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Message rom the Chair 2009 Looking AheadNot Behindb J. Brian Murph, CPCU, ARM, ARe, AMIM

Visit us onlinewww.cpcusociety.org

national economy, and like the economy,many eel it will get worse beore it getsbetter.

Eight years ago, I was searching or a newjob because mine had been eliminateddue to downsizing. I interviewed or anoperations manager position, and duringthe interview process the CEO, whois a CPCU, remarked: Oh, I see youknow something about reinsurance. Iexplained that I had some experience inthe area and had completed the Associatein Reinsurance (ARe) program.

He wound up oering me a positionthat grew into the vice president oreinsurance. It was a job that hadnteven been posted. I held that positionor almost eight years and enjoyed itimmensely. Now I am the chie riskocer and director o educationaldevelopment or the same rm andthoroughly enjoy my new responsibilities.

So, lets not dwell on the past but ratherlook orward to the uture, especiallywhat you can do or your own career andthose o your colleagues.

These are challenging times or all ous in the insurance industry, includingCPCUs. Each o us most likely knows

one or more colleagues who have losttheir jobs in the last year. There are manythings each o us can do to invest in ouruture. You have taken the rst importantstep, which is to earn your CPCUdesignation. But there is more that youcan do, such as:

Continue to hone your skills.

Keep active with your local CPCUSociety chapter.

Attend the CPCU Societys AnnualMeeting and Seminars, i you are ableto do so.

Take advantage o the CPCU Societyjob network.

Participate in and attend nonCPCUindustry events.

Network, network, network.

I you are able to devote the time in yourpresent position, take the opportunityto mentor and teach younger insuranceproessionals. Not only is it sel-ullling,it can add to your rsum and add valueto your present or uture employer. AsCPCUs, we have the opportunity andresponsibility to continue to build ourown skills and those o others.

May 2009 be a great year or each o you! n

Whats in This IssueMessage rom the Chair 2009 Looking Ahead Not Behind. . . . . . . . . . 1

From the Co-Editor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Business Income Made Simple . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

A Landmark or Builders Risk Insurance Policies . . . . . . . . . . . . . . . . . . 9

The Challenge o Undocumented Workers . . . . . . . . . . . . . . . . . . . . .12

New Interest Group Member Benet . . . . . . . . . . . . . . . . . . . . . . . . 14

Coverage Options Worth Exploring . . . . . . . . . . . . . . . . . . . . . . . . .15

J. Brian Murphy, CPCU, ARM,

ARe, AMIM, is chie risk ofcer

and director o educationaldevelopment or Brokers Risk

Placement Service, a managinggeneral underwriter andreinsurance intermediar located

in Chicago. Murphs experience

includes underwriting rolesspanning more than 25 ears intwo o the largest commercial

insurers as well as more recentlon the brokerage side o thebusiness. He serves on the boards

o the Association o LlodsBrokers and the Elmhurst Cit

Centre in Elmhurst, Ill. Murphis chair o the CPCU Societs

Chicago Chapter ProgramCommittee and the UnderwritingInterest Group Committee.

Underwriting Interest GroupVolume 21 Number 1 March 2009 Underwriting Trends

Two years ago, the caption or myFebruary message was A Refection onthe Past Year. While that may have beenappropriate in 2007 looking back on2006, the same does not apply to 2008.Our economy is in the worst shape sincemy parents grew up during the GreatDepression o the 1930s. The insuranceindustry is not immune to the ills o the


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This issue presents our inormativetechnical articles that underwriters willnd benecial to their day-to-day riskselection activities. Likewise, agents/

brokers will nd these articles particularlyuseul as part o their consultative sellingand risk advisement to clients.

Business Income Made Simple, byRobert M. Swit, CPCU, CIPA,CBCP. With business incomebeing one o the least understoodand undersold insurance coverages,coupled with the lessons learnedrom some o the CAT events overthe last several years, it seems timelyto provide an article on this subject.

Understanding this particular coveragecan help in closing the sale.

A Landmark or Builders RiskInsurance Policies, by William J.Warel, CPCU, Ph.D, CLU, and

Jerey J. Asperger, J.D. Discussiono a court case interpreting coverageprovided by builders risk (BR)policies. The Court recognized thatBR coverage is not ordinary propertycoverage and thereore not subject tothe states standard re policy statute.

The Challenge o UndocumentedWorkers, byJon Gice, CPCU,ARM. Claim handlers andunderwriters alike need to understandthe implications o this continuedtrend. There are unique issues inhandling these types o claims, aspresented in this article.

Coverage Options Worth Exploring,by Arthur Flitner, CPCU, ARM,AIC. Discussion o coverages availableor commercial property owners and

general contractors another leastunderstood topic. This article willhelp underwriters understand thecoverages, including risk treatmentoptions available; how such coverageis written and or whom; and why it isimportant.

As mentioned in previous newsletters, iyou have a topic you would like to sharewith others in the Underwriting InterestGroup newsletter, please get in touchwith one o the editors. Our contact

inormation is on the back page o thisissue. Well work with you in bringing thearticle to publish-ready status. n

Underwriting Interest Group Underwriting Trends2

From the Co-Editorb Gregor J. Masse, CPCU, CIC, CRM, ARM, PMP, CLCS

Gregory J. Massey, CPCU, CIC,

CRM, ARM, PMP, CLCS, is a vice

president or the propert lineso business and commercialproduct development at

Selective Insurance Compano America Inc. He previousl

worked or Anthem Casualtand The Hartord in several

underwriting management andmarketing positions. Masse isactivel involved in the industr,

including serving as a committeemember or the CPCU Societ,

Underwriting Interest Groupnewsletter editor, ISO Panel

member, past president o three

CPCU Societ chapters, AICPCUtextbook reviewer, AICPCU

academic advisor councilmember and CPCU Societ Ethics

Working Group. He has taughtat North Central College and

Ashland Universit in Ohio.

We put the YOU in underwriting.

The importance of this slogan is that insurance is still a people and relationshipbusiness. People make the difference.

Make sure to put the YOU in the underwriting process.

The Underwriting Interest Group Committee

UNDERWRITING

INTEREST GROUP


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Business income (BI) insurance is themost complicated and misunderstoodinsurance product. As a result, 75 percento businesses suering major propertydamage are out o business within threeyears because they did not have a testedcontingency plan or the proper nancingto see them through the period o recovery.Each year, businesses and insurancecompanies lose millions o dollars andlitigation becomes an ugly actor.

There are three areas o concern: Becausebusinesses are in denial, the underwriteris not receiving the proper premium orthe total exposure, agents and brokersare losing income and being sued because

insureds did not read their policies, andthe insureds are not getting paid whatthey expected.

Agents, underwriters and insureds needto do their respective part to producea policy that is properly valued andaccurately protects the organizations realexposure. Because adequate protection isthe goal, thorough preparation is key.

At the same time, everyone is conusedand irritated by the required businessincome worksheet. Underwriters donot receive one, agents get caughtin the middle and sometimes mustcomplete one, and insureds complainthe worksheet is cumbersome and doesnot t their business. The result: no BIworksheet in le. We want to resolvethese problems by identiying the mostcommon problem areas in the policy andproviding solutions to consider.

