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Taking Care Of Business: Commercial Loss Considerations


January 31, 2010   by


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Although loss investigation activities for commercial risks are similar to those for personal lines, the nature of the property is different, as are the wordings used in commercial policies.

The following review takes the standard Commercial Property Broad Form as a starting point. This form covers against all risk of direct physical loss or damage, subject to some exclusions. But it is always important to check for variances in policy forms: endorsements may limit or extend coverage, and manuscript policies are sometimes negotiated for large commercial risks.

Commercial fire losses

At a commercial fire scene, as at any other, an adjuster should examine where the fire originated if circumstances permit.

In restaurants, fires often originate with cooking equipment, which may include specialized appliances such as deep fryers, grills or wood-fired pizza ovens. Such appliances are usually equipped with devices to control the fire exposure. The history, maintenance and cleaning schedules for the equipment and devices should be checked, and the adjuster should ask the insured how the equipment was used on the day of the fire. Note the power source for the stoves so that it can be compared to the information provided on the application for insurance. If it appears that any cooking equipment may have contravened the building code, an experienced engineering consultant should be asked to document the situation.

Installed fire-suppression equipment sometimes fails. In this case, sub-rogation may be possible against the contractors who inspected and tested the equipment for the owners, as well as against the equipment suppliers and installers.

Water damage losses

When water damage is reported on a commercial risk, determining the cause of the damage is key to the investigation. Water-related perils typically excluded under the Commercial Property Broad Form are:

• Flood, including “surface water,” waves, tides, tidal waves, tsunamis, or the breaking out or overflow of any natural or artificial body of water. This exclusion does not apply to loss or damage caused directly by resultant fire, explosion, smoke, leakage from “fire protective equipment,” leakage from a water main, or property in transit.

• Seepage, leakage or influx of water derived from natural sources through basement walls, doors, windows or other openings, foundations, basement floors, sidewalks or sidewalk lights, the backing up or overflow of water from sewers, sumps, septic tanks or drains, or the entrance of rain, sleet or snow through doors, windows, skylights or other similar wall or roof openings, all unless concurrently and directly caused by a peril not otherwise excluded.

Named peril policy wordings, by contrast, generally cover only water that has escaped from fire protection equipment, such as sprinklers.

Loss of stock

When manufacturers lose stock to an insured peril, the level of indemnity depends on the state of the stock. On finished goods and on goods partially manufactured, indemnity is restricted to the cost of materials plus the cost of labour and other incidental charges necessary to return the product to its undamaged state. Endorsements may amend this coverage to provide an agreed actual cash value for finished goods.

Stock that has been sold but awaiting delivery is usually valued at the price for which it was sold, less all discounts and charges to which it would have been subject had no loss occurred. Other unsold stock is valued at the factory selling price plus freight and handling charges, less all discounts and charges to which it would have been subject.

Stock declaration insurance forms provide coverage on an actual cash basis and losses are paid according to the stock values reported. The insured is penalized in proportion to the amount of any underinsurance. The last reported value is compared to the actual true value of all stock insured at the time of the loss.

Construction-related losses

Builders risk or course of construction policies are designed specifically to insure property that is under construction. They typically cover the owners, the general contractor and any subcontractors, and usually contain a clause that waives all rights of subrogation against any party insured by the policy.

Under all-risks policies, adjusters should always look at the proximate cause of the loss to determine coverage, not necessarily at the consequences. Under a builders risk broad form policy, insurers provide coverage for the cost of replacing, repairing, constructing or reconstructing the property on the same project site with new materials of like, kind and quality. Under either policy, adjusters should note any unforeseen problems that arose after the project began — such as poor soil conditions or changed water table levels — that might provide a motive for insurance fraud.

Contractor’s equipment floater (CEF) policies are non-standard wordings covering large equipment used for road building and maintenance, excavation, construction, etc. Smaller pieces of equipment and hand tools may also be insured on this form. Policies generally cover owned machinery and equipment while it is in use on the job, in transit between jobs, undergoing repairs in repair shops, or being stored. They usually exclude losses that are caused by exceeding the rated capacity of the equipment. Property is often identified on a schedule, or coverage may be provided on a blanket basis but restricted to a specified limit per item. Limitations often apply to coverage for rented equipment and for a single location. Coinsurance clauses may penalize an insured for not insuring property to value.

Installation floaters insure fixtures (such as cabinetry) or equipment (such as heating, air conditioning, plumbing or production equipment) to be installed on a job against named perils or against all risks under a broad form wording. Wordings are often customized to each insured and each operation. Contractors who install electrical, refrigeration, mechanical or other equipment may have testing coverage added to the policy wording.

Boiler and machinery losses

Boiler and machinery policies cover direct losses caused by accident to equipment specifically insured under the policy. The term “accident” is defined as a sudden and accidental breakdown of the equipment, which results in simultaneous physical damage to it, and the physical damage must require the repair or replacement of the equipment. The equipment insured may include pressure equipment such as boilers, hot water tanks, air tanks, steam cookers and refrigeration and air-conditioning vessels and piping. Mechanical and electrical equipment, such as compressors, pumps, blowers, fans, engines, electric motors, generators, electrical panels, turbines and transformers may also be included.

Property policies cover loss from fire or smoke and from water used to extinguish a fire. They also cover loss caused by a combustion explosion. When fire, smoke or a combustion explosion causes damage to boiler and machinery equipment, the boiler and machinery policy excludes the loss and the property policy covers it instead. A variety of other losses are treated similarly. An exception to this division of coverage arises when arcing occurs within an electrical item and causes a fire: It may be difficult to separate types of damage within the equipment, so the boiler and machinery insurer and the property insurer share the loss to the equipment.

Boiler and machinery coverage is a specialized area, and specialists usually attend to these losses. A property adjuster discovering a boiler and machinery loss should notify the insured, the insurer or the insured’s broker (depending how coverage was arranged) so that the boiler and machinery insurer is put on notice.

This article is based on excerpts from the study material in the Claims Professional Series of applied cours
es -a core
of the CIP Program that helps adjusters learn the functional knowledge and skills required of their profession.


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