Actuarial Notes

BPP Additional Coverages and Coverage Extensions

Study guide: Exam DISC-IA

Additional coverages and coverage extensions are the parts of the building and personal property coverage form (BPP) that pay for costs and property the main insuring agreement leaves out. The six additional coverages (debris removal, preservation of property, fire department service charge, pollutant clean-up and removal, increased cost of construction and electronic data) apply on every BPP. The seven coverage extensions apply only when the declarations show a coinsurance percentage of 80% or more, or a value reporting period symbol, and each carries a small limit of its own. The provisions below follow ISO CP 00 10 10 12, sections A.4 and A.5.

B = \min\big(0.25\,(P + d),\ C - P,\ E\big)

\text{Debris} = \min\big(E,\ B + 25{,}000\big)

\text{ICC} = \min\big(10{,}000,\ 0.05\,C\big)

  • Symbols: E is the actual debris removal expense, P is what the insurer pays for the direct physical loss to the damaged covered property, d is the deductible and C is that property's limit of insurance. B is the debris removal paid within the limit. When E exceeds B, the form pays up to $25,000 more per location per occurrence in addition to the limit. ICC is the most paid for increased cost of construction for each building with its own limit.
  • Debris removal: Pays to remove debris of covered property and other debris on the described premises caused by a covered cause of loss during the policy period, if the expense is reported in writing within 180 days. Within the limit it pays up to 25% of the deductible plus the direct loss payment, and the loss payment plus debris removal cannot exceed the limit. If either cap binds, up to $25,000 more per location is paid. If no covered property was damaged, the most paid to remove other property's debris is $5,000 per location. It does not pay to remove deposits of mud or earth, to extract pollutants from land or water, or to remove property not covered.
  • Preservation of property: Covers direct physical loss to covered property while it is moved to protect it from a covered cause of loss, or while temporarily stored elsewhere, for damage within 30 days after it is first moved. It does not increase the limit.
  • Fire department service charge: Pays up to $1,000 per described premises, unless the declarations show more, for the insured's liability for fire department service charges assumed by contract before the loss or required by local ordinance. No deductible applies, and the limit holds however many departments respond.
  • Pollutant clean-up and removal: Pays to extract pollutants from land or water at the described premises when their release was caused by a covered cause of loss during the policy period, reported within 180 days. The most paid is $10,000 per described premises for each separate 12-month period of the policy. Testing and monitoring are excluded, except testing done in the course of extraction.
  • Increased cost of construction: Applies only to buildings to which the replacement cost optional coverage applies. It pays the increased cost of meeting the minimum standards of a building, zoning or land-use ordinance or law in force at the time of loss when repairing or rebuilding damaged parts of the building. It pays nothing for a law the insured should already have complied with and did not, for pollutant or fungus requirements, or until the building is actually repaired or replaced, as soon as reasonably possible and within two years. The limit is the lesser of $10,000 and 5% of the building's limit; under a blanket limit, the lesser of $10,000 and 5% times the damaged building's value times the coinsurance percentage.
  • Electronic data: Pays to replace or restore electronic data destroyed or corrupted by a covered cause of loss, or, if it is not restored, the cost of blank media. The causes of loss are those applying to business personal property, limited to the "specified causes of loss" and collapse when the special form applies. A virus or harmful code is covered, but manipulation by an employee or by someone retained to work on the system is not. The limit is $2,500 for all loss in a policy year, unless the declarations show more.
  • Which are additional insurance: Under the limits clause, fire department service charge, pollutant clean-up, increased cost of construction and electronic data are paid separately from the limits. Debris removal is within the limit, plus the $25,000 additional amount, and preservation of property does not increase the limit.
  • Coverage extensions: Each is additional insurance unless the extension says otherwise, and the coinsurance condition does not apply to them.
    • Newly acquired or constructed property: new buildings being built on the described premises and buildings acquired elsewhere for a similar use or as a warehouse, up to $250,000 per building; business personal property at newly acquired locations (not fairs, trade shows or exhibitions) or in newly acquired or constructed buildings at the described location, up to $100,000 per building. Coverage ends at the earliest of policy expiration, 30 days after acquisition or the start of construction, or when the insured reports values.
    • Personal effects and property of others: personal effects of the insured, its officers, partners or members, managers and employees, and property of others in the insured's care, up to $2,500 per described premises. Theft of personal effects is not covered.
    • Valuable papers and records (other than electronic data): the cost to restore lost information for which no duplicates exist, up to $2,500 per described premises. Blank material and the labor to copy records are paid within the business personal property limit.
    • Property off-premises: covered property temporarily at a location the insured does not own, lease or operate, in storage at a location leased after the policy term began, or at a fair, trade show or exhibition, up to $10,000. It excludes property in or on a vehicle, and property in the care of salespersons except at a fair or show.
    • Outdoor property: fences, antennas and satellite dishes, trees, shrubs and plants, including debris removal, but only against fire, lightning, explosion, riot or civil commotion and aircraft. The limit is $1,000 per occurrence, and no more than $250 for any one tree, shrub or plant.
    • Non-owned detached trailers: trailers used in the business, in the insured's care at the premises, that the insured is contractually responsible for, up to $5,000, excess over other insurance. Loss while the trailer is attached to a vehicle or being hitched or unhitched is excluded.
    • Business personal property temporarily in portable storage units: within 100 feet of the building or premises, for up to 90 days, up to $10,000. This limit is part of, not in addition to, the business personal property limit.

