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Chapter 18

Chapter 18. Commercial Property Insurance. Scope of This Chapter. Explain how businesses can use a package insurance policy to protect themselves against direct and indirect losses Commercial and personal property insurance definitions Definition of Business(BI) coverage

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Chapter 18

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  1. Chapter 18 Commercial Property Insurance

  2. Scope of This Chapter • Explain how businesses can use a package insurance policy to protect themselves against direct and indirect losses • Commercial and personal property insurance definitions • Definition of Business(BI) coverage • Explain how property insurance rates are developed • Distinguish between ocean marine and inland marine insurance • Describe about types of exposure covered by ocean marine insurance • Explain about aircraft property insurance

  3. Commercial Insurance • Both Businesses and homeowners need property insurance • When individuals purchase insurance , it is called personal insurance versus when businesses purchase insurance, it is called commercial insurance. • Because the material of commercial insurance contracts is comparable to the material of personal insurance contract ,no need to analyze the details of commercial insurance contracts again.

  4. Property and Marine(Transportation) Insurance • A broad division is made to describe the physical property when buying insurance • Property is either permanently attached to land or it is not. • If property permanently attached to land, such as buildings and fixtures , it is called real property whereby if it can be moved it is personal property. • The difference in the nature of the property has led to a division in property insurance between real property insurance and transportation insurance.

  5. Insurance Coverages for Real Vs. Mobile Property • Some type of property insurance such as fire insurance provides coverage for real property specifying the location of the covered property. • Mobile property which is movable, however, can be insured by transportation insurance (marine insurance) • The perils facing mobile property are broader in scope than the perils facing real property. • In addition to perils such as fire, lightening , and windstorm, mobile property may be sunk, hijacked , collided with and stolen more easily than real property.

  6. Commercial Package Policy • Historically, businesses had to purchase several different insurance policies to achieve their insurance objectives. • Since 1987, a package or combination of policies has allowed many firms to make one insurance purchase providing all generally needed coverages. • The Insurance Services Office(ISO) designed the commercial package policy (CPP) to provide insurance coverage to a broad range of profit and nonprofit organizations. • Manufacturing firms , schools , retailers , and apartment building owners can use this policy.

  7. The main insurance agreement s of commercial package policy (CPP) is shown in FIGURE 14-1. Insured must buy at least two of the package ‘s components, but they may purchase as many additional parts as they need.

  8. Common Declarations and Conditions in CPP • Declaration and conditions of CPP are applied to the entire package . • The common declarations establish the insured’s identity and the location of the business and also shows the different component coverages purchased and the premium charged. • Common conditions cover policy cancellation , assignment of the policy , and other legal rights and duties. • Each components part has its own specific declarations page and conditions extra to common declarations and conditions.

  9. Business Income(BI) Coverage • The business income Form of the CPP may be used to cover the indirect losses. • Insurers categorize the indirect losses as follows: • 1- Loss of Income In the case of fire destroys a clothing store, the loss of the building and inventory is a direct loss and the loss of income during the building is rebuild or business reestablished is an indirect loss.

  10. 2- Continuing Expenses Fixed expenses such as bond interest payments, property taxes, and salary for indispensable employees continue while the business is being reestablished. • Insurance that replaced only net income loss(direct loss) would not cover continuing expenses unless the business income coverage defined in the policy.

  11. 3- Extra Expenses Some businesses such as television stations , bakeries , and banks will not suffer income lost after a direct loss because they will keep operating. • Extra expenses for these businesses are borne to stay in operation and business income insurance can cover these extra costs. 4- Leasehold Interest The difference between present value of preloss and postloss rent paid by insured plus any unamortized costs ,improvements, or prepaid rent is under the business income coverage.

  12. Dependent Properties Business Income Form A situation where a business suffers no direct physical damage ; however, its operations depend on other businesses or the transportation system sustain physical loss. Example: After the 1994 Northridge earthquake in California several well established buildings survived; however, because the interstate highways leading to them were destroyed , operations in these buildings still had to be stopped.

  13. Property Insurance Rating • A property insurance rate is the cost per hundred dollars of exposed value. • How insurer use the property insurance rate to calculate the premium? Insurers calculate the premium by multiplying the rate by dollar value of exposed property. Example Assume that the property insurance rate is $0.80 per each $100 of value. If a factory has a value of $16million such units, what is the premium that this factory has to pay for property insurance? 16,000,000/100 ×$0.80=$160,000

  14. Two Methods to Rate Property Insurance • Class rating Class rating involves placing property in a class with similarly situated exposures such as residential homes, small apartment buildings, or churches. Factors that influence a class rating: 1- Construction of Building(wood or brick frame) 2- Occupancy (e.g. owner-occupied or not) 3-irefighting capacity( a 1-10 scale to grade a fire protection district) 4- External surrounding exposures (Nearby structure of the building and how quickly fires spread to the insured property?)

