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Effective September 1, 2017, Insurance Services Office (ISO):

• Broadened coverage for water damage in the CP 10 30 Cause of Loss – Special Form;
• Introduced two new endorsements related to Building Coverage for Tenants and removed one tenant-specific endorsement;
• Revised two Protective Safeguards endorsements;
• Created several new waiting period options for the CP 15 45 Utility Services – Time Element endorsement;
• Created a new optional coverage for the two primary Ordinance or Law endorsements (CP 04 05 and CP 15 31) and the ordinance or law coverage in the Functional Building Valuation endorsement (CP 04 38); and
• Introduced a new endorsement to provide ordinance or law protection for tenants’ improvements and betterments.

Broadened Coverage for Water Damage in the CP 10 30
Historically ISO’s CP 10 30 (Cause of Loss – Special Form) has excluded damage from wear and tear unless the wear and tear resulted in a “specified cause of loss” (a defined term). Included as a “specified cause of loss” and thus excepted from the wear and tear exclusion is: “Accidental discharge or leakage of water or waterborne material as the direct result of the breaking apart or cracking of a water or sewer pipe that is located off the described premises…caused by wear and tear.”
However, current policy language requires the water or sewer pipe be part of a municipal potable water supply or sanitary sewer system. The 09 17 edition revises this requirement by removing the requirement that the pipe be attached to a municipal systems in favor of a potable water supply and/or sanitary sewer systems operated by either a public or private utility service provider granted authority by the regulatory body having jurisdiction over the location where the premises is located.
Removing the municipal system limitation is a broadening of coverage per ISO.

Building Items Coverage for Tenants
Commercial tenants often are contractually required by lease to insure or be responsible for building property such as HVAC equipment, building fixtures, permanently installed machinery equipment and building glass.

ISO addressed the building glass issue more than 10 years ago with the CP 14 70 (Building Glass – Tenant’s Policy), but until this filing, there was no available endorsement to cover other landlord-owned real property. To garner the needed protection, the insured tenant had to rely on the concept of insurable interest (created by contract) and attempt to extend coverage to the landlord’s property through the commercial property policy.

Two new ISO commercial property endorsements more appropriately and specifically address this tenant exposure:

• CP 14 01 09 17 Scheduled Building Property Tenant’s Policy. The tenant’s policy is modified by this endorsement to include certain landlord-owned building property as insured property; but only if the insured specifically schedules the property and provides a limit. When this endorsement is used, the definition of building property includes building glass; or
• CP 14 02 09 17 Unscheduled Building Property Tenant’s Policy. Like the CP 14 01, this endorsement modifies the tenant’s policy to include certain landlord-owned building property as insured property; but unlike the CP 14 01, this endorsement does not require the insured to specifically schedule the property. All property, other than building glass is included within the limit selected. Thus, the insured chooses a separate limit for Building Glass and Building Property Other Than Glass.

Both endorsements define building property to mean building fixtures and permanently installed machinery and equipment. The only difference is that the CP 14 01 includes building glass within the definition of building property and the CP 14 02 does not.

Further, both endorsements list the applicable Cause of Loss form, Coinsurance percentage (if applicable), deductible, valuation method (ACV or RC) and the limits of coverage applicable to the scheduled or unscheduled property. A separate building glass deductible is an option as well in both forms. These forms, percentages and amounts can match the underlying policy or apply endorsement-specific limits, forms, and amounts. For example, the underlying property policy may have a $1,000 deductible while the property listed in whichever endorsement is used can have a $500 deductible.

According to ISO commercial property Rule 30, these endorsements, “may be used to provide coverage for building glass, building fixtures and/or permanently installed machinery and equipment, provided that:

(1) The insured is a tenant and the Building is not otherwise covered under the policy; and

(2) The tenant has a contractual responsibility to insure such property, or a contractual responsibility to pay for loss or damage to that property.”
If the policy already includes building (real property) coverage extended to include the landlord’s property, apparently neither of these endorsements is necessary.
With the introduction of these endorsements, ISO has withdrawn the CP 14 70. Either one of the new endorsements can be used to extend building glass coverage.

Protective Safeguards

Endorsement Revisions
Both protective safeguards endorsements, CP 04 11 and CP 12 11, were revised by this filing. The CP 04 11 Protective Safeguards endorsement specifically addresses fire protection and the CP 12 11 Burglary and Robbery Protective Safeguards endorsement, as its name suggests, relates specifically to burglary and robbery preventative measures.

CP 04 11 09 17 Protective Safeguards Revisions.
Requirements currently addressed and paragraph “B.” are moved to paragraph “A.” in the revised endorsement. And the newly developed paragraph “B.” restates that failure to comply with the conditions contained in paragraph “A.” results in an exclusion of coverage. A new condition that may negatively impact the application of this endorsement is added to paragraph “A.”.

This new condition requires that any automatic alarm or system listed in the endorsement’s schedule be maintained in the “on” position at all times. This change is in response to and is intended to combat insured arguments that an inactive system is not equivalent to a suspension or an impairment of a system – which is the wording in the current edition of the form. This new condition can be seen as a reduction in coverage if a carrier historically agreed with this argument.

CP 12 11 09 17 Burglary and Robbery Protective Safeguards Revisions.
Like the CP 04 11, requirements currently addressed and paragraph “B.” are moved to paragraph “A.” in the newly revised endorsement, but again, this change does not alter coverage. Once again, the reworded paragraph “B.” restates that failure to comply with the conditions in paragraph “A.” results in coverage exclusion. Further, like in the CP 04 11, a new condition is added to paragraph “A.”

