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Trieschmann, Hoyt & Sommer

Risk Management and Commercial Property–Part II

Unit 6

Source Material

• Trieschmann J., Sommer, D. & Hoyt, R. E. (2004). Risk

Management and Insurance 12th Edition. KY: South-

Western College

Introduction

• Various types of policies are used to insure personal property

including

– Transportation policies that include ships and their cargo as well as

personal property carried by trains and trucks

• Such policies include coverages for items that may be transported by land, air, or sea.

– Floaters that concern property that will be or is capable of being moved

from one place to another.

– Several miscellaneous coverages including

• credit, title, and glass insurance.

Transportation Insurance

• Transportation insurance is one of the oldest and most vital forms of insurance.

• All types of trade depend heavily on the availability of insurance for successful and expedient handling.

• Insurance played a vital part in stimulating early commerce

– In Roman times bottomry contracts and respondentia contracts govern the terms under which money was borrowed to finance ocean commerce.

• The lender of money would took as security for the loan; either the ship itself (bottomry), or the cargo (respondentia).

• However, if the ship or cargo was lost as a result of ocean perils, the loan was canceled.

• If the voyage was successful, the loan was repaid and substantial interest was charged;

– mainly because the interest included an allowance for the possibility of loss of the security.

– Essentially it was an insurance premium.

The Perils of Transportation

• There is an inability to control adequately or completely the forces of nature – or to prevent human failure as it affects the safe movement of goods.

• With ocean transportation, for instance – Storms can capsize even the largest ocean vessels

– Hurricane winds often dump tons of sea water onto a vessel and damage cargo

– Engine failure may drive ship aground

• With ground transportation – Vehicles can overturn

– Rough or careless handling can damage goods

The Liability of the Carrier

• The question arises – “Is not the carrier of the goods responsible for their safe movement?”

• To some extent, yes.

• The common law liability of the carrier differs depending on: – The country in which the transportation conveyances are chartered

– The applicable statutes

– Custom

– The type of shipping, etc.

The Carrier’s Liability in Ocean Transportation

• The carrier or ship owner is responsible only for failure to exercise

due diligence.

• The responsibility of the carrier is to:

– Make the ship seaworthy

– Employ proper crew

– To equip and supply the ship

– Make all holds and other carrying compartments safe and fit for the goods

stored there

– Exercise due care in loading, handling, and storing cargoes

The Carrier’s Liability in Ocean Transportation

• The carrier is definitely not liable for certain things, including loss resulting from: – Errors in navigation or management of the vessel

– Strikes or lockouts

– Acts of god

– Acts of war or public enemies

– Seizure of the goods under legal process

– Quarantine

– Inherent vice of the goods

– Failure of the shipper to exercise due care in the handling or packing of the goods

– Fire

– Perils of the seas

– Latent defects in the hull or machinery

– Other losses where the carrier is not at fault

Need for Transportation Insurance

• Even though the carrier must prove that it was not to blame,

the shipper of the goods has little claim against the carrier for

loss of goods by some force outside the control of the carrier,

such as wind storm or other perils of the sea;

– as many types of transportation losses fall outside the responsibility

of the common carrier.

• Additionally, common carriers have been slow to settle losses

for which they’re legally liable.

– Thus, a shipper may use outside insurance in order to achieve a

prudent level of security and safety.

Ocean Transportation Insurance

• Larger ships and more advanced instruments of navigation made long voyages possible.

– With these changes came the realization that insurance protection was almost a necessity.

• The major source of underwriting capacity was England;

– probably because the country was among the first to develop a complex system of admiralty law;

• a very necessary adjunct to successful insurance underwriting.

Table 10-1: United States Ocean Marine

Insurance Premiums

The table the increase in ocean marine insurance for the U.S. market by almost 120 percent from 1980 to 2002.

Major Types of Coverage

• The chief interests to be insured in an ocean voyage are:

– The vessel, or the hull

– The cargo

– The shipping revenue or the freight received by the ship

owners

– Legal liability for proved negligence

• If a peril of the sea causes the sinking of a ship in deep

water, one or more of these losses can result.

• However, each can be covered under various insurance

policies.

Major Types of Coverage

• Hull (vessel)Policies

– May cover the ship only during a given period of time, usually not in

excess of one year.

