General Property Insurance Product Knowledge

The standard fire policy

The standard fire policy (SFP), sometimes called the 165-line standard fire policy, is the historical foundation for nearly every property policy sold today. On its own it insures only three perils - fire, lightning, and removal - and almost all modern coverage is built by attaching forms and endorsements to it. Studying the SFP matters because its conditions still shape how property claims are handled.

The SFP is organized into an insuring agreement, a list of excepted or uninsurable property, conditions that can suspend or restrict coverage, and requirements the insured must meet after a loss. Removal coverage protects property that is moved away from an insured peril to keep it safe, for a limited time and at another location, so that the act of protecting the property does not leave it uninsured.

Several SFP conditions are tested repeatedly. Coverage can be suspended while the hazard is increased by something within the insured's knowledge or control, or while a described building stands vacant or unoccupied beyond the period the policy allows. The policy values covered property at actual cash value unless a replacement cost endorsement changes that basis of settlement.

After a loss the insured must give prompt notice, protect the property from further damage, prepare an inventory, and submit a signed and sworn proof of loss within the time the policy specifies. If the insurer and insured cannot agree on the amount of loss, either party may demand appraisal, a process that resolves the dollar amount of the loss without deciding whether coverage applies.

• The standard fire policy itself insures only fire, lightning, and removal; all other perils are added by attached forms.
• The concealment or fraud condition can void coverage when the insured misrepresents a material fact.
• The pro rata liability condition limits each insurer to its share of the loss when other insurance also applies.
• Subrogation lets the insurer recover from a responsible third party after it pays the insured's claim.

Personal lines and homeowners forms

Homeowners policies package property and liability coverage for individuals and families into one contract. The property side is divided into Coverage A for the dwelling, Coverage B for other structures, Coverage C for personal property or contents, and Coverage D for loss of use, while Coverage E provides personal liability and Coverage F provides medical payments to others.

The homeowners forms differ mainly in who is eligible and in whether the dwelling and contents are written on a named perils or an open perils basis. Named perils coverage, provided by the broad form, pays only for a loss caused by a peril the policy lists, and the insured must show the loss fits a listed peril. Open perils coverage, provided by the special form, pays for any cause of loss that is not specifically excluded, which shifts the burden of proof to the insurer.

Under most homeowners forms the dwelling is settled on a replacement cost basis when the insured carries enough limit, while personal property is commonly settled at actual cash value unless a replacement cost endorsement is added. The forms also impose special limits of liability on categories such as jewelry, furs, silverware, firearms, and money, which is why high value items are frequently scheduled separately on a floater.

• The dwelling is Coverage A, personal property is Coverage C, and loss of use is Coverage D.
• The HO-3 is the most widely sold form: open perils on the structure and named perils on contents.
• The HO-5 is the broadest form, insuring both the structure and the contents on an open perils basis.
• Special limits cap payment for theft-prone items such as jewelry, cash, and firearms unless they are scheduled.

Commercial property, package policies, and causes of loss forms

Commercial property insurance protects a business's real and personal property. The Building and Personal Property Coverage Form is the workhorse, covering the building, the insured's business personal property such as contents, machinery, stock, and tenant improvements, and personal property of others left in the insured's care.

What perils are covered depends on which causes of loss form is attached. The basic form is a named perils form covering a core list that includes fire, lightning, explosion, windstorm and hail, smoke, aircraft and vehicles, riot, vandalism, and sprinkler leakage. The broad form adds perils such as falling objects, the weight of ice and snow, and certain water damage and collapse. The special form provides open perils coverage, paying for any cause of loss that is not excluded.

A Commercial Package Policy (CPP) assembles two or more coverage parts, such as commercial property, general liability, crime, and inland marine, under one set of common declarations and common policy conditions. A policy that carries only a single coverage part is called monoline. Packaging is popular because it reduces coverage gaps and often costs less than buying each line separately.