The new condition in the CP 12 11 reads the same as the new condition found in the CP 04 11; it requires the system be actively engaged and maintained in the “on” position at all times. Another newly-created and related condition enables the carrier to implement additional requirements - such as the need to protect a valuable item even during business hours.

Although these changes appear to result in a reduction of coverage (or a broadening of the exclusion) in the CP 12 11, the revised endorsement introduces a new provision that may be considered a broadening of protection. A new exception has been added to the requirement that the insured notify the insurance carrier if there is a suspension or impairment of the protective system. The exceptions states that such notification is not necessary if protection can be restored within 48 hours and there is at least one watchperson or some other means of surveillance during non-work or any other unoccupied periods.

Utility Services – Time Element Waiting Period Options
Essentially, there is no impact in the breadth of coverage as a result of this filing. The only change is the waiting period options required to be met before payment commences. The current waiting period options are 72 hours (base form option), 24 hours and no waiting period. Once approved, the new waiting period options available are:

• No waiting period (a current option);
• 12 hours;
• 24 hours (a current option);
• 48 hours;
• 72 hours;
• 96 hours;
• 120 hours;
• 144 hours; and
• 168 hours.

Obviously, loss costs and premiums differ based on the waiting period chosen.

Ordinance or Law Coverage: Post-Loss Change to Building Codes
One major limitation in the current Ordinance or Law endorsements revolves around the building codes to which the endorsements apply. All ordinance or law endorsements or policy wording limit protection to only those building codes in effect at the time of the loss.

Following a large scale, collectively catastrophic loss (i.e. flood, windstorm, wildfire, etc.), many jurisdictions withhold the issuance of building permits until current building codes can be reviewed and new, more stringent building codes implemented to avoid or mitigate losses from similar events in the future. For example, if current building codes don’t address the community’s new flood or wind hazards, the jurisdiction may want any new and severely damaged buildings to be built or rebuilt incompliance with new building codes more specifically designed to address these risks. To assure all buildings meet this requirement, the county may not issue building permits to rebuild damaged buildings until the new building codes are adopted.

Current ordinance or law endorsements do NOT pay for increased costs resulting for the new building codes adopted after the loss. These increased costs would have to be paid by the insured. However, this filing gives insureds the option to purchase protection for this “new building code” possibility.

Being a coverage option, obviously there is a charge. It appears this is a rather inexpensive coverage option. According to ISO rules, “When this option applies, increase the rates developed under Paragraphs (1), (2) and (3) by applying a factor of 1.02.” Essentially the same wording applies to the CP 15 31 (Ordinance or Law – Increased Period of Restoration Endorsement).

ISO also revised the CP 04 38 Functional Building Valuation endorsement to allow for this option. Remember, the functional replacement cost endorsement automatically includes ordinance or law protection; this new filing allows this post-loss building code option to be added to the ordinance or law coverage provided in the CP 04 38 endorsement.

Tenants Improvements and Betterments: Ordinance or Law Coverage
This is the filing’s second tenant-focused change and the second ordinance or law-specific endorsement.

Tenants often make changes to the buildings they occupy; these are traditionally referred to in insurance as improvements and betterments. Although the tenant acquired and installed these additions, they cannot be removed because they legally become part of the real property - which is owned by the landlord.
Although part of the building, the landlord generally requires the tenant to be responsible for insuring these real property improvements and betterments. This is where the coverage gap is created.

Assume, for sake of this discussion, the building suffers major damaged as a result of a covered cause of loss prompting the local jurisdiction to require the building to comply with current building codes. Traditional ordinance or law endorsements, such as the CP 04 05, pertain to only the building owner’s interest in the building, not the tenant’s interest in its improvements and betterments.

Since the tenant is required by its lease to insure the improvements and betterments, the building owner’s policy does not pay to put them back, and certainly not in compliance with current building codes. Because of this, the tenant will experience a potentially major out-of-pocket expense.

To close this coverage gap, ISO introduced a new endorsement, the CP 04 26 09 17 Ordinance or Law Coverage for Tenant’s Interest in Improvements and Betterments (Tenant’s Policy). This endorsement provides the same three coverage parts found in the CP 04 05:

• Coverage A. Coverage for loss to the undamaged portion of the tenant’s improvements and betterments;
• Coverage B. Demolition cost coverage; and
• Coverage C. Increased cost of construction coverage.

The post-loss ordinance or law option (introduced previously) is also available within this new endorsement.

According to ISO, the coverage extended from and conditions found within this endorsement are equivalent to those found in the CP 04 05. The major difference between the CP 04 05 and the CP 04 26 is the terminology related specifically to improvements and betterments found in the new CP 04 26.

ISO’s Commercial Property Rule 32.F.2. states: When Endorsement CP 04 26 is added to the policy, do not write improvements and betterments as part of an item also covering personal property under a blanket amount.

The End – For Now
These changes remind us that edition dates are extremely important when considering coverage. States and insurance carriers will approve these new forms and endorsements at different times. And even if a state approves all the changes, a specific carrier may not begin using them for several months or even years (I know of some carriers that didn’t adopt the 2013 changes until 2015 or later). The moral: Never assume, confirm edition dates.

Christopher J. Boggs, CPCU, ARM, ALCM, LPCS, AAI, APA, CWCA, CRIS, AINS, is the Executive Director of the Independent Insurance Agents and Brokers of America (Big “I”) Virtual University. Meet Chris at MAIA’s Annual Convention, February 19-21, 2018 in Grand Rapids.