– It is commonly subject to geographical limits.

• If the ship is laid up in port for an extended period of time, the contract may be

written at a reduced premium under the condition that the ship remain in port.

– May cover builders’ risk while the vessel is being constructed.

• Cargo Policies

– May be written to cover losses only during a specified voyage (under hull

contracts) or on an open basis

• The latter is the most common. W ith such contract, there is no termination date but

either party may cancel upon giving notice, usually 30 days.

Major Types of Coverage

• Freight Coverage (the money paid for the transportation of the goods)

– Is an insurable interest because in the event that freight charges are not paid

• the carrier has lost income with which to reimburse expenses incurred in preparation for a voyage.

– Normally freight coverage is made a part of the regular hull or cargo coverage instead of being written as a separate contract.

– If the ship sinks, the freight is lost and the vessel owner loses the expenses incurred plus the expected profit on the venture.

– The hull may become damaged; thereby discontinuing the voyage or the cargo may be damaged and cannot be delivered.

• In either case, the carrier’s right to earn freight may be defeated.

Major Types of Coverage

• Legal Liability for Proved Negligence – this is based on two clauses:

– Running down clause (RDC) • W ithin this clause, the Hull owner is protected against third-party

liability claims that arise from collisions.

• RDC is intended to give protection in case the ship owner is held liable for negligent operation of the vessel that is the proximate cause of damage to certain property of others.

• The vessel owner or agent that fails to exercise proper care in their operations and caused a collision may become legally liable for damage to the other ship and for loss of freight revenues.

• The RDC normally excludes liability for damages to cargo, harbors, wharves, or piers and for loss of life or personal injuries.

Major Types of Coverage

– Protection and indemnity clause - is usually added to the hull policy.

• This is to provide liability coverage for personal injuries, loss of life, or damage to property other than vessels.

• It is intended to provide liability insurance for all events not covered by the more limited RDC;

– except liability assumed under contract.

Perils Clause

• In 1779, Lloyd’s of London developed a more-or-less standard ocean marine policy containing an insuring clause; – the wording of which has been retained in almost its original form in policies issued

today.

• The clause might be interpreted as an all-risk contract – because it refers to certain named perils “and all other perils, losses, and

misfortunes”. • However, the courts have interpreted the quoted phrase to mean “all other like perils”.

• Thus, the insuring clause covers perils of the sea and not all perils. – Perils on the sea, without an inherent cause arising from the sea, are not insured

unless they’re specifically mentioned.

– Examples of perils on the sea include: action of wind and waves, stranding, and sinking. Fire can be a peril but it is insured by specific mention.

• Most modern policies contain a free-of-capture-and-seizure clause – That excludes all loss arising out of war.

– Pilferage is not typically covered but it may be added by endorsement.

General Average Clause

• Refers to losses that must be partly borne by someone

other than the owner of the goods that were damaged or

lost.

• General average losses may be partial or total

– W hereas particular average losses are always partial, by

definition

• All ocean marine policies provide for coverage for general

average claims that may be made against the insured.

Sue-and-Labor Clause

• The insured is required to do everything possible to save and

preserve the goods in case of loss.

• The insured who fails to do this has violated a policy condition and

loses the rights of recovery.

• This means that the insured must incur reasonable expenses

– such as salvage, attorney, or storage fees

– which may be reimbursed by the insurer even if the expenses fail to recover

the goods.

• It is possible to recover for a total loss plus sue-and-labor-charges

even if the face amount of the policy proceeds is exhausted.

Abandonment

Two types of total loss are recognized:

• Actual Total Loss

– Occurs when the property is completely destroyed.

• Constructive Total Loss

– It occurs even when the ship or other subject matter of insurance is not totally

destroyed, it would cost more to restore than it is worth.

– The damage must equal 50 percent or more of the ship’s value in an undamaged

condition under U.S. law before constructive total loss can occur, but 100 percent of

sound value under British law.

– In most hull policies, the British rule is stated as a policy provision to the effect that if

it costs more to repair the ship than its agreed-on value as stated in the policy, the

ship may be abandoned to the insurer and the insured collects the full amount of the

policy.

