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Week 6 in Property and Casualty Insurance

by: Whitney Smith

Week 6 in Property and Casualty Insurance INS 3203

Marketplace > Mississippi State University > Economcs > INS 3203 > Week 6 in Property and Casualty Insurance
Whitney Smith

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Week 6 on Chapter 5 in Property and Casualty Insurance
Property and Casualty Insurance
Priscilla King
Class Notes
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This 5 page Class Notes was uploaded by Whitney Smith on Saturday February 27, 2016. The Class Notes belongs to INS 3203 at Mississippi State University taught by Priscilla King in Winter 2016. Since its upload, it has received 49 views. For similar materials see Property and Casualty Insurance in Economcs at Mississippi State University.


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Date Created: 02/27/16
Chapter 5 A. Basic Concepts a. Condominium i. A real estate development consisting of a group of units, in which the air space within the  boundaries of each unit is owned by the unit owner, and all remaining real and personal property  is owned jointly by all the unit owners. b. Condominium Unit i. The portion of a condominium owned solely by a unit owner. c. Condominium association i. An entity composed of the unit owners in a condominium to manage the condominium and to own the common elements. d. Common elements i. Areas of a condominium that are jointly owned by all unit owners, including the land on which the buildings are located. B. Enabling Statutes and Documents a. Condominium association agreement i. A document that describes what each condominium unit owner has purchased and clarifies the  rights and responsibilities of the unit owners and the association. C. Bare­Walls, Single­Entity, and All­In Concepts a. An important issue in assessing condominium loss exposures involves the dividing line between the unit  owners’ property interests and the association’s interests. Three general approaches appearing in  condominium statutes and agreements are the bare­walls concept, the single­entity concept, and the all­in  concept. i. Bare­Walls Concept 1. A concept of condominium ownership in which the association has no ownership interest  within the bare walls of each unit. ii. Single­Entity Concept 1. A concept of condominium ownership in which the association is considered to be the  owner of all property contained in the unit as sold to the original purchaser or  replacements of such property if the replacements are of like kind and quality. iii. All­In Concept 1. A concept of condominium ownership that is similar to the single­entity concept except  that the all­in concept includes improvements made by the unit owner, not just the  original installations or replacements of like kind and quality. D. Arranging the Appropriate Coverage a. Some states have condominium statutes that specify the basis of coverage required. In states without such  statutes, the condominium association agreement, the master deed, or the declaration may specify the basis  of coverage required. b. However, if unit owners adopt a similar strategy and insure as broadly as possible, they may be obtaining  expensive and unnecessary duplicate coverage. E. Other Forms of Combined Ownership a. Two additional forms of combined ownership of real property by the occupants – cooperative corporations  and planned unit developments – are similar to condominiums. b. Cooperative corporation i. A form of real property ownership in which the real property is owned by a corporation whose  shareholders are the tenants of the property. c. Planned Unit Development i. A real estate development in which each occupant has exclusive ownership of its own unit and the  land that the structure occupies and a homeowners’ association composed of all the unit owners  jointly owns the surrounding land and structures. F. Condominium Insurance Requirements a. Ideally, the applicable statute or the condominium agreement is clear enough to indicate what insurance the association should carry. However, this is not always the case. b. Two ISO commercial property forms have been designed especially for condominium property exposures: Chapter 5 i. Condominium Association Coverage Form ii. Condominium Commercial Unit­Owners Coverage Form A. Condominium Association Coverage Form a. Building i. Although the building coverage of the Condominium Association Coverage Form closely  resembles the building coverage of the BPP, they differ in their treatment of fixtures,  improvements, alterations, and appliances contained within individual units (including, but not  limited to, those used for refrigerating, ventilating, cooking, dishwashing, laundering, and  housekeeping). b. Your Business Personal Property i. A condominium association might need insurance to cover personal property that does not already fall within the scope of building coverage. c. Personal Property of Others i. The Condominium Association Coverage Form’s coverage for personal property of others is the  same as that of the BPP. d. Conditions i. There are several important differences between the Condominium Association Coverage Form  conditions and the BPP’s conditions, which include these: 1. Loss Payment a. The Loss Payment condition contains an additional clause stating that if the  association has designated an insurance trustee, then the insurer may pay  covered claims to the designated insurance trustee. 