Christopher J. Boggs | Academy Journal Blog | December 14, 2015
First, let’s be clear – this is only a SMALL sampling of simple questions agents and underwriters fail to ask! There are dozens of simple, common sense questions that are often skipped – why remains a mystery.
Second, this article does not provide every answer or option available for each of these questions. This is not intended as a text book, the point of this short article is to raise your awareness of the need to ask questions, even or especially those that may seem basic. Because if you don’t ask, the lawyers will (and juries will be very interested in the simplicity of the questions).
These seven questions relate specifically to commercial insureds, but there are personal lines questions just as basic. Feel free to add your simple questions no one asks in the comments section of this article; maybe a follow-up will result. Let’s begin.
Who owns the building?
Sounds familiar. Like the first question, this seems like a question every agent and underwriter would ask when writing real property coverage. But, like the first question, the agent and underwriter just assume that because the building is on the existing policy or is being added to the policy, it must be owned by the named insured.
Guess what, that’s a bad assumption. Many times the adjuster discovers, after the loss, that the building is actually owned by the president of the company (or his/her spouse). And upon further research, the adjuster discovers that there is no lease between the building owner and the named insured requiring the named insured to insure the building.
In short, there is NO insurable interest on the part of the named insured. Insurable interest exists when a person or entity can be financially harmed due to a loss and arises from either ownership, legal liability, or contract. Since the named insured has none of these, there is no coverage in the policy.
There needs to be a lease agreement between the building owner(s) and the named insured requiring the named insured to insure the buildings. The lease creates the necessary insurable interest. The true owner is can be protected for its interest in one of two ways:
- Attaching the CP 12 19: Additional Insured – Building Owner; or
- Some carriers have proprietary endorsements that allow the building owner to be a named insured for building coverage only.
“We have ‘x’ buildings on the policy, is that correct?”
Errors and omissions (E&O) underwriters and attorneys love to tell stories about the millions of dollars of buildings that were never listed on the policy – one story involved an entire airplane hangar that was missed (that’s a pretty big building). The “x” could be any number; “We have 12 buildings on the policy, is this correct?”
A simple question, but one that is probably overlooked on a regular basis. Yes, the insured may have provided you with a building schedule, but still ask. “Your schedule lists 12 buildings, is that correct?” The insured makes mistakes as well. And if you are coping the information from another agent, don’t assume he/she was any good – ask the question.
Of course, this question needs to be asked only if you don’t tour and diagram the property(ies) yourself. And if you can’t get there, use Google Earth (or something else) – those satellites show an amazing amount of detail.
“Do you have any inventory (stock) that could spoil or die if you lost power?”
Granted, this is probably an operation-specific question, but you might be surprised how many insureds should be asked this question. Examples of operations that have “perishable” inventory include:
- Restaurants
- Bakeries
- Ice cream shops
- Fruit and vegetable operations
- Cheese stores
- Grocery stores
- Convenience stores
- Specialty shops (like butchers)
- Florists or greenhouses
- Pharmaceutical operations
- Food processing plants
- Cigar stores
- Tropical fish stores (or pet shops that sell them)
- Blood banks and similar operations
- Laboratories
- Cold storage warehouses
The commercial property policy specifically excludes loss resulting from the loss of power – however caused and wherever it occurs (on or off premises). Insureds that could suffer financial loss due to spoilage or death arising out of the loss of power need to close this coverage gap using the Spoilage Coverage endorsement (CP 04 40).
Unlike the Utility Service endorsements (CP 04 17 and CP 15 45) and Equipment Breakdown coverage, the Spoilage Endorsement does not require a covered cause of loss to result in a power loss. If the power goes off (outside of the insured’s control), there is coverage for loss due to spoilage or death.
Don’t misunderstand, the Utility Service endorsements and the Equipment Breakdown coverage are not replaced by the Spoilage endorsement as each fills different coverage gaps. But to get the broadest spoilage loss protection requires the CP 04 40. (For more information on the Spoilage endorsement and the Utility Service endorsements, see Chapters 10 and 11 in “Wow! I Never Knew That!”)
“How do your lease payments compare to the current real estate market?”
If the insured tenant’s lease payments are somewhat lower than surrounding market conditions, the tenant has what is referred to as a “favorable lease.” Losing a favorable lease can result in an unplanned increase in operational expenses for YEARS following the event that resulted in the loss of the lease. The Leasehold Interest Coverage Form (CP 00 60) insures these additional expenses.
