Cpcu 551-1

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Firms must manage four categories of loss exposure

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Property, Liability, personnel, and net income loss exposure

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Property loss exposure

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the possibility of damage to property in which the firm has a financial interest.

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Liability loss exposure

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the possibility that a claim will be made against the firm by someoneseeking money damages or some other legal remedy

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Personnel loss exposure

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the possibility that a key person in the firm will die, retire, resign, orbecome disabled, depriving the firm of hard-to-replace skills and knowledge

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Net income loss exposure

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the possibility of a reduction in net income

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Firms manage loss exposures by applying the six-step risk management process

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Identify loss exposure, analyze loss exposure, examine the available risk management techniques, choose the best technique, implement the techniques, and monitor the results

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Identify loss exposures

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Identify loss exposures in all four loss exposure categories

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Analyze loss exposures

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Estimate the frequency and severity of loss for each exposure

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Examine the available risk management techniques

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Consider the costs of each riskmanagement technique that could be used to manage each loss exposure

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Choose the best technique

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Select the most effective and economical technique

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Implement the technique

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Put the chosen technique(s) into action

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Monitor the results

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Monitor the results of those techniques and revise the risk managementprogram as needed

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Risk management techniques are divided into

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risk control and risk financing techniques

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There are six risk control techniques

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Exposure Avoidance, Loss Prevention, Loss reduction, Separation, Duplication, and Diversification

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Exposure avoidance

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Abandon or avoid the loss situation, thus eliminating all possibility of loss.(Don’t perform operations with a high risk of fire, such as welding and spray painting.)A firm that avoids ever incurring a particular loss exposure is practicing proactive avoidance.A firm that eliminates an existing loss exposure is practicing abandonment.

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Loss prevention

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reduces loss frequency. (Build a masonry home, not a wood frame home.)

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Loss reduction

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reduces loss severity. (Install a sprinkler system.)

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Separation

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disperses resources over two or more locations.(Have school bus drivers take their buses home at night instead of parking them all in one garage.)

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Duplication

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creates copies or spares of important items and stores them at separate locations.(Photocopy contracts. Store spare parts. Create independent facilities.)

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Diversification

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spreads loss exposures over several projects, products, markets, and/or regions.(Create more than one product. Buy stocks from companies in different industries.)

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There are two risk financing techniques

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Retention and Transfer

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Retention

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generates funds from within the firm to pay for losses

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Transfer

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generates funds from outside the firm to pay for losses, through either insurance ornoninsurance transfer.

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RISK CONTROL FOR COMMERCIAL PROPERTY LOSS EXPOSURES

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Specific types of risk control techniques apply to property losses caused by 1 fire; 2 burglary, robbery, and employee theft; 3 explosion; 4 windstorm;5 flood; and 6 earthquake

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1 Fire exposures

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Fire consists of three elements: a heat source, oxygen, and fuel.A fourth element, an uninterrupted chain reaction, allows a fire to grow and spread.Fire prevention focuses on removing one of those four elements, often through fire-resistantbuilding construction. Pre-loss fire control techniques include controlling heat sources,separating heat sources from fuels, and using fire stops, fire walls, and fire divisions to help stopfires from spreading. Internal fire extinguishment methods include sprinkler systems, portablefire extinguishers, standpipe systems, guard services, and fire brigades.External fire extinguishment methods include public fire departments.

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2 Burglary

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is theft with forcible entry

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2 Robbery

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is theft by threat or use of bodily violence

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2 employee theft exposures

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is theft committed by an employee against his employer

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2 To control theft losses

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prevent or delay the criminal’s access, detect him, and/or identify him

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2 Methods of controlling employee theft include

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accounting controls, access controls, backgroundchecks, and separation of duties.

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3 Explosion exposures

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Fire-type explosion loss control measures include fire loss controlmeasures, suppression equipment which rapidly reacts to a pressure increase, and venting thatdirects pressure to open air or a solid barrier. Pressure vessel explosion loss control measuresinclude inspection, maintenance, proper operation, and safety release valves.

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4 Windstorm exposures

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Use wind-resistant construction, install shutters and blinds, maintain roofsand walls, secure outside property, and keep trees and utility poles away from buildings

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5 Flood exposures

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Avoid high water and low ground, build dams, build channels and open areas to direct and hold flood waters, sandbag during floods, install pumps to remove water, use equipment than resists dampness and flood water pressure, and develop plans to move property to higher ground.