Let us begin with the semantics. While

the two terms, business income andbusiness interruption are oten usedinterchangeably, they really meandierent things. Business interruption iswhat happens to a business (re damage)while business income is the insurancecoverage organizations buy to replacetheir lost income and pay their additionalexpenses during their period o recovery.

Insurance Contract Commercial Property and

Business IncomeFirst o all, there must be direct physicaldamage to the described property, whichimpairs operations and causes a losso income. The period o restoration(recovery) is the claim payment periodand stops when income reaches itsexpected level. However, some policesstate that the period o restoration ceaseswhen you are able to resume operations(turn on your machines or pick up the

telephone).This latter type o policywording does not actor the time it takesto reach projected sales into the recoveryperiod.

Business income coverage pays or actuallost business income (lost uture salesduring the recovery period). However,many o the insurance companyaccountants deny there are ever lostuture sales because they say businesseswill make it up. WRONG! However, thebusiness must be able to substantiate itsloss using sales orecasts with historicalaccuracy, specic lost contracts, expectedsales, etc. You must be very careul todierentiate between deerred sales andlost sales.

Also, there is a clause in the policythat limits the amount o loss payableor multiyear sales contracts that arecancelled within the recovery period.For example, i you have a three-yearcontract with Ford Motor Company anda re interrupts your business, when FordMotor cancels the contract, you may onlyclaim the amount o income lost duringthe recovery period (one o three years).This really catches a lot o businesses by

surprise and costs them millions o dollars

It is important to emphasize to insurancebuyers that they should careully readthe entire insurance policy to determinerights, duties, and what is and is notcovered. This places the responsibility oninsureds and orces them to determinetheir own proper risk management.

ISO Business Income(And Extra Expense)

Coverage Form Rents may be included, excluded

or by itsel. This coverage protectsincome rom a third party who hasan arms length relationship withthe insured. For example, the jewelrycounter or shoe department in adepartment store is owned by anothercompany, and it leases space rom thedepartment store and pay a percentage

Business Income Made Simpleb Robert M. Swit, CPCU, CIPA, CBCP

Continued on page 4

Volume 21 Number 1 March 2009 3

Robert M. Swit, CPCU, CIPA,

CBCP, is a business interruptionspecialist with more than 30 earsexperience in the insurance and

risk management feld, advisingcorporate executives on the

benefts o properl preparing ora disaster. Through his compan,

Business Interruption ConsultantsInc. (www.bisimplifed.com), hehas developed a unique, Web-

based business interruptionresource. Swit is an accredited

instructor or the Institute orBusiness Continuit Training.

He is a member o the CPCUSociet, the Disaster Recover

Institute, the Risk and InsuranceManagement Societ, the NationalInsurance Premium Auditors

Association and a past member othe Insurance Institute o London.


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o its sales as rent. I the departmentstore burns down, the store loses thisrental income.

Rents are an area o conusion becausequite a ew organizations have separateentities or their operations and ortheir realty ownership. For example,the president owns the real estate,and the operating company pays himrent through his realty company.This is simply two pockets o thesame suit and not considered rentprotection as long as both entities arenamed insureds on the policy. Thebusiness income policy pays the rentalexpense as a continuing expense o theoperating company, so it does not have

to be added as additional income. Business Income dened in the

policy to be net prot or loss andcontinuing normal operating expenses,including payroll. For example: salesminus cost o sales = gross margin orgross prot (and is approximately the100 percent BI amount). See Table 1.

As a rule o thumb, combinedBI and extra expenses shouldbe approximately as ollows:Manuacturers 100 percent o their

gross prot; wholesalers 50 percento their gross margin; retailers 30percent o their gross margin; service 15 percent o their revenues.

Do not use this to determine insurancelimits; but this will help prioritize youraccounts so you are able to spend timeon those needing the most attention.

Ordinary Payroll causes a lot oproblems or everybody. Businessesthink it is direct labor, cash labor,warehouse or temporary help, so

they exclude this coverage rom theirpolicy. However, it is dened in thepolicy to be everybody below thedepartment manager level. When thisis explained to insureds, their usual

comment is that they cannot aordto lose those people and want themincluded.

At the same time, i they do lay otheir employees ater a disaster, theirunemployment tax rate increases,they have less qualied people inthe job pool when they recover,and they have lost their reputationin the community. Ater workingwith several companies ollowingHurricane Katrina, the businessowners discovered that ater they hadrebuilt their acilities and contactedtheir employees to come back to work,very ew o the employees returnedbecause they had ound other jobs.

Consequently, these businesses oldedbecause they had no experiencedemployees to produce their product.

Law and Order remember toendorse building ordinance andincreased cost o construction becausewhile waiting or the property tobe repaired, you could be losing asignicant amount o sales.

Common Areas i there is nophysical damage to the premises, thereis no business income coverage. There

have been several high-rise ocebuildings damaged by re, hurricanes,tornadoes, etc., but because a specicsuite was not damaged, the claim wasdenied even though there was noaccess to it. The ISO policy includescommon areas as part o the premisesdenition, but many policies currentlyin the market do not. It should bepart o the premises description sothat a tenants premises include allinternal access routes (hallways, stairs,elevators, etc.).

Deductible most business incomepolicies have a 24- to 72-hourdeductible or lost income with nodeductible or extra expenses. Some

policies dene it to be normalbusiness hours, which means acompany working 9 to 5 with a72-hour deductible would subtractnine days rom its claim.

Extra Expenses do not conuseexpediting expenses with extraexpenses, even though some policiesmistakenly call expediting expensesextra expenses. The dierence is thaextra expenses pay all the expensesabove normal operating expensesincurred to recover rom a disaster.However, expediting expenses onlypay the expenses that directly reducelost income.

For example:

u Extra expenses are all the necessarymoney spent to avoid or minimizethe suspension o business, that is,$750,000 reduces the loss $500,000,but it pays all $750,000.

u Expediting expenses are the moniesspent that actually reduce the loss,that is, $750,000 spent reduces theloss $500,000 so it only pays the$500,000

Civil Authority access to premisesdenied by civil authority due to

adjacent property damage, commonlyhas a 24- to 72-hour deductible withcoverage or a three-week period.There is no coverage or evacuationprior to the food or hurricane onlyor denied access ater the disasterstrikes because it is the physicaldamage that triggers the coverage.

For example, three days prior to thehurricane, the city is evacuated. Threedays ater the hurricane makes landallthe access denial is lited. However,

your landlord denies you accessibilitywhile the building is checked ordamage. Three days later, the landlordsays there is no damage and allowsentrance to your premises. What isthe civil authority period o claim?It is the three days rom hurricanelandall to access denial lited bythe city. This causes a tremendousamount o conusion or insureds andis even more reason or them to havea well-planned contingency plan


Business Income Made SimpleContinued from page 3

Net sales: $10,000,000Cost o sales: 7,000,000Gross proft: $3,000,000 approximate annual business income amount

Table 1


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that includes conversations with thelandlord about how quickly he/she willopen the building or nd other spaceor you.