The Businessowners Policy (BOP) is a prepackaged program for eligible small and mid-size businesses that bundles property and liability, usually with business income coverage built in, into one simplified form. Boiler and machinery coverage, now often called equipment breakdown, insures the sudden and accidental breakdown of pressure vessels, boilers, and mechanical and electrical equipment and includes valuable inspection services. Cargo coverage protects goods while they are in transit.

• The special causes of loss form is open perils: covered unless excluded, with the burden of proof on the insurer.
• A CPP requires two or more coverage parts, while a single coverage part is a monoline policy.
• A BOP targets smaller, lower-hazard businesses and builds in business income coverage.
• Equipment breakdown covers accidental internal breakdown, not external perils such as fire or windstorm.

Inland marine coverage

Inland marine coverage grew out of ocean marine insurance to protect property that moves over land or that is otherwise hard to cover with a fixed-location property policy. The Nationwide Marine Definition describes the classes of property that may be written as inland marine, including goods in transit, property held by bailees, instrumentalities of transportation and communication such as bridges and pipelines, and certain movable equipment.

Personal inland marine is written through floaters. The Personal Articles Floater schedules high value items such as jewelry, furs, fine art, cameras, and musical instruments, typically on an open perils basis with worldwide coverage and often no deductible. Floaters are useful because they fill the gaps left by the special limits in a homeowners policy.

Commercial inland marine floaters include accounts receivable, valuable papers and records, contractors equipment, motor truck cargo, and bailee coverage for property held for customers. An installation floater covers materials and equipment while they are being installed at a job site, from the time they arrive until the work is accepted by the owner or put into use.

• The Nationwide Marine Definition sets the classes of property eligible for inland marine coverage.
• The Personal Articles Floater schedules valuables and usually provides open perils, worldwide protection.
• An installation floater covers property during installation until it is accepted or becomes operational.
• Inland marine is favored for movable, high value, or in-transit property that a location policy handles poorly.

Ocean marine coverage and average

Ocean marine insurance covers vessels and their cargo against the perils of the sea. It is traditionally built from four coverages: hull coverage for the vessel, cargo coverage for the goods carried, freight coverage for the income earned by carrying the goods, and protection and indemnity coverage for the owner's legal liability.

The protection and indemnity (P and I) clause is the liability portion, responding to bodily injury, illness, and damage to the property of others that the running down clause does not handle. The running down clause, also called the collision clause, is part of the hull coverage and pays for the insured vessel's liability when it collides with and damages another vessel and that vessel's cargo.

In marine insurance a partial loss is called an average. A particular average is a partial loss that falls entirely on the owner of the property that was lost or damaged. A general average is a loss deliberately incurred - for example, cargo thrown overboard to save a ship in peril - and it is shared proportionally by every interest in the voyage because the sacrifice was made for the common benefit.

• The four ocean marine coverages are hull, cargo, freight, and protection and indemnity.
• The running down or collision clause covers liability for damaging another vessel and sits within the hull coverage.
• Particular average is a partial loss borne by a single owner alone.
• General average spreads a voluntary sacrifice proportionally among the ship, cargo, and freight interests.

General average

A loss voluntarily incurred to save the entire marine venture from a common peril, shared proportionally by all interests including ship, cargo, and freight.

Particular average

A partial loss that falls entirely on the owner of the property that was damaged, without contribution from the other parties to the voyage.

Protection and indemnity

The liability portion of an ocean marine program, covering bodily injury and damage to others that the running down clause does not address.

Business income and time element coverage

Business income coverage, also called business interruption, replaces the money a business would have earned if a covered loss had not forced it to suspend operations. It is a time element coverage, which means the amount owed depends on how long the interruption lasts rather than on damage to a single piece of property.

The recovery equals the net income the business would have earned plus the normal operating expenses that continue while operations are suspended, measured over the period of restoration. The period of restoration begins after the direct physical loss and ends when the damaged property should be repaired, rebuilt, or replaced with reasonable speed and similar quality.