2. Unit­Owner’s Insurance a. The Unit­Owner’s Insurance condition states that the association’s policy is  primary if a unit owner also has coverage applying to the same property. 3. Waiver of Rights of Recovery a. In the Waiver of Rights of Recovery condition, the insurer agrees not to  subrogate against any unit owner. e. Condominium Addition Provisions Endorsement i. Act or Omission 1. No act or omission by any unit owner will void the policy r bar recovery unless the unit  owner acts on behalf of the association. ii. Expanded Waiver of Right of Recovery 1. Rights of recovery are waived, beyond the condition in the coverage form, to include  members of unit owners’ households and members of the board of directors when acting  within the scope of their duties. iii. Notice of Cancellation or Nonrenewal 1. The insurer will provide at least thirty days’ written notice to the first named insured of  policy cancellation or nonrenewal. iv. Additional Protection for Mortgage holders 1. The insurer will give thirty days’ advance notice of cancellation or nonrenewal to each of the mortgage holders. If the condominium is terminated, the insurer will pay covered loss to buildings or structures to each mortgage holder shown in the declarations in their order of precedence. B. Condominium Commercial Unit­Owners Coverage Form a. Form that covers business personal property exposures of commercial (nonresidential) condominium units. b. Loss Assessment Coverage i. Coverage for a commercial condominium unit­owner’s share of any assessment made by the  association against all unit owners because of physical loss to condominium property caused by a  covered cause of loss. c. Miscellaneous Real Property Coverage Chapter 5 i. Coverage for real property (such as a storage shed or garage building) that pertains only to the  named insured’s condominium unit or real property that the named insured has a duty to insure  according to the condominium association agreement. d. Covered Property i. A condominium unit owner generally has no need for full building insurance in its own name, so  the form includes coverage only for You Business Personal Property and Personal Property of  Others. e. Coordination With Association Coverage i. The Condominium Commercial Unit­Owners Coverage Form contains an exclusion that  coordinates the unit owner’s coverage with the condominium association’s coverage.  f. Optional Coverages i. The Condominium Commercial Unit­Owners Coverages endorsement contains provisions for two  optional coverages often needed by condominium unit owners: loss assessment coverage and  miscellaneous real property coverage. The insured can select either or both of these optional  coverages. C. Builders Risk Coverage Form a. Eligible Property and Insureds i. Under the Commercial Lines Manual (CLM) rules, the BRCF may be used to insure any building  in the course of construction, including buildings such as farm buildings and dwellings that will  not be eligible for coverage under the BPP when construction is completed. b. Covered Property i. The BRCF covers the building or structure being built, building materials and supplies intended to become a permanent part of the building, and temporary structures such as scaffolding and forms. c. Additional Coverages i. The BRCF contain four of the six additional coverages of the BPP – debris removal, preservation  of property, fire department service charges, and pollutant cleanup and removal. d. Covered Causes of Loss i. Like the BPP, the BRCF must be combined with an ISO causes of loss form (Basic Form, Broad  Form, or Special Form), plus any necessary endorsements, to be a complete policy. e. Completed Value Approach i. The BRCF is designed to be issued, at policy inception, for an amount of insurance equal to the  building’s full­completed value. This method of providing builders risk coverage is referred to as  the completed value approach. f. Need for Adequate Insurance i. The Need for Adequate Insurance condition is, in effect, a 100 percent coinsurance clause in  which the amount of insurance that should be carried is based on the value of the building on the  date it will be completed. The