Extended Period o Indemnity there is an automatic extended periodo indemnity o 30 days in mostpolicies, but this may not be enoughto allow the business to reach itsprojected sales once it has resumedoperations. The business usually needsat least 90, 180, or even 360 days ithere is any seasonality to the business.Once again, the contingency planidenties this need or the business.

Loss Conditions these osterseveral areas o concern:

uLoss Settlement Fees endorseclaim preparation or losssettlement ees o $25,000 to$100,000 to pay or experiencedhelp calculating the loss.

uDuties in the Event o Loss educate insureds so they knowwhat to expect and what theirresponsibilities are as well as how tosubmit their claim. A business ownerstated he lost $10 million because othe hurricane, but when pressed, he

was just submitting his policy limit.uLoss Determination excludes

communitywide disaster impact. Forexample, a hotel could have had125 percent occupancy because allthe hotels in the city were destroyed,but its historical occupancy was 85percent. The hotels claim will bebased upon the 85 percent gure, notthe 125 percent. A business cannotmake money rom the disaster.

uThe Loss Payment Clause thisalso causes a lot o rustration because

the insured misreads this statement,which says the insurance companywill pay 30 days ater agreement onthe amount of loss has been reached,not 30 days ater claim submission.Because even minor business incomeclaims take a long time to come toagreement, it is imperative that theinsured has alternative nancingavailable or cash fow while workingon the claim amount.

Coinsurance really causes problemsat the time o the claim and states thati the insureds business income limit ismathematically incorrect at the timeo loss, then the insured will pay that

error percentage o the claim.

For example, the policy says thereis a $1 million limit with a 50 percentcoinsurance clause. This meansthe 100 percent amount would be$2 million. I, at the time o loss, the100 percent amount was $3 million,then the limit should be $1.5 million(which is 50 percent o the $3 million)and the insured would be penalized33 percent o the claim ($1 million vs.$1.5 million).

One client was penalized 85 percento its $750,000 loss ater havingailed to revise its insurance limits orcoinsurance amounts in several years.The coinsurance penalty is cause ora lot o lawsuits and a lot o unpaidclaims. Put agreed amount on thepolicy and eliminate this problem.However, to do so requires a signedworksheet in le showing utureprojections o income. No worksheet?Then coinsurance applies.

Since most ISO companies have onlyled rates to go down to 50 percentor six-month coverage, there are twoother options available or businessesthat want less than six-monthprotection.

uMaximum Period o Indemnity actual loss sustained or 120 days. Nocoinsurance applies, but thispre-settles the loss period and willnot pay or a partial loss that exceedsthe 120 days.

uMonthly Limit o Indemnity isa commonly used endorsementthat provides a chosen monthlypercentage o the limit. Thirty-threepercent provides one-third o thelimit or three months, 25 percentgives one-ourth o the limit eachmonth or our months, etc. Nocoinsurance, but the problem is thatthis endorsement also limits theloss period and the amounts are not

additive. In other words, use it orlose it. See Table 2.

Business Income

WorksheetsNow lets discuss the inamousworksheets. They are an integral part othe insurance selection process becausethey easily determine an organizationsnancial risk/exposure to loss. Iagreed amount coverage is requested,insurance companies must have a signedworksheet in le rom the insured perstate regulations. Additionally, theworksheet ensures that the underwriterwill receive proper pricing on the policyand completing it is good practice orinsureds so they know how to calculatetheir loss.

My rm, Business InterruptionConsultants Inc., has completed overa thousand worksheets or all types oorganizations, and the issues are alwaysthe same: This worksheet does not t ourbusiness or We calculated a negativeamount or Where is payroll covered?or What about spread o risk? and soorth. In response, we have simplied

the worksheet completion process bydeveloping 16 industry-specic electronicworksheets on our Web site (www.bisimplied.com) that calculate the totalsor you.

The intent o the business incomeworksheet is to allow an organization toestimate the nancial impact o a disasterIt also helps the underwriter understandthe insureds logic and eel comortablethat the numbers used make sense. Forexample, i the sales number doubles next

year, then the number or payroll andinventory should also almost double.

Several scenarios may be used or theworksheets to see what the nancialimpact would be. Then, choose thescenario that best suits the organization.A worksheet may also be completed oreach location to see how this aects theorganization. The worksheet is almost

Continued on page 6



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never used at the time o loss, partlybecause hardly anyone completes them,so the only penalty or worksheet error iseither over- or under-insurance.

Most insureds do not realize that theycan change their business income limits

in the policy period. I always suggest thatthey review their calculations at leastquarterly to see i there have been anymaterial changes. With an electronicorm, it takes them only a couple ominutes to see how the changes impacttheir exposure. That way, they will makesure their insurance protection is keepingup with their business.

Warning Because only the businessowner has a thorough understanding ohis/her business operations, it is his/her

responsibility to complete and sign theworksheet. Insurance proessionals shouldnot attempt to ll out the worksheet, as itbecomes an E&O liability i the improperamount o insurance is purchased. Youmay, however, share the ollowing tipswith your client.

Lets take a look at the ISO businessincome worksheet. Since this is a one-size-ts-all orm, a business owner cannotchoose the appropriate worksheet ora specic business. However, there are

several other sources or worksheets thatmay be accessed or a more appropriateworksheet. For this explanation, Iam reerencing the ISO orm, as it isthe most common. The orm has ourcolumns the rst two are or thecurrent scal period and the second twoare or the projected scal period. It is thecalculation in the right-hand column thatdetermines the exposure, as it is utureincome that needs to be protected.

Make sure the business owner keeps inmind that the loss may not occur until thelast month o the policy period and thencontinue or a year into the uture. Thismeans i the policy period is 9/30/08 to9/30/09, the business owner must projectthe loss into 2010. In most cases, this is a

very large number, so the business ownershould start with a 2009 loss projectionand then check the calculations quarterly.It may be June 30, 2008, beore the lossis projected into 2010 and the policy isendorsed accordingly.

Worksheet Income Page one is the cover sheet that is

signed by the individual (businessowner) who completed the orm.

Page two is where the total annualbusiness income amount is calculated.This is the amount oincome thatwill be lost while the operations areinterrupted. The most recent scalyear-to-date prot-and-loss statementshould be used or the calculations.The intent o the worksheet is todevelop the income (revenue orsales) rom operations. I the businessdoes not actually receive the money,returns, discounts, etc., it is notincluded in the amount at risk.Also, the income not at risk, such as

royalties, license or rental income,should be subtracted rom the amountat risk. Continuing income, such asbank interest received, investmentincome (nancial institutions willinclude this), and income rom sale oassets should be disregarded becausethese monies are not generated romoperations. Finally, the business ownershould add items to income thatmay be ound below the line, such

as sale o scrap, commission incomeand third-party rental income. Thiscompletes page two, and the totalincome is calculated.

