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CHAPTER 22
Commercial Property Insurance
I. SUGGESTED CLASSROOM TIME: 50–75 MINUTES
II. CHAPTER OVERVIEW
In the first edition of this text the “Branches of the Private Insurance System” were
covered in a single chapter. Many adopters of the first edition suggested expanding this
material, and over the subsequent editions the material expanded to cover four chapters.
These chapters are devoted to describing in greater detail the branches of the private
insurance system.
This chapter in prior editions discussed the area of fire insurance based upon the
Standard Fire Insurance Policy. Since the Standard Fire Insurance Contract is not being
III. LECTURE OUTLINE
A. Introduction—overview of property insurance
1. Each year there are large losses of property and lives from fires and other perils.
(See the Property Insurance Fact Book for current numbers.)
B. Commercial Package Policy (CPP)
1. Commercial property coverage
a. Part of ISO Commercial Package
b. Similar coverage is offered by non-ISO companies
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ii. Personal property coverage—called business personal property; also
described is nonowned property but in insured’s care, custody, or control.
formulas, and computer software.
b. Perils covered—causes of loss, Basic Form
i. Fire
ii. Lightning
iii. Explosion
iv. Windstorm or hail
c. Broad form coverage adds falling objects and water damage.
d. Special form provides coverage on an “open perils” basis.
C. Fire Insurance History
1. Early U.S. history
D. Defining Fire
1. Fire—rapid combustion accompanied by heat, and light or glow. The fire must be
“hostile” for an insured to collect. Definition of fire limits coverage. The policy does
E. Business Income Coverage—Loss of Use
1. Indirect losses
a. Loss of income—inability to generate income due to the loss
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2. Business income from dependent properties—no physical loss but operations are
F. Property Insurance Rating
1. Class rating operates by locating a particular exposure within its proper class, then
applying the class rate (dollars per hundred of property value) to the particular
G. Transportation Insurance—Ocean Marine Insurance
1. One of the earliest forms of insurance and associated with bottomry and
respondentia loan arrangements; in exchange for a premium above the interest on
3. A typical ocean marine insurance policy covers the following exposure on an “all
risks” basis (No policy is actually “all-risk.” The term open peril is the more modern
4. Particular and general average losses
a. Particular average loss adjustments make the loss borne by the owners of the
cargo.
b. General average loss adjustments make the loss payable by all participating in
5. Rating factors in ocean marine
a. Seaworthiness
b. Experience of the captain and crew
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1. IM is a very important and not well-known insurance coverage. There was over
several billions of coverage in premiums in recent years.
2. IM insurance is an American distinction due to the historical development of
transportation in the United States. To resolve jurisdictional disputes, the
Nationwide Inland Marine Definition was created in 1933. IM now covers:
a. Property designated for export
3. Bailment—responsibility for the property of others being transported or stored
4. Shipping property on common carriers
5. Property used in transportation and communication
6. Personal and commercial property floater policies
I. Aviation Insurance
1. The definition of aircraft is broad and includes planes, helicopters, and space
satellites.
2. There is separate coverage for commercial and noncommercial aircraft.
J. Business Automobile Insurance—the cause of loss, part of the CPP
1. The definition of “collision” is very important in auto property insurance. “Contact
between auto and another object.” “Other than collision” includes all losses not
considered a “collision” and ones listed in the contract.
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IV. ANSWERS TO REVIEW QUESTIONS
1. What is the difference between real and personal property? Why is this
difference important in insurance underwriting and pricing (rating)? For
insurance purposes, property is divided between real and personal. Property is either
2. Briefly explain the format and content of the ISO Commercial Package
Policy (CPP). The CPP is composed of a set of common declarations and conditions,
3. Identify several different types of organizations that might purchase a
CPP. The Insurance Services Office (ISO) designed the Commercial Package Policy
4. What role does the ISO play in the commercial property insurance
market? The ISO (Insurance Services Office) is an industry-supported association
5. Why do insurers insist on exact identification of an insured’s covered
property? Insurers insist on an exact identification of an insured’s covered property
6. Identify some property excluded from coverage under the building and
personal property coverage form. The building and personal property coverage
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7. What is business personal property? Business personal property includes such
8. List the fourteen perils covered in the basic causes-of-loss form. The
9. Describe the chief difference in coverage between the broad and special
policy forms. The broad causes-of-loss form is a named perils form, covering only
10. Explain the difference between extra expenses and continuing expenses in
BI coverage. When a property loss occurs, some businesses must spend sums of
11. Give some examples of a need for BI coverage from dependent properties.
Business income from dependent property coverage covers situations where there is
physical damage to other businesses upon which the insured is heavily dependent. For
12. What is a reporting form, and what purpose does it serve? Insurance
companies and insureds use reporting forms to make sure fluctuating amounts of
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13. Describe the differences in setting premiums using schedule and class
rating systems. Schedule rating uses a basic rate and credits and debits the rate
based upon characteristics—good and not so good—of the particular structure. There is
14. Describe the loss exposures insured by hull, cargo, and freight policies in
ocean marine insurance. 1) The hull exposure occurs if there is damage or loss to
the ship, its supplies, equipment or engine(s); 2) cargo coverage is designed to handle
15. Why is ocean marine coverage so broad in scope? What are the limits on
ocean marine coverage with respect to losses not covered? Ocean marine
policies must be broad in the perils covered because one cannot easily determine the
16. Identify some items in your possession that have been covered by inland
marine insurance at some point in time. Anything transported on a truck, plane,
or train would have been covered by inland marine insurance.
17. What factors are considered when insurers develop a rate for an ocean
marine exposure? The following factors usually are considered: 1) the
18. What is the Nationwide Definition of marine insurance? The 1933
Nationwide Definition settled a dispute between the fire and the inland marine
insurers. (The first title was the Nationwide Definition and Interpretation of the
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19. What kinds of property are covered by floater policies? Floater inland marine
20. What is a bailment? Describe three bailments in which you have been
involved. A bailment occurs when the owner of property temporarily transfers
21. Describe the difference between the annual transit policy and the motor
truck cargo policy. The annual transit policy protects the insured, e.g., a department
22. What is the difference between blanket and scheduled floaters? A blanket
23. Define the term collision. “Collision” in automobile insurance means contact
considered to be a collision because the proximate cause of the loss controls payment.
V. ANSWERS TO OBJECTIVE QUESTIONS
1. The basic form of business property coverage provides protection against all the
following perils except
2. If a business has large differences in the value of the inventory it has on hand during
the year, the cost of its insurance requires the ______________ form of insurance
policy.
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3. Which of the following statements is true?
4. Floater policies cover
5. Property that is permanently attached to land, such as buildings, is called
6. Which of the following is considered when calculating a property insurance rate?
7. Which of the following is not one of the categories of indirect losses?
8. A property insurance ______ is the cost per each $100 of exposed value.
VI. IDEAS FOR INSTRUCTORS AND TEACHING METHODS
1. Select a firm that is fairly familiar to your students. Have the students discuss what the
firm does and how it does it. Have them enumerate the direct and indirect losses that
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3. Have students identify and discuss the types of losses that could occur in
4. Have students consider component parts of business income loss (lost profits and
continuing expenses). Get examples from the FC&S Bulletins.
5. Have students develop examples of when a dependent property loss could disrupt
6. Have students identify what role ocean marine or inland marine plays in their lives
7. Discuss inland marine insurance as a “loan.” Because of subrogation, the insurer is
likely to recover from the negligent shipper (or their insurer). Thus, all the insurer