formula is as shown: Limitof insurance Amount payable= ( Completedvalue X Loss −)eductible g. Valuation i. The BRCF contains a standard valuation condition that provides coverage on the  h. Builders Risk Reporting Form i. Another method, less commonly used, is to write builders risk coverage on a value reporting basis. By adding the Builders Risk Reporting Form endorsement, the BRCF can be changed to a value  reporting basis. i. When Coverage Ceases i. The BRCF is intended to cover buildings during the course of construction only. When the work is completed, another policy, such as the BPP or a homeowners policy, is needed. The BRCF  therefore contains an explicit condition of when coverage ceases. ii. Coverage ceases immediately when any of these events occur: 1. The named insured’s interest in the property ceases. 2. The property is accepted by the purchaser. Chapter 5 3. The named insured abandons the project with no intention of completing it. D. Standard Property Policy a. A commercial property policy form for covering buildings and business personal property on restricted  terms. b. Covered Property i. The declarations indicate what limits of insurance, if any, apply to buildings, business personal  property, and property of others. ii. Coverage applies on an actual cash value basis. c. Covered Perils i. Considering the fact that the SPP is used to insure distressed property risks, flexibility in limiting  the covered perils is an important feature of the policy. d. Conditions i. The SPP contains three conditions that result in more restrictive coverage than under the BPP 1. Vacancy and unoccupancy 2. Increase in hazard 3. Cancellation E. Legal Liability Coverage Form a. A commercial property coverage form that provides legal liability coverage on buildings or personal  property of others in the insured’s care, custody, or control. b. Insuring Agreement i. The insurer agrees to pay those sums that the named insured becomes legally obligated to pay as  damages because of direct physical loss or damage, including loss of use, to covered property  caused by accident and arising out of any covered cause of loss. c. Exclusions i. An applicable causes of loss form, shown in the declarations, expresses the covered causes of loss, exclusions, and limitations for the Legal Liability Coverage Form. ii. All of the other exclusions of the causes of loss forms apply to the Legal Liability Coverage Form, except these: 1. Ordinance or Law 2. Governmental Action 3. Nuclear Hazard 4. Utility Services 5. War and Military Action d. Legal Liability Coverage Form Versus CGL Coverage i. The commercial General Liability Coverage Form excludes coverage for damage to property of  others in the insured’s care, custody, or control. e. Premium Rates i. The rate for the Legal Liability Coverage Form is lower than the rate for direct property insurance  because the insurer is obligated to pay only when the insured is liable for the damage. f. Additional Insureds i. These types of entities cannot be added to the Legal Liability Coverage Form as additional  insureds: 1. Tenants, lessees, concessionaires, or exhibitors in policies covering general lessees,  managers, or operators of premises. 2. Contractors or subcontractors, in policies covering tenants or lessees of premises. g. Insurance to Value i. The Legal Liability Coverage Form has no coinsurance condition. This omission is appropriate  because the insured frequently does not know the value of property of others in its care, custody,  or control. F. Leasehold Interest Coverage Form a. A commercial property coverage form for insuring a tenant’s financial losses resulting from the  cancellation of the tenant’s lease because of damage to the premises by a covered cause of loss. b. Examples of Loss Exposure Chapter 5 i. Cancellation of a lease may cause a lease (tenant) to suffer a financial loss in any of these  circumstances: 1. The lease has a lease at a rental rate much lower than the current rental value of  comparable premises. 2. The lessee has sublet the premises to another at a profit. The loss would be the loss of the profit margin for the duration of the lease. 3. The lessee paid a bonus to acquire the lease. 4. The lessee has paid advance rent that is not recoverable under the terms of the lease in the event of cancellation. 5. The lessee has installed improvements and betterments. c. Characteristics of the Coverage Form i. The Leasehold Interest Coverage Form covers the total amount of net leasehold interest of the  insured for the unexpired period of the lease. d. Why Leasehold Interest Is Seldom Insured i. Although leasehold interest insurance fills a need for some insureds, such insurance is seldom  bought, perhaps because many risk managers and producers are unaware it exists.


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