On page three, cost o sales (materialsand supplies) is subtracted becausei the business owner cannotmanuacture or sell the companysproduct, raw materials need notbe purchased. The cost o goodssold should not be automaticallysubtracted, as there may be payrollincluded in this amount that shouldnot be subtracted. Only the costo materials and supplies should besubtracted.

Manuacturers also need to adjust

their net sales or production value.I production is increasing, uturesales should also be increasing. Thismeans the beginning nished goodsinventory at sales price should besubtracted because that was last yearsproduction. Then the ending yearnished goods inventory at sales priceshould be added because that refectsthe companys production activity orthe current year. Now the value omanuacturers nished stock has beencalculated or the property policy.

Finally, the expenses that discontinuedirectly with the loss o sales shouldbe subtracted. ISO does not havethis line, so this amount should beincluded with Cost o Sales. Forexample: Subcontractor costs, rentalequipment or temporary help thatwould discontinue i the operationswere shut down need to be accuratelyidentied, or the business owner willbe misrepresenting the income at risk.When in doubt, it should be omitted

(not subtracted). A shortcut that maybe ollowed is to take Net Sales minusCost o Sales. This is the 100 percentannual business income amount.

Page our is the summary section thatputs everything together. The ISOorm does not provide or dividingtotal income by spread o risk or thenumber o locations, so a separateworksheet must be completed or eacho the largest locations. For example,



For example, a $100,000 limit with 33 percent monthl limits would be:

Month 1 lost: $45,000 Polic pas: $33,000

Month 2 lost: $27,000 Polic pas: $27,000

Month 3 lost: $38, 000 Polic pas: $33,000

Total lost: $110,000 Polic pas: $93,000

Table 2


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8/16

hours o non-billable time hand-holding,talking to the adjuster and explaining thepolicy to the insured. This unnecessarytime and expense could be better usedgetting the insured properly prepared and

adequately protected up ront.

The insured is responsible or calculatingand submitting the claim to the insurancecompany and, to protect the businesssinterests, should hire a specialist to doso. There is usually coverage to paysome o this experts ees in the losssettlement ees section o the insurancepolicy. That way, the business ownerretains control over the claim processand any business considerations thatshould be included. Remember, it isthe insureds responsibility to tell theinsurance company what the business lostand the expectation o payment. Thisis not a whimsical or unsubstantiated

number, but must be a well-documented,calculated amount. It seems incongruousthat the insurance company will send anaccountant to the insured to advise howmuch the insurance company should pay.

The biggest problem with businessincome claims is an unrealistic projectiono lost sales and an inaccurate recoveryperiod. Discontinuing expenses to besubtracted is another area o conusion.Most orensic accountants use a computermodel to calculate all expenses as apercentage o sales and then arbitrarilysubtract some o each line item. Forexample, utilities are 4 percent o sales,so a one-month interruption would be4 percent divided by 12 or 0.33 percent.This amount would then be subtractedrom lost sales as a discontinuing expenseregardless o the actual utility costs duringthis period.

We will save urther detailed businessincome claim discussions or anotherarticle. Suce it to say, a little orewarninggoes a long way in reducing the negativeimpact o a business income loss, and

insurance companies would be betterserved spending their money educatinginsureds instead o deending lawsuits.

In summary, prudent people plan orthe worst case scenario. Make certainthe nancial impact has been careullyassessed and nanced. Review boththe commercial property and businessincome insurance policies to ensure ullprotection and make certain to use thecombined orm with agreed amount.Do not exclude ordinary payroll andmake sure it is the business owner whocompletes and signs the worksheet. Beingprepared oers the best protection. n



Achieving Leadership Excellence

Take advantage of unique leadership learning opportunities with

CPCU Society and industry leaders at the 2009 Leadership Summit.

Broaden your leadership horizons through:

Society business meetings.

Two new volunteer leader workshops.

Chapter leader workshops.CPCU Society Center for Leadership courses, which are open

to all members.

Networking opportunities.

The Momentum Continues Dont miss out. Mark your calendar today!

CPCU Societys 2009 Leadership Summit April 2125, 2009 Phoenix, Ariz.

Visitwww.cpcusociety.org for the latest information.

Achieving Leadership Excellence Achieving Leadership Excellence Achieving Leadership Excellence

Achieving Leadership Excellence Achieving Leadership Excellence Achieving Leadership Excellence


9/16

William J. Warel, CPCU, Ph.D., CLU,

is a proessor o insurance and riskmanagement at Indiana State Universit.

He received his doctorate in insurance

and risk management rom IndianaUniversit. Warel is widel published in

applied proessional journals; a numbero his articles have appeared in the CPCU

eJournal, Risk Management Magazine,and The John Liner Review, among

other publications. He has served asa testiing and/or consulting expertwitness in more than 40 cases; most o

these cases have concerned breach ocontract, agent-broker liabilit and bad

aith issues. Warel can be reached [email protected].

Jerey J. Asperger, J.D., is the principaland ounder o Asperger Associates

LLC. His practice includes the handlingo complex and multipart litigation

involving negligence, product liabilit,contract, and commercial liabilit,

among other areas. Asperger earneda bachelors and masters degree romKent State Universit and a J.D. rom The

John Marshall Law School in Chicago. Inthe legal case discussed in this article,

he served as lead coverage counselor the insurer. Asperger has served as

lead coverage counsel in a number oinsurance cases.

Editors note:This article is reprintedand has been edited or length with

permission rom Risk ManagementMagazine. The article originall appeared

in the Februar 2008 issue oRiskManagement Magazine. Copright 2008.

Risk and Insurance Management SocietInc. All rights reserved. This article was

also reprinted in the September 2008issue o the CPCU Societs ClaimsInterest Group newsletter.

Liberty Insurance Underwriters, Inc. vWeitz Co., LLC, 215 Ariz. 80, 158 P.3d209 (2007)

The Weitz Company was the generalcontractor or a project to erect ourdormitory buildings at Arizona StateUniversity. Consistent with the customand practice and Occupational Saety andHealth Association (OSHA) re saetyrequirements, the applicable buildersrisk policy contained several protectivewarranty endorsements (e.g., maintainadequate re extinguishers on site,conduct a re watch during all weldingoperations or other hot processes, inspector re hazards at the end o the work day,etc.). A breach o a protective warrantyautomatically renders the coveragenull and void. In this particular case, asubcontractors employee was perorminghot work operations using a blowtorchto cut and weld structural steel supportsor the roo o a dormitory building. Asa result o the cutting and welding, thecombustibles in the immediate area wereignited and spread to destroy the entiredormitory building and caused damage toadjacent property.

According to a written statementprovided by the subcontractorsemployee subsequent to the re, hewas perorming this hot work alone,there was no one providing a re watchor his work, and he did not have a reextinguisher either with him or in thevicinity. The subcontractors employeeattempted to extinguish the re witha jug o water, but this attempt wasunsuccessul. A co-worker summoned bythe subcontractors employee ater the

re started ran to another foor o thebuilding to nd a re extinguisher, butthe re spread unchecked, destroying thedormitory building and causing damageto the adjacent property. Based on thesestatements, it was clear that severalprotective warranties in the builders riskpolicy were breached.

