Actuarial Notes

Causes of Loss Special Form

Study guide: Exam DISC-IA

The Causes of Loss – Special Form (ISO CP 10 30) is the open perils option of the commercial property program: when "Special" is shown in the declarations, covered causes of loss means direct physical loss unless the loss is excluded or limited in the policy. Attached to a coverage form such as the BPP, it covers every cause the basic and broad forms name and more, theft included, so the work of reading it lies in its exclusions, its limitations and the exceptions that give coverage back.

\text{Covered}(c) \iff c \notin E \ \text{and}\ c \notin \Lambda

\text{Paid}_{\text{theft},k} = \min\big(L_k,\ \ell_k\big)

  • Symbols: c is the cause of a loss, E is the set of exclusions and \Lambda the limitations. In the second block, L_k is a theft loss to property in special-limit category k in one occurrence and \ell_k is that category's limit; the special limits are part of, not in addition to, the limit of insurance. The burden shifts to the insurer: a loss is covered unless the insurer shows that an exclusion or limitation applies (Causes of Loss).
  • "Specified causes of loss": The form defines these as fire; lightning; explosion; windstorm or hail; smoke; aircraft or vehicles; riot or civil commotion; vandalism; leakage from fire-extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; and water damage. Water damage here includes accidental discharge from a cracked system on the premises (other than a sump) and, if caused by wear and tear, from a broken off-premises municipal water or sewer pipe. Many exceptions give coverage back only when a specified cause of loss results.
  • Exclusions B.1 (regardless of any other cause): The same as the named perils forms: ordinance or law, earth movement, governmental action, nuclear hazard, utility services, war and military action, water, and fungus, wet rot, dry rot and bacteria. Under this form, volcanic eruption that results in fire, building glass breakage or volcanic action is covered, and fungus that results in a specified cause of loss is covered.
  • Exclusions B.2: artificially generated electrical current (ensuing fire covered); delay, loss of use or loss of market; smoke from agricultural smudging or industrial operations; wear and tear, rust and corrosion, decay, latent defect, smog, settling and cracking, nesting or infestation by insects, birds or animals, mechanical breakdown (ensuing elevator collision covered), and dampness, temperature changes or marring of personal property, with an ensuing specified cause of loss or building glass breakage covered; explosion of the insured's steam boilers; continuous seepage or leakage over 14 days or more; freezing of plumbing unless the insured did its best to keep heat on or drained the system; dishonest or criminal acts, including theft, by the insured, its partners, officers, employees or anyone it entrusts the property to (but destruction by employees is covered, while employee theft is not); voluntarily parting with property because of a fraudulent scheme; rain, snow, ice or sleet to personal property in the open; collapse, except under the collapse additional coverage or when caused by a specified cause of loss, building glass breakage, weight of rain on a roof or weight of people or property; release of pollutants unless itself caused by a specified cause of loss; and neglect to protect property after a loss.
  • Exclusions B.3: weather conditions (only when they combine with a B.1 cause), acts or decisions of any person or body, and faulty planning, design, workmanship, materials or maintenance. For each, a covered cause of loss that results is covered. The form also excludes loss to products from an error or omission in their development, production or use.
  • Limitations: The form does not pay for loss to steam boilers or water heaters from conditions inside them; to a building's interior or contents from rain, snow, sleet, ice, sand or dust unless the roof or walls are first damaged by a covered cause of loss or the damage is from thawing on the building; for theft of building materials not attached to the building (except materials held for sale); for property missing with only an inventory shortage as evidence; or for property transferred on unauthorized instructions. Animals, fragile articles such as statuary and porcelain (not glass or containers of stock), and builders' machinery and tools away from the premises are covered only against the specified causes of loss or building glass breakage.
  • Theft special limits: In any one occurrence of theft, unless the declarations show more: $2,500 for furs and fur garments; $2,500 for jewelry, watches, precious stones and metals and bullion, except jewelry and watches worth $100 or less per item; $2,500 for patterns, dies, molds and forms; and $250 for stamps, tickets (including lottery tickets held for sale) and letters of credit.
  • Additional coverages: Collapse pays for abrupt collapse caused by hidden decay or hidden insect or vermin damage not known to the insured, or by defective construction materials or methods during construction (or afterwards, if a specified cause, building glass breakage or the weight of people, property or roof rain contributes). It excludes buildings in danger of collapse or standing though cracked. Limited fungus coverage pays up to $15,000 per 12-month period for fungus, rot or bacteria resulting from a specified cause of loss other than fire or lightning. Neither increases the limit.
  • Additional coverage extensions: Property in transit covers the insured's personal property more than 100 feet from the premises in a vehicle it owns, leases or operates, against fire, lightning, explosion, windstorm or hail, riot, vandalism, collision or overturn, and theft of a whole package by forced entry into a locked vehicle, up to $5,000 in addition to the limit. Water damage pays to tear out and replace part of the building to repair the system that leaked. Glass pays to board up openings or put up temporary plates while repair is delayed and to remove obstructions when replacing building glass.