Extra expense coverage pays the additional costs a business incurs to keep operating or to speed its return, such as renting a temporary location or leasing replacement equipment. Because business income policies often carry their own coinsurance requirement based on projected annual earnings, accurate income projections matter so the insured avoids a penalty at the time of loss.

Ordinance or law, valuable papers, garagekeepers, and umbrella

Property policies routinely exclude the added cost of complying with building codes, so an ordinance or law exclusion removes coverage for the increased cost to demolish undamaged parts, meet current codes, and rebuild to a higher standard. Ordinance or law coverage adds that protection back in three parts: the loss to the undamaged portion of the building, the cost of demolition, and the increased cost of construction.

Valuable papers and records coverage insures the cost to research, replace, and reconstruct damaged documents such as records, manuscripts, and drawings that a standard property limit would barely address. Garagekeepers coverage protects an auto service, repair, or storage business against damage to customers' vehicles left in its care, custody, and control.

A personal or commercial umbrella policy sits above the primary auto, homeowners, or general liability limits, paying large liability claims after the underlying limits are exhausted and sometimes covering a few claims the primary policy excludes. Specialized needs are met by aviation coverage for aircraft and yacht coverage for larger pleasure boats, both of which blend physical damage and liability much like an auto or marine policy.

• Ordinance or law coverage addresses undamaged property loss, demolition cost, and the increased cost of construction.
• Garagekeepers coverage responds to damage to customers' autos in the insured's care, custody, or control.
• An umbrella provides excess limits above underlying policies and may drop down for some claims the primary excludes.
• Valuable papers coverage funds the reconstruction of records beyond the small standard property allowance.

Coinsurance and insurance to value

Commercial property policies reward policyholders who insure close to the full value of their property. The coinsurance clause sets a minimum percentage of value - commonly 80 percent stated in the policy's own terms - that the limit of insurance must meet. If the limit falls short at the time of loss, the insurer reduces a partial loss payment in proportion to the shortfall.

The penalty applies to partial losses, which are far more common than total losses. That is exactly why the clause exists, because without it an owner could buy a small limit, pay a small premium, and still collect in full on the typical partial loss, which would be unfair to owners who insure to value.

• The coinsurance formula is (limit carried divided by limit required) x loss = payment, never more than the limit.
• The required limit equals the property value at the time of loss multiplied by the coinsurance percentage.
• A deductible, when present, is subtracted after the coinsurance calculation is applied.

Bonds and professional liability

Bonds are three-party agreements that differ from the two-party structure of an insurance policy. The principal is the party who must perform, the obligee is the party protected by the guarantee, and the surety is the party that guarantees the performance. Surety bonds guarantee that an obligation such as a construction contract will be completed, while fidelity bonds protect an employer against loss caused by dishonest employees.

Professional liability, including errors and omissions coverage, protects professionals against claims that their advice or services caused a client financial harm through a mistake, an oversight, or a negligent act. Unlike general liability, which focuses on bodily injury and property damage, errors and omissions coverage responds to the purely economic losses that arise from rendering or failing to render professional services.

Public adjusters themselves are a classic buyer of errors and omissions coverage, because a missed deadline or a miscalculated claim can expose them to a client's financial loss. These policies are usually written on a claims-made basis, which means the claim must be made during the policy period, and they typically exclude dishonest or criminal acts.

• A bond involves three parties - principal, obligee, and surety - while an insurance policy involves two.
• Fidelity bonds cover employee dishonesty, and surety bonds guarantee performance of an obligation.
• Errors and omissions coverage responds to financial harm from professional mistakes, not bodily injury.
• Errors and omissions policies are commonly claims-made and exclude intentional or criminal conduct.

Principal

In a bond, the party who agrees to perform the obligation and whose performance the surety guarantees to the obligee.

Obligee

In a bond, the party protected by the guarantee and to whom the underlying obligation is owed.

Surety

In a bond, the party that guarantees the principal will meet the obligation and pays the obligee if the principal fails to perform.