In contending that coverage was availableunder the policy, the Weitz Company

challenged the legal validity o theprotective warranties. It contended thatthe policy constituted property insurancerather than inland marine insurance and

thereore had to be consistent with theStandard Fire Policy (SFP). Arizona isone o about 29 SFP jurisdictions. Weitzcontended that a protective warrantyconditions coverage on compliance withterms and conditions not ound in theSFP and, thus, is inconsistent with it,detracting rom the coverage required tobe provided by the SFP.

Hence, Weitz contended that Libertycould not rely on the breach o aprotective warranty to deeat coverageotherwise provided by the builders riskpolicy. Liberty contended that the policyconstituted inland marine insurance andthereore any confict with the SFP wasmoot. In all SFP jurisdictions, an inlandmarine policy is statutorily exempted romcomplying with the terms o the SFP.

Without engaging in any actual analysisconcerning whether the policy wasconstituted inland marine insuranceor property insurance, the trial court

summarily ruled that the policy is notan inland marine policy. In a landmarkdecision led on March 27, 2007, theArizona Court o Appeals, Division One,overturned the trial court decision andruled that the policy constitutes an inlandmarine policy.

A Landmark DecisionLike virtually all states, Arizona hasadopted the nationwide inland marinedenition. This denition includes ourgeneral classes o property, one o which

is Commercial property foater riskscovering property pertaining to a business Builders risks and/or installation riskscovering interest o contractors, againstloss or damage to machinery, equipment,building materials or supplies, being usedwith and during the course o installation,testing, building Such policies maycover at points or places where work is

A Landmark or Builders Risk Insurance Policiesb William J. Warel, CPCU, Ph.D., CLU, and Jere J. Asperger, J.D.

Continued on page 10

9Volume 21 Number 1 March 2009


10/16

being perormed, while in transit andduring temporary storage or deposit, oproperty designated or and awaitingspecic installation, building is asubclass within this general class.

The guidelines urther stipulate that(1) Such coverage shall be limited tobuilders risks or installation risks whereperils in addition to re and extendedcoverage are to be insured, and (2) iwritten or account o a contractorthe coverage shall terminate when theinterest o the contractor ceases.

In ruling that the Weitz policy constitutedinland marine insurance as opposed toproperty insurance as a matter o law,the Arizona Appellate Court relied uponthe presence o two coverage eaturescustomarily associated with inland marineinsurance that were contained in thepolicy. Both o these coverage eatures arereerenced in the guidelines pertainingto coverage or builders risks and/orinstallation risks and, thus, are codied inthe Arizona statute.

First, coverage terminates under theapplicable policy when the interest o the

contractor ceases (i.e., upon completiono the building, at which time the ownertakes possession). This provision isconsistent with inland marine insuranceas opposed to property insurance. Aninland marine coverage orm is fexibleand adaptable with respect to the terms ocoverage including, or example, the timeperiod or which coverage is applicable,such that the coverage orm is responsiveto changing circumstances and providescoverage consistent with an exposure toloss that is not staticthe parameters

o the exposure to loss are unknown onthe inception date o coverage. Inlandmarine insurance is an outgrowth o oceanmarine insurance. In the case o oceanmarine insurance, coverage terminatesupon the completion o the voyageaparameter that is unknown when coveragecommences. For this reason, an expirationdate as such is not identied in thedeclarations o an ocean marine policy.

Similarly, while the builders riskpolicy contained an expiration date,the coverage orm allowed or somefexibility in terms o the policy period.Coverage may terminate beore the

expiration date i, or example, theowner or buyer accepts the propertybeore this date.

In emphasizing the presence o thiscoverage eature, the Arizona AppellateCourt distinguished this case rom1993s Village of Kiryas Joel LocalDevelopment Corporation v Insurance

Company of North America, in whichthe question o whether cancellation oa policy prior to the loss was deectivehinged on whether the applicablebuilders risk policy constituted inlandmarine insurance or property insurance.There were statutory restrictions ongrounds or cancellation that appliedto property insurance but not to inlandmarine insurance. In holding that theapplicable policy constituted propertyinsurance as opposed to inland marineinsurance, the U.S. Court o Appeals,Second Circuit, noted that coverageunder the policy did not terminate uponcompletion o the structure or receipt o

certicate o occupancy.

Second, the Weitz Court relied upon theact that coverage under the applicablepolicy included perils in addition tore and the extended coverage perils,an apparent reerence to the breadth ocoverage provided under the applicablepolicy in terms o coverage or the perils otransportation. Such breadth o coverageis consistent with inland marine insuranceas opposed to property insurance.

While the builders risk policy excludescauses o loss that pertain to exposuresthat are clearly uninsurable (e.g. food,wear and tear) or are more appropriatelyaddressed under a specialty insurancecoverage orm (e.g., loss caused bydishonest acts o employees o thepolicyholder is excluded; this exposureis more appropriately addressed byan employee dishonesty policy), theexclusions are careully dened and

limited so as to preserve broad coveragewhile property is in transit and exposed totransportation perils.

Other coverage eatures customarily

associated with inland marine insuranceas opposed to property insurance werenot considered by the Arizona AppellateCourt because these coverage eatures arenot specically identied in the Arizonastatute. However, the court noted thatthese other coverage eatures may berelevant in the event a case is submitted toa act nder. The presence o these othercoverage eatures, or the lack thereo, ina builders risk policy may create a actualissue in terms o whether the policyconstitutes inland marine insurance asopposed to property insurance.

Other Coverage FeaturesOther coverage eatures customarilyassociated with inland marine insurancealso are contained in the applicablebuilders risk policy:

Coverage under the applicablepolicy is contingent on adherenceto warranties, the breach o whichautomatically voids coverage. Inocean marine insurance, the potentialmagnitude o the risk o loss is sosubstantial that the exposure toloss is uninsurable in the absence owarranties. The character o the vesseland its equipment or the particularcargo or voyage are undamentalto the underwriter in arriving at adecision whether or not to accept therisk and in establishing the premiumto be charged. Thus, or example,the policyholder must warrant thatthe vessel is seaworthy. Coverage is

automatically void in the event thatthe warranty is breached.

Similarly, the builders risk policycontained a re extinguisher warrantythat requires the maintenance o anadequate number o re extinguisherson the premises at all times; a rewatch warranty that requires anemployee with a ully operational reextinguisher to observe welding orother hot process during the operation


A Landmark or Builders Risk Insurance PoliciesContinued from page 9


11/16

and or at least 20 minutes thereater;and a daily inspection warranty thatrequires daily inspections or thepurpose o uncovering re hazards.The potential magnitude o the risk

o loss associated with the erectiono a dormitory acility on a majoruniversity campus is substantial.Inclusion o protective warranties inthe policy made it possible or Libertyto provide coverage at a reasonablecost or an exposure that otherwisewould have been uninsurable.

