 11)
The CP 04 11 Protective Safeguards endorsement is being introduced to replace the IL 04 15 Protective Safeguards endorsement. The new endorsement pertains only to property insurance. It contains the same provisions as the IL 04 15 and adds a symbol and description to recognize hood and duct fire extinguishing systems.

Ted Kinney is director of education and technical affairs for the Alabama Independent Insurance Agents.

This is the last story in a three-part series on 2012 revisions to policy forms and endorsements. It also featured stories on changes that broaden coverage and revisions represent new coverage options.