• The insurer is better abled to deal with salvage due to their connections and

experience in such matters.

Ocean Transportation Insurance

• Warehouse-to-Warehouse Clause

– Protection afforded under the insuring agreement extends

from the time the goods leave the warehouse of the shipper

• Until they reach the warehouse of the consignee

• Coinsurance

– There is no coinsurance clause in ocean marine policy but

losses are settled as though each contract contained a 100

percent coinsurance clause.

Warranties in Ocean Marine Insurance

There are two types of warranties in marine insurance.

• Express Warranties

– W ritten into the contract and become a condition of the

coverage relating to potential causes of an insured event.

• Implied Warranties

– Not written into the policy but become a part of it by custom.

• Breach of warranty in marine insurance voids the

coverage, even if the breach is immaterial to the risk.

Types of Express Warranties

• Free of Capture & Seizure (FC & S) warranty

– Both parties agree that there should be no coverage in the case of loss from such perils as capture, seizure, confiscation, weapons of war, revolution, insurrection, civil war, or piracy

• Strike, Riot & Civil Commotion (SR & CC) warranty

– It is agreed that the insurer pay no loss due to strikes, lockouts, riots, or other labor disturbances

• An endorsement is available to add coverage for these exposures

• Delay warranty

– Insurer excludes loss traceable to delay of the voyage for any reason

• Unless such liability is assumed in writing

• Trading warranty

– Examples include those

• Restricting the operation of the ship to a given area; such as a certain coastal route

• Specifying that the insurance issued represents the true value of the ship or other interests

• Restricting the time during which the ship may operate

Implied Warranties

• Seaworthiness

– If the ship leaves port without being in safe condition

• the implied warranty as to seaworthiness has been breached.

– The entire coverage is immediately void.

– If the ship leaves port seaworthy but became unseaworthy later on

• the warranty is not breached.

– Seaworthiness involves such factors as having a sound hull, engines in good running order, a qualified captain and crew, proper supplies for the voyage to be undertaken, and sufficient fuel

Implied Warranties

• Deviation

– The warranty is breached when a vessel, without good and sufficient reason, departs from the prescribed course of the voyage;

• but without the intention of abandoning the voyage originally contemplated.

– Liability of the insurer ceases the moment the ship departs from its course.

– Undue delay may constitute a deviation.

– Even if the ship later resumes course and then suffers a loss

• no coverage is available unless later negotiations with the insurer have restored the insurance.

– Unavoidable necessity (such as deviate to avoid capture, carried off course by a war ship, etc.) and aiding in saving human life may excuse a deviation that has not been authorized by contract

Implied Warranties

• Legality

– The implied warranty of legality is one that is never waived.

– If the voyage is illegal under the laws of the country under

whose dominion the ship operates the insurance is void.

– Hence providing insurance for illegal enterprise is obviously

against public policy.

Floater Contracts

• The practice of insuring property at a fixed location or while it is being

transported by a common carrier is well established.

• The need for coverage is universally recognized.

– Owners of such goods rely on fairly standard contracts to protect them.

• A more difficult insurance problem is the risk of loss associated with

property that is either not at a fixed location or not being transported by

a common carrier.

– For example, equipment (such as those for building roads and bridges) are

seldom located at any one place for long, and the equipment is neither being

moved by nor in the custody of common carrier.

– Coverage under traditional property insurance forms is not suitable.

• A Floater Policy and more so a Contractor’s Equipment Floater is

required.

Floater Contracts

• Floater policy

– Has never been satisfactorily defined.

– However, it is generally understood to be a contract of property

insurance that satisfies these requirements:

• Under its terms, the property may be moved at any time.

• The property is subject to being moved

– That is, the property is not at a location where it is expected

to remain permanently.

• The contract insures the goods while they’re being moved from

one location to another (in-transit), as well as while at a fixed

location.

Bailed Property

• A bailment exists when one has entrusted personal property to another – such as in the case of laundries, repair establishments, and garages.

• Special forms of insurance are available to some bailees to cover loss to bailed goods for which they might be liable.

• Homeowners forms also cover such losses but only with respect to the bailor’s (the individual’s) interest.

• Other bailees use floater policies to cover losses to bailed property.