Coverage under the applicablepolicy includes coverage or propertyexposures that are mobile, or temporal,in nature. In the case o ocean marine

insurance, coverage is provided toshippers and vessel owners (i.e.,carriers) or ocean shipments o cargo.Ocean marine insurance was designedto cover property in transit on the sea.

The builders risk policy includes$100,000 o land-based transitcoverage or materials and supplieswhile being transported rom an o-premises site to the university campus.

Coverage under the applicable policyincludes coverage or remote losses

beyond direct damage to property. Inocean marine insurance, coverage isprovided not only or direct damageto property (e.g., hull insuranceencompasses direct damage to thevessel and its equipment), but alsoor nancial losses that are remote innature. An ocean marine insurancepolicy includes a sue, labor and travelclause under which, or example,expenses incurred by the insured toprevent an imminent covered loss areaddressed.

The builders risk policy includessubstantial coverage or a range onancial losses that are remote innature, such as $100,000 o accountsreceivable coverage; coverage oradded costs related to impairedcollections; $25,000 o valuablepapers and records coverage; coverage($25,000) or a contract penaltyimposed on the policyholder or ailureto meet a deadline; coverage or

expediting expense incurred by thepolicyholder to prevent a delay thatotherwise would have resulted becauseo direct damage to covered propertycaused by a covered cause; and

$25,000 o computer equipment, dataand media coverage.

Coverage under the applicable policyincludes coverage or non-ownedproperty in the care, custody, orcontrol o the insured or which theinsured is legally liable. In oceanmarine insurance, coverage is providedor the liability exposure aced bythe carrier (i.e., the vessel owner) inconnection with loss to cargo in itscare, custody or control while being

transported by the vessel.

Inclusion o protective warranties is inthe interest o both general contractorsand insurers. Absence o such

warranties would render the exposureuninsurable and result in a higher

incidence o construction accidents,making many construction projects

economically ineasible.

The builders risk policy providessubstantial coverage or non-owned

property in the care, custody or controlo the insured or which the insured islegally liable. First, coverage propertyis specically dened to include notonly property owned by the insured,but also property o others or whichthe insured is legally liable. Second, the$25,000 coverage extension pertainingto computer equipment, data and mediaincludes not only owned property, butalso non-owned property or which theinsured is legally liable. Deense coverageis implied under the policy (i.e., the

duties in the event o loss conditionspecies that the insured is not authorizedto admit any liability without the consento the carrier, which means that thecarrier reserves the right to contest asuit alleging liability on the part o theinsuredpresumably at the expense othe carrier).

All o the coverage eatures associatedwith inland marine insurance need not be

present or a builders risk policy to qualiyas inland marine insurance as opposed toproperty insurance, and the presence oa single coverage eature per se does notautomatically transorm what otherwise

would be property insurance into inlandmarine insurance. These coverageeatures must be collectively considered indetermining whether a builders risk policyconstitutes inland marine insurance asopposed to property insurance.

Preserving AordableCoverageBecause the risk o loss that is insuredunder a builders risk policy is substantial,particularly in the commercial arena,

insurers typically issue such policies on aninland marine coverage orm. Inclusiono protective warranties is in the interesto both general contractors and insurers.Absence o such warranties would renderthe exposure uninsurable and resultin a higher incidence o constructionaccidents, making many constructionprojects economically uneasible.

For such warranties to be upheld in SFPjurisdictions, at a minimum, insurersand brokers must careully design thepolicy to meet statutory requirementsor inland marine insurance. Meetingthese statutory requirements entailsthe inclusion o certain coverageeatures in the policy. An abundanceo these coverage eatures likely willtilt resolution o a dispute between aninsurer and a policyholder in avor othe policyholder. Liberty Internationalv the Weitz Company et al. bodeswell or the continued availability ocomprehensive builders risk insurance

at an aordable price.n



12/16

Not an Incidental Exposure

Claim operations are conronted withthe reality o an ever-growing number oclaims involving undocumented workers.

While it is a violation o ederal law tohire an illegal alien, it is estimated thatthere are millions o undocumentedworkers currently employed in theUnited States. A signicant number areoten hired to perorm dangerous tasks.During a recent ve-year period, the rateo workplace atalities or oreign-bornworkers increased 43 percent compared toa 5 percent decline among U.S. citizens.Undocumented workers are either poorlytrained or not provided with any saetyorientation, due to cultural or languagebarriers.

The Federal Immigration Reorm &Control Act was enacted by Congressin 1986. The law made it illegal to hirea worker who is either unlawully livingin the United States or unlawullyauthorized to work in the United States.

Employers are mandated under this lawto veriy the legal status o every hireby completing an I-9 orm with the

ederal government. Employers ace civilnes and may be subject to criminalprosecution i ound guilty o ailing toveriy legal status or knowingly hiring anillegal alien.

But even or diligent employers, thisprocess o verication isnt enough.It is estimated that millions o illegalimmigrants have purchased somecombination o a countereit SocialSecurity card, drivers license, work visa,green card and/or birth certicate. These

documents are very authentic looking, soonly an expert review can identiy themas countereit. Many o these documentsare acquired as part o the price paid tobe smuggled into the U.S., or are easilyacquired through vendors operating onthe street and/or fea markets.

Other employers are not so diligent intheir hiring eorts, either through lacko controls or deliberate avoidance o

the law. These customers may ail tocomplete the I-9 orm and, in the worstscenario, pay the worker cash ratherthan through a ormal payroll process.Such customers are not only in violationo ederal law, but are also potentiallyguilty o payroll raud in the eyes o theirworkers compensation insurance carrier.

Despite the illegality, the hiring oundocumented workers continuesunabated in many industries. One authorhas taken the position that the problemisnt illegal workers, the problem is illegalemployers. Fortune magazine estimatesthat up to 40 percent o all new U.S.home construction is completed by illegal

workers.1

A recent study cited in thatsame article concluded that 36 percent oinsulation workers, 29 percent o rooersand 28 percent o drywall workers areundocumented workers.

Beyond the diculty o nding peopleto perorm jobs that U.S. citizens may beunwilling to perorm, another incentiveor hiring undocumented workers is theopportunity to pay a lower wage to thisworker. The lower labor cost provides aperverse economic reality. It has been

suggested that the price o a new homein Florida would increase by as much as40 percent i these lower-paid workerswere eliminated rom the home buildingindustry.

Challenges oUndocumented WorkersAn undocumented worker is not likely toreport a sot tissue injury or ear o losinghis or her job. It is the undocumentedworker who alls rom a rootop or is

crushed by a piece o equipment whoseclaim is reported. It is common or aclaim involving traumatic brain injury,a severe burn or a spinal cord injury toeasily exceed $1 million.

Attempts to deny these claims based onarguments that these workers are illegalhave largely ailed. For example, a keydecision in Connecticut was renderedin Dowling v Slotnik, 712 A.2d 386,

The Challenge o Undocumented Workersb Jon Gice, CPCU, ARM

Jon Gice, CPCU, ARM, is thesecond vice president o theworkers compensation major case

unit at Travelers. An insuranceexecutive with more than 25

ears experience, Gice previouslheld senior leadership positions

at Roal & Sun Alliance, ManagedComp, Orion Capital and theSt. Paul Companies. In addition

to having built and managedworkers compensation claims

and managed care programs, hehas worked in workplace health,

saet and underwriting. Gice is arequent author and speaker onindustr trends and topics.