A Theft Under the Special Limits A department store's business personal property is insured under the BPP with the special form. Burglars take, in one night: jewelry worth $6,800 made up of items worth more than $100 each; watches worth $1,200, each worth $100 or less; a sheet of stamps worth $600; fur coats worth $3,000; and $5,000 of other clothing. Ignoring the deductible, what does the special form pay?

Answer Theft is covered because nothing excludes it, but three of the categories have special limits, and jewelry and watches worth $100 or less per item are outside the jewelry limit.

\begin{align*}
\text{Paid} &= \min(6{,}800,\ 2{,}500) + 1{,}200 + \min(600,\ 250) \\
&\quad + \min(3{,}000,\ 2{,}500) + 5{,}000 \\
&= 2{,}500 + 1{,}200 + 250 + 2{,}500 + 5{,}000 \\
&= 11{,}450
\end{align*}

The store bears $5,150 of the theft. A higher limit shown in the declarations for a category would close the gap. The same theft would not have been covered at all under the basic or broad form.

Exclusions, Limitations and Their Exceptions A restaurant's building is insured under the special form. Which of these losses are covered? (a) Rain enters through roof flashing that has worn out over years and soaks the ceilings. (b) A dishwasher pipe cracks and floods the kitchen floor in one afternoon. (c) A night manager steals the week's supply of wine. (d) A disgruntled cook smashes the dining-room windows. (e) A wiring error by the electrician who renovated the kitchen starts a fire.

Answer

  • (a) Not covered: Wear and tear is excluded, and rain damage to the interior is limited unless a covered cause first damages the roof or walls.
  • (b) Covered: Sudden discharge from a cracked appliance is not excluded, and it is also a specified cause of loss (water damage). The cost to repair the cracked pipe itself is not paid, but tearing out to reach it is.
  • (c) Not covered: Theft by an employee is excluded as a dishonest act; employee theft is a crime insurance exposure.
  • (d) Covered: The dishonesty exclusion does not apply to acts of destruction by employees.
  • (e) The fire is covered: Faulty workmanship is excluded, but a covered cause of loss that results from it, here fire, is covered.

How it appears on the exam

  • DISC-IA: The objective is the causes of loss special form. Questions give a loss and ask whether an exclusion or limitation applies, whether an exception restores coverage, and what a special limit pays.
  • Comparisons: A common question asks which loss the special form covers that the broad form does not (theft is the usual answer), or which loss no form covers (flood, earthquake).

Exam traps

  • Open perils is not all risks: The B.1 exclusions are the same under every form. Flood and earth movement are excluded even under the special form.
  • Theft limits are per occurrence and inside the limit: The $2,500 and $250 special limits apply to theft only, per occurrence, and do not add to the limit of insurance. Jewelry and watches of $100 or less per item are outside the jewelry limit.
  • Employees destroy versus steal: Employee vandalism is covered; employee theft is excluded.
  • Ensuing loss: Many exclusions (wear and tear, faulty workmanship, mechanical breakdown) end with an exception for a resulting covered or specified cause of loss. Denying the fire because faulty wiring started it misreads the exception.
  • Interior rain: Rain inside a building is covered only if a covered cause first opened the roof or walls. A leak through worn roofing is not.