Business Floater Policies

• Block policies

– In insurance language, the term “block” connotes the general

idea of a contract that is somewhat broader than the traditional

form of inland marine or fire insurance.

– A block policy covers en bloc (collectively), on an all-risk basis,

the stock in trade or the equipment belonging to a business firm

• no matter where the property is located.

• Block policies exist for jewelers, furriers, camera and musical

instrument dealers, and agricultural and equipment dealers.

Business Floater Policies

• Jewelers’ block policy – Written to insure all the stock in the trade of the typical jeweler on an all-

risk basis.

• The items are covered whether they belong to the jeweler or to a customer.

• Items are also covered if they belong to another firm and are in the store on consignment so that the jeweler is legally liable for their safety or has a financial interest in them.

– The policy covers not only property belonging to the jeweler as an owner but also property of the customer bailor

– Thus, the policy is an example of a bailee liability insurance.

– Coverage may be extended to insure property anywhere in the world and while in transit to or from the jeweler’s place of business.

Scheduled Property Floater Risks

• Scheduled property floater

– This is a general or skeleton form to which is attached an endorsement describing specific types of property and the conditions under which they are insured. Two main types are:

• Contractors’ equipment floater

– Is typical of most floaters on scheduled property.

– Contractors have a special need for protection against the many perils that can cause loss to movable equipment.

– Large sums are often invested in a single piece of equipment that is used under basically dangerous conditions.

• This floater insures such items as tractors, steam shovels, cement mixers, scaffolding, pumps, engines, generators, hoists, drilling machinery, hand tools, cable, winches, and wagons.

• Electronic data processing floater (EDP)

– Can cover special perils not addressed in the BPP.

– As computer equipment becomes more portable this property is often utilized by firm’s employees away from the insured premises.

– Can provide coverage for data and media and for business income and extra expense associated with loss of use of EDP equipment.

– Valuation can also be on an upgraded value basis which allows for replacement with the latest state-of-the-art equipment

Title Insurance

• Title insurance is a device by which the purchaser of real estate may be protected against losses in case it develops that the title obtained is not legitimate, or can be made legitimate only after certain payments are made.

• Defects in titles may stem from sources such as: – Forgery of titles, forgery of public records, invalid or undiscovered wills,

defective probate procedures, and faulty real estate transfers.

– A person may occupy real property for years only to find that the one who conveyed the title was not the rightful owner.

• If the title is defective, title insurance does not guarantee possession of the property.

The Title Insurance Contract

• No standard title insurance contract exists. – But the general form of the insuring clause is fairly uniform.

• The insurer agrees to indemnify the owner against any loss suffered

– “By reason of the unmarketability of the title of the insured to or in said premises or … from all loss and damage by reason of liens, encumbrances, defects, objections, estates, and interests, except those listed in schedule B”.

• Schedule B is a separate endorsement which lists all title defects or rights in the property found during the title search.

The Title Insurance Contract

• Defense

– Under the typical policy, the insurer agrees to defend the insured in any legal proceedings brought against the insured concerning the title;

• assuming that the action involves a source of loss not excluded under the contract

– The insured is required to notify the insurer of any such proceedings and to cooperate in any legal action by the insurer.

• Premium

– Paid only once, and it keeps the policy in force for the named insured for an indefinite period

– If the property is transferred, a new premium must be paid for the protection of the new purchaser

• The old policy is not assignable to the new buyer and no reduction in premium usually occurs even if the property in transferred a short time after the prior purchase.

Insurance vs Bonding

• Bond

– A legal instrument whereby one party (the surety) agrees to reimburse

another party (the obligee)

• should this person suffer a loss because of some failure by the person bonded (the

the principal or obligor)

– If a contractor furnishes a bond to the owner of a building

• the surety will reimburse the owner if the contractor fails to perform as agreed and

thereby causes a loss to the owner.

• A bond may appear to be a contract of insurance, but some

important differences should be considered.

Insurance vs Bonding

– In bonding, the surety sees as its basic function the lending of credit for a premium

• It expects no losses and reserves the legal right to collect from the defaulting principal.

• Insurance contracts are set up with the presumption that there will be losses.

– The nature of the risk is different • Usually a bond guarantees the honesty of an individual and the capacity and ability of that

individual to perform. These matters are controlled by the individual.