  15. Schedule rating Scheduled rating requires comparing property to a standard exposure and increasing or decreasing the premium for desirable or undesirable features. • Is property insurance rating is scientific and precise? No, insurance rates are based on shared loss data and estimates . While the mathematical estimating process is refined , insurance rates still involve actuarial and underwriting judgment and estimates.

  16. Transportation Insurance Transportation usually covers mobile property and it includes two type of insurance: 1- Ocean Marine insurance 2- Inland marine insurance

  17. Ocean Marine Insurance Ocean marine insurance provides protection for goods transported over water . • All types of oceangoing vessels and their cargo can be insured by ocean marine contracts. • The legal liability of ship owners and cargo owners can also be insured.

  18. History of Ocean Marine Insurance • Bottomry Bottomry was one of the earliest forms of ocean marine insurance that protected an owner from financial loss if his ship was destroyed. • If the shipowner acquired the ship by means of a loan, an interest rate was paid to lender. • The moneylender, for a premium beyond the interest rate, would agree to forgive the loan if the ship were destroyed.

  19. Some points are considered regarding the elements of ideally insurable exposure: • Similar units(ships) were exposed to similar perils • Non-accidental , losses were excluded from coverage • Losses are definite and measurable • Catastrophes were not likely

  20. History of Ocean Marine Insurance • Respondentia A loan on the cargo of a vessel, payment being contingent on the safe arrival of the cargo at the port of destination. If the goods should be lost in the course of the voyage, by any of the perils enumerated in the contract, the lender shall lose his money; if not, that the borrower shall pay him the sum borrowed, with the interest agreed upon. Important Bottomry is a loan on the ship; respondentia is a loan upon the goods.

  21. Four Distinct types of Exposure Covered by Ocean Marine Insurance • 1- Hull exposure The hull exposure includes the value of the ship and its equipment. • 2-Cargo exposure The cargo exposure is the value of the goods being shipped. • 3- Loss of freight The loss of freight is the loss of income that the shipowner would have earned if the cargo(or passengers) had been delivered rather than lost and it is comparable to the business income coverage(BI). • 4- Liability loss The loss that a shipowner would suffer if the ship were held to be legally responsible for negligently injuring other people or their property.

  22. Advantage of broad lists of perils covered by Ocean Marine Insurance • This is an advantage of ocean marine insurance that has a broad list of perils covered. • If the perils were specific and narrow rather than “ all other perils , losses, and misfortunes,” it would be very hard to collect insurance coverage for losses because the peril that caused a loss is difficult or even impossible to establish when the ship is at the bottom of the ocean.

  23. Disadvantage of perils covered by Ocean Marine Although the list of perils covered by ocean marine insurance is broad ; however, current ocean marine policies do not cover all risks e.g. losses from war or fraud.

  24. Ocean Marine Rating • Unlike fire, ocean marine insurance rates are based on the judgment of the underwriter. • There are some points to be considered: • The seaworthiness of the ship • The experience and the ability of the captain and the crew • Potential for loss of cargo; types of goods that are carried. • The route scheduled to be traveled and the season of the year • The coverage provided by the policy

  25. Inland marine insurance • Inland marine coverage is one of the component of the commercial package policy(CPP). Inland marine insurance is an open-perils contract. Definition of open-peril contract An open-perils contract dose not mean that all losses will be covered. It means that except the excluded losses all other losses will be covered by insurer. • If the insurer proves that an exclusion applies it has the legal right to deny a claim.War,nuclear hazard, wear and tear, and government action are among several exclusions that apply to inland marine insurance policies.

  26. Inland marine insurance provides protection for goods shipped on land. It includes insurance on imports and exports, domestic shipments, and means of transportation such as bridges and tunnels. In addition , inland marine insurance can be used to insure fine arts , jewelry, furs, and other property.

  27. Aircraft Property Insurance • This is applicable to helicopters, hot air balloons, hang gliders and space satellites. • It is parallel to ocean marine insurance that is the owners need to purchase insurance to protect hull, freight and cargo and liability exposure

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