Editors note: This article frst appearedin the October 2008 issue o theCPCU Societs Claims Interest Group

newsletter.


13/16

409. The court held that the legislatureintended to include illegal aliens in thegroup o persons who, in order to obtaincompensation or work-related injuries,are not only eligible, but also requestedto invoke the remedy provided by theWorkers Compensation Act. Whenconronted with a claim that involves the

issue o an illegal alien or undocumentedworker, it is essential that the appropriatestate or jurisdictions laws, court decision,and rules are careully considered inall claim decisions. There are severalcomprehensive documents available tomember companies o the AmericanInsurance Association (AIA), www.aiadc.org, and other organizations. Butthe law in this area is not static, and noone document should be relied on inconsidering our duties and obligationsunder the law or the benets that are

allowable under law. To that end,contact local deense counsel to assurecompliance with the states current lawon these issues.

An undocumented worker who sustainsa catastrophic injury presents additionalcosts that are only occasionally acedin claims involving U.S. citizens.Interpreter service is the most commonand perhaps obvious additional cost, but

the undocumented worker also presentsthe ollowing potential additional claimcosts:

Transportation.

Family members, i they reside in theU.S., oten do not hold a valid driverslicense or own a vehicle, so expensivemedical transportation servicesbecome necessary.

Housing.Family members oten do notreside in the U.S., resulting in thecatastrophically injured worker havingno viable U.S. residence to returnto that can be modied to meet theworkers needs.

Agency attendant care.Family members oten do not residein the U.S., producing increasedcosts through the use o proessionalagencies in meeting the ongoingnursing and home care needs o theundocumented worker.

Return to work is not an option.Because the undocumented worker cannot be legally reemployed, a return-to-work eort may be deemed a violationo the Federal Immigration Law.

Claim Handling SuggestedSolutionsThe ollowing two actions are suggestedto meet the challenges o each claiminvolving a known or suspectedundocumented worker:

Social Security number.A claim where the injured worker cannot produce a Social Security numberis easy to identiy as involving anundocumented worker. A claim where

a Social Security number is presentedis more complicated, as the numbermay be countereit. Any claim that issuspected to involve an illegal workermust be investigated to conrm legalstatus through contacting a localSocial Security administration oce.The Social Security oce will requirethe employers TIN number, so beprepared beore making the call. Ithe employer reuses to participate

in the investigation, this reusal maystrongly suggest that the worker isundocumented. The Social Securityoce is the easiest way to veriy thenumber, and there is no charge.

Beneft Limitations.Once it is ound that the worker istruly an undocumented worker, claimhandling needs to ocus on expeditingmaximum medical improvement.Additional care must be taken in thecalculation o average weekly wage.For example, some states, such asFlorida, dene wages as: earnedand reported or ederal incometax purposes on the job where theemployee is injured .

Obtaining a wage statement romthe employer is a critical step in theinvestigation o a claim involving anundocumented worker, as real wages,using the denition o what is reportedor ederal tax purposes, may total zero.Local law may permit or require onlya minimum compensation rate be paidin such cases. State law may also limitthe other benets the claimant mightotherwise be entitled to receive, suchas vocational rehabilitation benets,since rehiring the undocumented

worker in any new position violatesederal law!

Handling claims that involve anundocumented worker are challenging,and rom all indications, these claimswill only continue to grow in number.A claim handler needs to understand thechallenge and nd ways to best handle theclaim to the most optimal conclusion. n

Endnote1. Birger, J. and Mero, J. Immigration

reorm: Building costs could soar.

Fortune 12 Jun. 06, Vol. 153, No. 11.

Accessed 9/9/06: www.mone.cnn.com



14/16


New Interest Group Member Beneftb CPCU Societ Sta

Beginning Jan. 1, 2009, every Societymember became entitled to benets romevery interest group or no extra ee beyondthe regular annual dues, including accessto their inormation and publications,and being able to participate in theireducational programs and unctions.

An Interest Group Selection Surveywas e-mailed to members beginningmid-November. By responding to thesurvey, members could identiy any othe existing 14 interest groups as beingin their primary area o career interestor specialization. I you did not respondto the survey and want to take ulladvantage o this new member benet,go to the newly designed interest grouparea o the Societys Web site to learnmore about each o the interest groupsand indicate your primary area o careerinterest. You will also see options toreceive your interest group newsletters.

Currently, there are 14 interest groups:Agent & Broker; Claims; Consulting,Litigation & Expert Witness; Excess/Surplus/Specialty Lines; InormationTechnology; International Insurance;Leadership & Managerial Excellence

(ormer Total Quality); Loss Control;Personal Lines; Regulatory & Legislative;Reinsurance; Risk Management; SeniorResource; and Underwriting.

As part o the Interest Group SelectionSurvey, members also were asked toexpress their interest in the ollowingproposed new interest groups: Actuarial& Statistical; Administration &Operations; Client Services; Education,Training & Development; Finance &Accounting; Human Resources; Mergers

& Acquisitions; New Designees/YoungCPCUs; Nonprots & Public Entities;Research; Sales & Marketing; and TheExecutive Suite.

Members who missed the Survey mayupdate their selections on the SocietysWeb site or by calling the MemberResource Center at (800) 832-CPCU,option 4. Members can also order printednewsletters or nonprimary interest groupsat an additional charge. n

The Agent & Broker Interest Group promotes discussion o agenc/

brokerage issues related to production, marketing, management and

eective business practices.

The Claims Interest Group promotes discussion o enhancing skills,increasing consumer understanding and identiing best claims settlement

tools.

The Consulting, Litigation, & Expert Witness Interest Group promotesdiscussion o proessional practice guidelines and excellent practice

management techniques.

The Excess/Surplus/Specialty Lines Interest Group promotes discussion

o the changes and subtleties o the specialt and non-admitted insurance

marketplace.

The Inormation Technology Interest Group promotes discussion o theinsurance industrs increasing use o technolog and whats new in the

technolog sector.

The International Insurance Interest Group promotes discussion o

the emerging business practices o todas global risk management andinsurance communities.

The Leadership & Managerial Excellence Interest Group promotes

discussion o appling the practices o continuous improvement and total

qualit to insurance services.

The Loss Control Interest Group promotes discussion o innovativetechniques, applications and legislation relating to loss control issues.

The Personal Lines Interest Group promotes discussion o personal risk

management, underwriting and marketing tools and practices.

The Regulatory & Legislative Interest Group promotes discussion o the

rapidl changing ederal and state regulator insurance arena.

The Reinsurance Interest Group promotes discussion o the critical issues

acing reinsurers in todas challenging global marketplace.

The Risk Management Interest Group promotes discussion o riskmanagement or all CPCUs, whether or not a risk manager.