• Insurance contracts covers losses outside the control of the individual

– In bonding, if the principal defaults and the surety makes good to the obligee

• The surety enjoys the legal right to attempt to collect for its loss from the principal

• In insurance, the insurer does not have the right to recover losses from the insured.

– The bonding contract involves three primary parties • Whereas the insurance contract normally involves only two

– In insurance, the contract is usually cancelable by either party • In bonding, the surety is often liable on the bond to the beneficiary, regardless of breach of

warranty or fraud on the part of the principal. Also, the bond often cannot be canceled until it has been determined that all the obligations of the principal have been fulfilled

Fidelity and Surety Bonds

• Strictly speaking, all bonds are surety bonds.

– However it is convenient to classify them as fidelity bonds and surety bonds

• Fidelity bonds

– Indemnify an employer for any loss suffered at the hands of dishonest employees.

• Surety bonds

– Sometimes known as financial guaranty bonds are contracts among three parties

• The principal (obligor), the person protected (obligee), and the insurer (surety)

– The surety agrees to make good on any default on the part of the principal in the principal’s duty toward the oblige.

– For example, the contractor (obligor) has agreed with the obligee to construct a building meeting certain specifications. The obligee may request the posting of a bond from the obligor to effect faithful performance. In the event the contractor fails, the surety must “make good” to the owner and the recover any losses from the contractor.

Types of Fidelity Bonds

There are two types of fidelity bonds:

• Bonds in which an individual is specifically bonded

– Individual bond - Names a certain person for coverage.

• If the employer suffers any loss through dishonest or criminal act of the employee, either

alone or in collusion, while the employee holds a position with the employer, the surety will

be good for the loss up to the limit of liability (penalty) of the bond.

– Schedule bonds

• May list many employees by name and bond them for specific

amounts.

– The bonds are known as name schedule bonds.

– Additional names may be added or old names deleted on written

notice to the surety (insurer).

Types of Fidelity Bonds

• Blanket Bonds – Have several advantages over individual or schedule bonds

• Automatic coverage of a uniform amount is given on all employees.

• New employees are automatically covered without need of notifying the surety.

• If the loss occurs, it is not necessary to identify the employees who are involved in the conspiracy in order to collect.

• Because blanket bonds are subject to rate credits for large accounts

– The cost may be no more than that of schedule bonds.

– Heavily favored among most business firms.

– Two major types of blanket bonds

• Blanket position bond – has penalty ranging from $2,500 to $100,000 applicable to each employee

• Commercial blanket bond – has a penalty ranging upward of $10,000 applicable to any one loss.

Types of Surety Bonds

• Construction Bonds

– Contract construction bond

• Sometimes called a final or performance bond

• Guarantees that the principals (contractors) involved in construction

activities will complete their work in accordance with the terms of the

construction contract and will deliver the work to the owner free of any

liens or other debts or encumbrances.

– Bid bond

• In contrast to construction bonds, guarantees that if the bidder is

awarded the contract at the bid price and under the terms outline, the

bidder will sign the contract and post a construction bond.

Burglary, Robbery, and Theft Insurance

• Burglary – Defined somewhat narrowly to mean the unlawful taking of property from within premises

closed for business; • entry to which has been obtained by force.

– Visible marks of the forcible entry must be present.

• Robbery – The unlawful taking of property from another person by force, by threat of force, or by

violence.

– Personal contact is the key to understanding the basic characteristic of the robbery peril.

– Thus, if you stole the wallet of a sleeping night guard, that’s not robbery. • Robbery means forcibly taking property from a messenger or a custodian.

• Theft – Includes all crimes of stealing, robbery, or burglary and any stealing crime not meeting the

definition of burglary or robbery.

• Forgery – Losses involves the passing of bad checks are among the most common of types of

dishonesty losses and are among the easiest to prevent • Only one third of all check losses are caused by professionals (game of amateurs)

Crime Insurance and Bonds

• Surety bonds and fidelity bonds

– Provide guarantees against loss through the dishonesty or

incapacity of individuals who are trusted with money or other

property and who violate this trust

• Theft insurance

– Provides coverage against a loss through stealing by

individuals who are not in a position of trust.