Do You Understand ISO’s 2017 Commercial Property Form Changes?

Effective Sept. 1, the Insurance Services Office (ISO) filed six important commercial property changes, including:

1) Broadening coverage for water damage in the CP 10 30.

Historically, ISO’s CP 10 30 (Cause of Loss – Special Form) excluded damage due to wear and tear unless the wear and tear resulted in a “specified cause of loss” (a defined term). One exception was the “accidental discharge or leakage of water or waterborne material as the direct result of the breaking apart or cracking of a water or sewer pipe that is located off the described premises…caused by wear and tear.”

However, former language required the water or sewer pipe to be part of a municipal system. The 09 17 edition revises this requirement by removing the reference to municipal systems in favor of a potable water supply and/or sanitary sewer systems operated by either a public or private utility service provider that is granted authority by the regulatory body.

2) Introducing two new endorsements related to building coverage for tenants, and removing one tenant-specific endorsement.

Leases often require commercial tenants to insure or be responsible for certain building property, such as HVAC equipment, building fixtures, permanently installed machinery equipment and building glass.

Two new ISO commercial property endorsements specifically address this tenant exposure:
  • CP 14 01 09 17 Scheduled Building Property Tenant’s Policy: modifies the tenant’s policy to allow them to include certain landlord-owned building property as insured property, provided the property is specifically scheduled. 
  • CP 14 02 09 17 Unscheduled Building Property Tenant’s Policy: modifies the tenant’s policy to allow them to include certain landlord-owned building property as insured property—but unlike the CP 14 01, does not require the insured to specifically schedule the property.

Both endorsements define building property to mean building fixtures and permanently installed machinery and equipment. The only difference is that the CP 14 01 includes building glass in the definition of building property and the CP 14 02 requires a separate limit for building glass.

With the introduction of these endorsements, ISO withdraws the CP 14 70. Use either of these new endorsements to extend building glass coverage.   

3) Revising two protective safeguards endorsements.

This filing revises both the CP 04 11 and CP 12 11.

CP 04 11 09 17 Protective Safeguards

Requirements currently addressed and paragraph “B.” move to paragraph “A.” in the revised endorsement. This change does not alter coverage. However, the new paragraph “B.” restates that failure to comply with the conditions contained in paragraph “A.” results in exclusion of coverage.

Paragraph “A.” also contains a new condition that may negatively impact the application of the endorsement—it requires any automatic alarm or system listed in the endorsement’s schedule to be on at all times.

CP 12 11 09 17 Burglary and Robbery Protective Safeguards
CP 04 11 features all of the above changes, plus a new related condition which enables the carrier to implement additional requirements, such as the need to protect a valuable item even during business hours.

Although these changes appear to result in a reduction in coverage under the CP 12 11, another new provision could actually broaden protection: an exception to the requirement that the insured notify the insurance carrier in the event of suspension or impairment of the protective system. The exception states that such notification is not necessary if protection can be restored within 48 hours and there is at least one watchperson or some other means of surveillance during non-work or any other unoccupied periods.  

4) Creating new waiting period options for the CP 15 45 Utility Services – Time Element endorsement.

Essentially, there is no impact in the breadth of coverage as a result of this filing. The only change is a handful of new waiting period options:
  • No waiting period (former option)
  • 12 hours
  • 24 hours (former option)
  • 48 hours
  • 72 hours
  • 96 hours
  • 120 hours
  • 144 hours
  • 168 hours

5) Developing new optional Ordinance or Law coverage.

One major limitation in the former Ordinance or Law endorsements relates to the building codes to which the endorsements apply—they limit protection to only building codes that are in effect at the time of the loss, which means they don’t pay for increased costs related to new building codes adopted after the loss but before rebuilding or reconstruction begins. New building codes introduced during the interim could result in increased building costs for the insured.

This filing gives insureds the option to purchase protection for the possibility of new building codes. This option is available for the CP 04 05, CP 15 31 and CP 04 38.

6) Introducing a new endorsement for tenants’ improvements and betterments.

Tenants often make changes to the buildings they occupy, which the insurance industry traditionally refers to as improvements and betterments. Although the tenant acquires and installs these additions, they cannot be removed because they legally become part of the real property, which is owned by the landlord.

But even though real property improvements and betterments are part of the building, landlords generally require tenants to be responsible for insuring them—creating a coverage gap.

Assume a building sustains major damage as a result of a covered cause of loss, prompting the local jurisdiction to require the building to comply with current building codes. Traditional Ordinance or Law endorsements and wording apply to only the building owner’s interest in the building, not the tenant’s interest in improvements and betterments.

Since the tenant’s lease requires them to insure the improvements and betterments, the building owner’s policy does not pay to put them back, and certainly not in compliance with current building codes. Because of this, the tenant faces a potentially major out-of-pocket expense.

To close this coverage gap, ISO introduces a new endorsement, the CP 04 26 09 17 Ordinance or Law Coverage for Tenant’s Interest in Improvements and Betterments (tenant’s policy). This endorsement provides the same three coverage parts found in the CP 04 05:
  • Coverage A: coverage for loss to the undamaged portion of the tenant’s improvements and betterments
  • Coverage B: coverage for the cost of demolition
  • Coverage C: coverage for the increased cost of construction

The previously introduced post-loss ordinance or law option is also available within this new endorsement. According to ISO, the coverage and conditions of this endorsement are equivalent to those of the CP 04 05. The major difference between the CP 04 05 and the CP 04 26 is the latter’s terminology related specifically to improvements and betterments.

To prepare agents for these changes, the Big “I” Virtual University (VU) will host a webinar at 1-2:30 p.m. ET next Tuesday, Oct. 24: ISO’s 2017 Commercial Property Changes. Register today to learn how to highlight the positives in this filing, and protect against the negatives.

Chris Boggs is executive director of the VU.