Debris Removal Above the 25% Cap A warehouse is insured for $200,000 with a $1,000 deductible and no coinsurance penalty. A fire causes $170,000 of direct damage, and removing the debris costs $70,000. How much does the insurer pay for debris removal, and how much does the insured bear?

Answer The loss payment is the loss less the deductible, within the limit. Then the debris removal paid within the limit is capped at 25% of the payment plus the deductible, and by the room left under the limit.

\begin{align*}
P &= 170{,}000 - 1{,}000 \\
&= 169{,}000 \\
B &= \min(0.25 \times 170{,}000,\ 200{,}000 - 169{,}000,\ 70{,}000) \\
&= \min(42{,}500,\ 31{,}000,\ 70{,}000) \\
&= 31{,}000 \\
\text{Debris} &= \min(70{,}000,\ 31{,}000 + 25{,}000) \\
&= 56{,}000
\end{align*}

The debris expense exceeds both caps, so the additional $25,000 applies. The insurer pays $169,000 for the fire and $56,000 for debris removal, and the insured bears $14,000 of the debris expense as well as the deductible.

Extensions After a Fire A florist's BPP declarations show a 90% coinsurance percentage. A fire at the shop burns three ornamental trees worth $400 each and $600 of fence, both outdoors. An employee's coat, worth $300, burns in the back room. The town charges $1,800 for the fire department's response, as its ordinance allows. What do the extensions and additional coverages pay? How would the answer change if the trees had been blown down by wind?

Answer Fire is one of the five causes of loss for outdoor property. Each tree is capped at $250, and the total at $1,000 per occurrence.

\begin{align*}
\text{Trees} &= 3 \times \min(400,\ 250) \\
&= 750 \\
\text{Outdoor} &= \min(750 + 600,\ 1{,}000) \\
&= 1{,}000
\end{align*}

The coat is an employee's personal effect, paid in full under the $2,500 personal effects extension. The fire department service charge is required by ordinance, so it is paid up to $1,000 with no deductible. Windstorm is not one of the outdoor property causes of loss, so trees and fence blown down by wind would not be covered at all.

How it appears on the exam

  • DISC-IA: The objective covers the BPP's additional coverages and coverage extensions. Questions describe a loss and ask which additional coverage or extension pays a cost, what its limit is, and whether it is paid within or in addition to the limit of insurance.
  • Calculations: Debris removal is the usual calculation, with the 25% cap, the limit and the $25,000 additional amount; outdoor property with its per-item cap is another.
  • Linked pages: What is covered property in the first place is on BPP Covered Property, and the limits clause that names the separate coverages is on BPP Limits of Insurance and Deductible.

Exam traps

  • Extensions need 80% coinsurance: No extension applies unless the declarations show a coinsurance percentage of 80% or more, or a value reporting period symbol. The additional coverages apply regardless.
  • Outdoor property is named perils: Trees, fences and antennas are covered only against fire, lightning, explosion, riot or civil commotion and aircraft, even under the special causes of loss form. Wind and hail damage to them is not covered.
  • 25% of what: The debris removal cap is 25% of the deductible plus the amount paid for direct loss, which equals the loss itself when the loss less the deductible is within the limit. It is not 25% of the limit, and the debris removal paid within the limit still cannot push the total past the limit.
  • Increased cost of construction needs replacement cost: It applies only where the replacement cost optional coverage applies, and pays nothing until the building is rebuilt.
  • Portable storage units are inside the limit: Unlike the other extensions, the $10,000 for property in portable storage units does not add to the business personal property limit.