P&C Property Insurance Policies 2 — Questions and Answers
Question 1: Which of the following commercial property coverage forms provides the broadest protection, covering all risks of physical loss except those specifically excluded?
- Basic Cause of Loss Form
- Broad Cause of Loss Form
- Special Cause of Loss Form (Correct answer)
- Named Perils Form
Correct answer: Special Cause of Loss Form
The Special Cause of Loss Form (ISO CP 10 30) provides open-perils (all-risk) coverage for buildings and business personal property, covering all causes of physical loss not specifically excluded.
ISO commercial property policies use three cause-of-loss forms: Basic (11 named perils), Broad (Basic plus additional perils like falling objects and weight of snow/ice), and Special (open perils). The Special form is the broadest and most commonly used for commercial buildings. It shifts the burden of proof — instead of the insured proving the loss was caused by a listed peril, the insurer must show the loss was caused by an excluded peril.
Question 2: Under an inland marine insurance policy, which of the following would typically be covered?
- Ocean cargo on an international vessel
- A contractor's equipment and tools at various job sites (Correct answer)
- A commercial building's fixed structure
- Workers compensation claims for maritime workers
Correct answer: A contractor's equipment and tools at various job sites
Inland marine policies cover moveable or flowing property such as contractors' equipment, scheduled personal property, and goods in transit over land, reflecting its historical roots in covering goods away from a fixed location.
Inland marine insurance evolved from ocean marine to cover property in transit over land, bridges, communication equipment, and floater policies for moveable valuables. Common inland marine coverages include: contractors' equipment, installation floaters, exhibition floaters, fine arts floaters, commercial articles floaters, and accounts receivable coverage. Because inland marine covers non-standard risks, it is one of the most flexible lines.
Question 3: Under a commercial property policy, 'business personal property' (BPP) coverage includes:
- The insured's building and its permanent fixtures
- Furniture, equipment, inventory, and other personal property owned by the insured and used in the business (Correct answer)
- Employee-owned property brought to the workplace
- Land under the building
Correct answer: Furniture, equipment, inventory, and other personal property owned by the insured and used in the business
Business personal property (Coverage B) covers personal property owned by the insured and used in the business — furniture, machinery, equipment, stock — located in or within 100 feet of the described premises.
Under the ISO Building and Personal Property Coverage Form, Coverage A insures the building; Coverage B covers business personal property (owned by the insured); and Coverage C covers personal property of others in the insured's care. BPP includes items such as office furniture, computers, inventory, and machinery. It is subject to the cause of loss form selected (Basic, Broad, or Special) and the policy limit.
Question 4: A 'valued policy' in property insurance means:
- The insurer determines the value of covered property at the time of loss
- A pre-agreed value is stated in the policy, and that amount is paid in full if a total loss occurs, without depreciation or proof of value (Correct answer)
- The insured must prove the market value of the property each year
- The policy covers only the actual cash value of the property
Correct answer: A pre-agreed value is stated in the policy, and that amount is paid in full if a total loss occurs, without depreciation or proof of value
A valued policy (common in fine arts, marine, and some personal property floaters) specifies the agreed value upfront; if a total loss occurs, the insurer pays that amount without applying depreciation or requiring additional proof of value.
Valued policies differ from indemnity policies in that the settlement amount is determined before the loss occurs, not after. This is appropriate for unique items whose value is hard to establish post-loss — such as original art, antique jewelry, or classic vehicles. Some states have valued policy laws requiring insurers to pay the full policy amount for a total loss on real property, even if the actual replacement cost is less than the insured amount.
Question 5: The 'coinsurance clause' in a commercial property policy is triggered when:
- The insured carries more insurance than the property's replacement cost
- The insured carries less than the required percentage (typically 80%) of the property's replacement cost, resulting in a reduced claim payment for partial losses (Correct answer)
- The insured files more than one claim in a policy period
- The insured does not have a separate liability policy
Correct answer: The insured carries less than the required percentage (typically 80%) of the property's replacement cost, resulting in a reduced claim payment for partial losses
The coinsurance clause penalizes underinsurance: if the insured carries less than the required coverage (usually 80% of replacement cost), partial losses are paid only in proportion to the ratio of insurance carried to insurance required.
The coinsurance formula is: (insurance carried ÷ insurance required) × loss = payment. For example, if a building has a $1,000,000 replacement cost and 80% coinsurance is required, the minimum required coverage is $800,000. If the insured carries only $600,000 and suffers a $200,000 partial loss, the payment is ($600,000 ÷ $800,000) × $200,000 = $150,000 — not the full $200,000. Agreed value endorsements eliminate this risk.
Question 6: Under a commercial property policy, which of the following losses would typically be excluded under the 'flood' exclusion?
- A burst pipe inside the building
- A roof leak caused by heavy rain
- Surface water from a nearby river overflowing and entering the building (Correct answer)
- A sprinkler system malfunction
Correct answer: Surface water from a nearby river overflowing and entering the building
Flood exclusions in commercial property policies exclude losses caused by surface water, overflow of bodies of water, and storm surge — the kind of flooding that comes from outside the building.
The flood exclusion removes coverage for water that originates from outside the building — rivers overflowing, tidal surges, and surface water runoff. Internal water damage such as burst pipes, leaking roofs, and sprinkler system malfunctions is generally covered under commercial property policies (unless a separate plumbing exclusion applies). Flood coverage for commercial properties is available through the NFIP or private flood insurers.
P&C Property Insurance Policies 2
Which of the following commercial property coverage forms provides the broadest protection, covering all risks of physical loss except those specifically excluded?