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6 Earthquake exposures

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Avoid earthquake-prone areas and use earthquake-resistant construction,which can be either a rigid design that will resist earthquake forces or a flexible design that willmove with and absorb earthquake forces.

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Commercial property insurance

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covers property loss exposures for businesses and nonprofit organizations

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COMMERCIAL INSURANCE POLICY FORMATS

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1 Multiline (package) policy,2 monoline policy, 3 standard form, 4 nonstandard form, 5 commercial package policy (CPP), 6 businessowners policy (BOP), and 7 output policy

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1 Multiline (package) policy

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covers two or more lines of business

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2 Monoline policy

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Covers one line of business.

Many firms cover most of their property and casualty loss exposures through a multiline policy,then add one or more monoline policies to provide coverage not available through the multilinepolicy.

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3 Standard form

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is developed by the ISO (Insurance Services Office, Inc.), the AAIS (AmericanAssociation of Insurance Services), or another insurance advisory organization.

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4 Nonstandard form

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is developed independently by an insurer or broker

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5 Commercial package policy (CPP)

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is a multiline policy with two or more ISO commercial linescoverage parts.Under the ISO’s Commercial Lines Manual (CLM) rules, a CPP requires one building and/orbusiness personal property form and one commercial general liability form.

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5 Each coverage part includes

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declarations forms, a coverage form, sometimes a generalconditions form, and any applicable endorsements.Each coverage part is combined with a common declarations page and a common policyconditions form to form a policy.

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6 Businessowners’ policy (BOP)

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is a freestanding package policy that provides property andliability coverages for small to medium-sized businesses.

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6 Typical BOP coverages include

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building and business personal property, business income and extra expense, and the equivalent of commercial general liability. The insurer benefits from reduced adverse selection and handling costs and simpler rating. The insured benefits from convenience and lower premiums.

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7 Output policy

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combines several commercial property coverages into one policy form with associated endorsements.

Compared with standard commercial package policy forms, the output policy offers extraproperty coverage enhancements and broader coverage.

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COMMON POLICY CONDITIONS

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are applicable to all coverage parts under a CPP. Cancellation, Changes, Examination of books and records, inspection and surveys, premiums, and transfer of rights and duties

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Cancellation

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The insured can cancel at any time by sending written notice to the insurer.The insurer can cancel at any time by sending written notice to the first named insured, with 10days’ notice in cases of nonpayment of premium and 30 days’ notice for all other reasons.The insurer sends any premium refund to the first named insured.In almost all states, state law supersedes the cancellation condition.

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Changes

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Only the first named insured has authority to request changes.The policy can only be changed by written endorsement issued by the insurer.In practice, verbal changes not yet confirmed by written endorsement are usually binding

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Examination of books and records

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The insurer has the right to audit the insured’s books andrecords relating to the policy during the policy period and up to three years after termination

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Inspections and surveys

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The insurer has the right to inspect the insured’s premises andoperations during the policy period.

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Premiums

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The first named insured is responsible for paying the premium and receives any returnpremium due from the insurer

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Transfer of rights and duties

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The insured cannot transfer rights or duties under the policywithout the insurer’s written consent. If the named insured dies, the insured’s rights and duties areautomatically transferred to the insured’s legal representatives

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EO 4

COMMERCIAL PROPERTY CONDITIONS

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are applicable to all commercial propertycoverage forms under a CPP

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policy condition

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is any provision that qualifies an otherwise enforceable promise in an insurance policy

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Concealment, Misrepresentation, or Fraud

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Coverage is void if you commit related fraud orintentionally conceal or misrepresent any material fact related to any coverage, claim, or yourinsurable interest.

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Control of Property

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Any act of neglect by anyone to your property when it is out of your controlwill not affect coverage.

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Insurance Under Two or More Coverages

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We will not pay more than the actual amount ofyour loss, no matter how many coverages apply

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Legal Action Against Us

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You can’t sue us unless you’ve complied with all the coverage partconditions and you bring suit within two years of the date of loss

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Liberalization

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If we broaden coverage without additional premium within 45 days beforepolicy inception or during the policy period, you have the broadened coverage

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No Benefit To Bailee

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No one else having custody of covered property benefits from thisinsurance. Coverage continues for you. Coverage is not voided if you are the bailee of propertythat is damaged. We may seek recovery from any negligent third party.