The Senior Resource Interest Group promotes discussion o issues

meaningul to CPCUs who are retired (or planning to retire) to encourage a

spirit o ellowship and communit.

The Underwriting Interest Group promotes discussion o improving the

underwriting process via sound risk selection theor and practice.


15/16

Editors note: Reprinted with thepermission o the American Institute or

CPCU and Insurance Institute o America(the Institutes). Flitner based this article

on material published b the Institutesin its CPCU and Associate in Risk

Management designation programs.This article frst appeared in the Februar

2009 issue o the CPCU Societs Agent &Broker Interest Group newsletter.

Given todays litigious climate andcertain court decisions, members o theconstruction industry should careullyresearch and weigh all insurance optionsbeore acquiring the necessary insurancecoverages. CGL policies, which provideor a broad range o risks and exposures,

provide coverage or commercial propertyowners and general contractors who aceloss exposures such as vicarious liabilityand supervision o an independentcontractors work, but there are also

other coverage options a property owneror general contractor might nd worthexploring.

Vicarious liability is a legal responsibilitythat occurs when one party is held liableor the actions o a subordinate or anassociate because o the relationshipbetween the two parties. There are manysituations in which a property owner ora general contractor (the principal)can be held vicariously liable or injuryto others resulting rom the negligenceo its independent contractor during aconstruction project. In addition, theprincipal can also be held directly liableor injury to others that results rom theprincipals alleged ailure to properlysupervise its independent contractorswork. Some principals see greater benetin transerring the cost o insuring thesetypes o loss exposures to the contractor.

Three common options a principal mayconsider or coverage protection are:

(1) Requiring the independentcontractor to purchase an ownersand contractors protective (OCP)liability insurance policy listingthe principal as the namedinsured.

(2) Requiring the contractor to addthe principal as an additionalinsured under the contractorsCGL policy.

(3) Using a hold-harmless agreementto transer the nancialconsequences o liability claimsto a contractor that is working onthe project. The advantages anddisadvantages o each should beconsidered by the owner whenmaking insurance decisions.

OCP liability insurance, provided byusing ISO orm CG 00 09, is typically

a separate, monoline policy, purchasedby an independent contractor, that liststhe principal as the named insured. OCPcoverage can be purchased by a generalcontractor to protect the building owner,

or by a subcontractor to protect a generalcontractor. An OCP policy does notprotect the designated contractor whoactually purchases the policy.

OCP policies only cover operationsperormed or the named insured by thedesignated contractor at the locationspecied in the policy. When the work iscompleted, the coverage under the OCPpolicy ends. OCP coverage is primaryinsurance, and the project owners OCPcoverage will pay beore the owners ownCGL policy, i any.

The property owner could also askto be added to the contractors CGLpolicy as an additional insured, which isaccomplished by adding an endorsementto the contractors policy that designatesthe property owner as an insured.Similarly, a general contractor can benamed as an additional insured undera subcontractors CGL policy. Thereare a number o additional insured

endorsements available, although in2004, Insurance Services Oce Inc.(ISO) added more restrictive languageto the CGL endorsements that deal withconstruction-related risks.

Endorsement CG 20 10 is commonly usedor naming property owners, lessees, orcontractors as additional insureds underthe CGL policies o organizations that areentering into contracts with any o thoseparties. A listed person or organizationis an additional insured or liability

or bodily injury, property damage,or personal and advertising injurycaused, in whole or in part, by the actsor omissions o those (such as the namedinsureds subcontractors) acting on thenamed insureds behal. The location othe operations must be designated in theendorsements schedule in order or thenamed person or organization to be anadditional insured or those operations.

Coverage Options Worth Exploringb Arthur Flitner, CPCU, ARM, AIC

Continued on page 16


Arthur Flitner, CPCU, ARM,

AIC, is a senior director o

knowledge resources at theAmerican Institute or CPCU andInsurance Institute o America (the

Institutes) in Malvern, Pa., wherehe participates in the Institutes

product development process.Flitner is the author o numerous

textbooks, writes articles orinsurance trade publicationsand gives presentations on

technical insurance topics atindustr meetings, workshops

and webinars. His main area oendeavor is in the teaching o

commercial propert and liabilit

insurance contracts. He previouslwas associate editor oThe Fire,

Casualty, and Surety Bulletins o theNational Underwriter Compan.


16/16

CPCU Society720 Providence RoadMalvern, PA 19355www.cpcusociety.org

Address Service Requested

PRSRT STD

U.S. POSTAGE

PAIDBARTON & COONEy

INSURINGYOUR SUCCESS

Chartered PropertyCasualtyUnderwriters

S O C I E T Y

Volume 21 Number 1 March 2009

Underwriting Interest Group

The Underwriting Interest Group newsletter ispublished b the Underwriting Interest Group o thCPCU Societ.

Underwriting Interest Grouphttp://underwriting.cpcusociet.org

ChairJ. Brian Murph, CPCU, ARM, ARe, AMIMBrokers Risk Placement ServiceE-mail: [email protected]

Co-EditorGregor J. Masse, CPCU, CIC, CRM, ARM, PMP, CLCSelective Insurance Compan o America Inc.E-mail: [email protected]

Co-EditorStephen W. White, CPCUState FarmE-mail: [email protected]

CPCU Society720 Providence RoadMalvern, PA 19355

(800) 932-CPCUwww.cpcusociet.org

Director of Program Content and Interest GroupsJohn Kell, CPCU, CPCU Societ

Managing EditorMar Friedberg, CPCU Societ

Associate EditorCarole Roinestad, CPCU Societ

Design/Production ManagerJoan A. Satchell, CPCU Societ

Statements o act and opinion are the responsibilio the authors alone and do not impl an opinion othe part o ofcers, individual members, or sta othe CPCU Societ.

Underwriting Trends

Coverage Options Worth ExploringContinued from page 15

The policy limits are available to thenamed insured and all those listed asadditional insureds or the duration othe policy period, but a notice o changesto the policy is sent to the named insuredonly.

The third option a property owner mayconsider is negotiating terms o a hold-harmless or Indemnity agreement, whichis a contract provision in which one partyagrees to indemniy another. This type

o agreement can be used to transer thenancial consequences o liability lossexposures rom one party to another.

Hold-harmless agreements are not alwaysenorceable, and in some states statutoryor common law prohibits one party romassuming another partys liability incertain situations. When hold-harmlessagreements are enorceable, the partyassuming anothers liability can insureitsel or this obligation by making sure

its CGL policy includes open-endedcontractual liability coverage.

In many instances, insurers restrictcontractual liability coverage underthe CGL to a ew specied types oincidental contracts (such as leasesand elevator maintenance agreements)that do not include constructioncontracts, using the Contractual LiabilityLimitation Endorsement (CG 21 39).Any rm accepting contractual liability

under a construction agreement mustmake sure that this endorsement has notbeen added to its CGL policy.

The insurance needs o propertyowners and contractors can be verycomplicated, and all options should becareully reviewed. It is important or aproperty owner or general contractor tounderstand the nature and scope o allcoverages oered, exclusions applied, andany potential problems or pitalls.n

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