Provisions in most lease agreements allow the landlord to cancel a lease following a major property loss. Presumably this is to allow the tenant the opportunity to get out of the lease and move on without penalty and being stuck with an untenable property. However, landlords who have extended a favorable lease, for a myriad of reasons, can use the provisions to get themselves out of a lease that is no longer beneficial to them (because the local real estate market has improved).
Four expenses covered by the Leasehold Interest Coverage Form are:
- Tenants Lease Interest: This is the difference between the amount actually paid by the tenant and the market value of the property (again, this could be thousands of dollars over the term of the lease);
- Bonus Payments: This is nonrefundable money paid by the tenant to “purchase” the favorable lease.
- Tenant’s Improvements and Betterments: These are additions and upgrades made by the tenant to the real property that cannot be removed and thus become the property of the building owner. This part extends coverage only if these improvements and betterments aren’t insured under the property section; and
- Prepaid Rent: This is rent the tenant paid in advance that is not returned.
Before the CP 00 60 responds, three conditions must be met: 1) there must be direct property damage; 2) the damage must result from a covered cause of loss; and 3) the loss must lead to the cancellation of a favorable lease.
If your insured has a favorable lease, you need to insure it to avoid the possibility of a big out-of-pocket expense. The only way you will know if this possibility exists is to ask the question.
This is but a quick overview of this coverage. More detailed information is found in Chapter 12 of “Wow! I Never Knew That!”
“Do you now or have you ever done business as a limited liability company (LLCs) or partnerships? Are you now or have you ever been part of a joint venture?”
What is the first question asked by an adjuster after the loss, “Is the person or entity suffering or causing the loss, injury, or damage an insured?” If the answer is “No,” there is no need to go any further – there is NO coverage.
Commercial general liability (CGL) policies specifically exclude coverage for any LLCs, partnerships, or joint ventures not specifically listed as a named insured on the policy. Based on the operations of the insured and the completed operations theory of a particular state, the insured may have no coverage for past operations. Further, if there are any current LLCs, partnerships, or joint ventures, there is no coverage for them either.
Two simple questions that can avoid an uncovered loss. Your E&O underwriter will smile broadly and sleep well at night if you ask these questions.
“What year was your building built?”
Wait, this question is so basic it is already on the application. It is not the question that is basic, it is what should be done with the information that is basic.
Few commercial structures fully meet the applicable jurisdictional building codes and regulations to which they are subject. Federal, state, and local building codes are routinely reviewed, revised and updated, usually the result of newly developed technology or advances in construction methodologies or materials. The older the structure, the more “out of compliance” it likely is.
When constructed, the building was in “perfect” compliance with the building code. But in as little as five to 10 years, the same building may now be noncompliant in several aspects of its design and construction. The time required to move from “in” to “out” of compliance can range from only a few months to several years depending on the frequency and nature of changes to local ordinances or laws.
All three commercial property causes of loss forms (basic, broad, and special) specifically exclude the increased cost of rebuilding, repair, or remodeling created by the application of an adverse building code. Likewise, the business income policy specifically excludes any increased loss of business income (as defined in the policy) resulting from the lengthened “period of restoration” due to construction delays brought about by the enforcement of such codes.
Noncompliance with building codes has the potential to cost a building owner many thousands of dollars in out-of-pocket expenses following a “major” property loss.Ordinance or Law Coverage is designed to fill coverage gaps existing in the unendorsed commercial property policies and business income forms related to the additional costs and time associated with the enforcement of changes in local building codes.
When you know: 1) how old the building is; and 2) the amount of damage required to forfeit “grandfather” protection related to building codes in the jurisdiction, you simply have to ask the insured one question.
“Would you like the cost to rebuild your structure to current building code following a major loss to be covered by your insurance policy?”
Certainly the insured will ask, “Why wouldn’t it?” You now have the opportunity to explain the gaps in coverage and how to fix them.
Voila, you used the most basic of information to protect your insured from a major out-of-pocket expense. A simple question and answer with significant implications.
Obviously, this is only a minimal description of Ordinance or Law coverage. More detail is available in the Academy course, “Understanding and Explaining Ordinance or Law Coverage” or in Chapter 8 of “Wow! I Never Knew That!”