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Other Insurance

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If the other policy has the same terms, conditions, and provisions as the BPP,the other insurer shares losses with us on a pro rata basis.If the other policy has different terms, conditions, and provisions, we’ll pay on an excess basis

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Policy Period, Coverage Territory

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Policy period is shown by the dates listed in the declarationspage. Coverage begins at 12:01 AM standard time at your address.Coverage territory is these US, Puerto Rico, and Canada.

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Transfer of Rights of Recovery Against Others to Us

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After we’ve paid, we reserve the right torecovery from a responsible third party. You can not impair our right of subrogation.You may waive your rights before a loss.

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After a loss, you may waive your rights only against

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a. another insured under this policy,b. a business you own or control,c. a business that owns or controls you, and/ord. your tenant

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OTHER COMMERCIAL PROPERTY INSURANCE CONDITIONS

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1 Valuation (ACV, RC, Selling Price),2 Coinsurance, 3 Duties in the event of loss or damage, 4 Appraisal, 5 Loss Payment, 6 Recovered Property, 7 Vacancy, 8 Mortgage holders Condition, 9 Loss Payable Provision Endorsement

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1 Valuation

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The building and personal property (BPP) coverage form uses three valuation approaches: AC, RCV, Selling Price

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1 Actual cash value (ACV)

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replacement cost minus depreciation.Replacement cost is determined at the time and location of loss; it is not original cost.Depreciation reflects the property’s remaining useful life; it is not accounting depreciation

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1 Replacement cost (RC)

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the cost to replace the property with new property, determined at the time and place of loss.

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1 Selling price

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Stock that you’ve sold but not yet delivered is valued at its sales price, minus both discounts and unincurred expenses

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2 Coinsurance

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Coinsurance encourages insurance-to-value by penalizing insureds who do not buy coverage equal to (typically) 80 - 100% of the property’s full value. If the amount of insurance is less than the total value of the insured property times the coinsurance percentage, we’ll pay (the amount of insurance times the amount of loss) divided by (the value of the property at the time of loss times the coinsurance percentage). Know! [Mnemonic: ‘did over should’ times the loss.] A higher coinsurance percentage requires the insured to buy more insurance, but reduces the rate

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3 Duties in the Event of Loss or Damage

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You must promptly give us notice of loss; file a policereport if a law may have been broken; protect the covered property from further loss; give uscomplete inventories of the damaged and undamaged property including values; let us inspect theproperty and your records; let us question you under oath, if we ask; and send us a signed, swornstatement of loss if we request it

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4 Appraisal

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If you and we disagree on property value or loss amount, either of us can demand thatwe each hire our own appraiser. The two appraisers then, together, select an umpire.Values and amounts agreed on by any two of those three shall bind both you and us.

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5 Loss Payment

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We may (It’s our decision to) pay the value of the lost property or pay the costof repairing or replacing it.

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6 Recovered Property

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If property is recovered after loss settlement, you can have it back if you repay us. We’ll pay recovery and repair costs

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7 Vacancy

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If a tenant’s building area is vacant for 60 or more consecutive days before the loss

a. we won’t pay for any loss caused by vandalism, sprinkler leakage (unless you took steps to avoid freezing), building glass breakage, water damage, theft, or attempted theft.

b. we’ll pay you only 85% of what we’d otherwise pay for loss.

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7 The Vacancy Permit Endorsement

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brings back full coverage for vacant buildings for additional premium.

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8 Mortgageholders Condition

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We’ll pay for covered loss to each mortgagee in the order in which they appear. If we deny your claim because of your acts or omissions, the mortgagee can still collect for loss if it

a. pays the premium when you don’t;

b. submits a signed, sworn proof of loss within 60 days of when we ask; and

c. has notified us of any change in ownership, occupancy, or material risk known to it.

We’ll give the mortgagee at least 10 days’ notice if we cancel for nonpayment or do not renew the policy. If we cancel for any other reason, we’ll give the mortgagee at least 30 days’ notice.

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9 Loss Payable Provisions Endorsement

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contains four options: Loss Payable, Lenders Loss Payable, Contract of Sale, Building owner loss payable

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9 Loss Payable

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The loss payee is entitled only to joint loss payment with the insured

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9 Lender’s Loss Payable

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A loss payee whose interest in the insured property is establishedthrough written agreements (receipts, bills of lading) is entitled to joint loss payment.

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9 Contract Of Sale

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The buyer or seller in a contract of sale is entitled to joint loss payment as their (both parties’) interests may appear (abbreviated ATIMA)

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9 Building Owner Loss Payable

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The owner of a building in which the insured is tenant isentitled to payment for losses to the described building