Flood, Flood or Flood? – Part II

May 6, 2015 by Christopher J. Boggs

In case you missed it (and don’t want to begin in the middle of the conversation), here is the link to Part I.

Part II

AAIS’s COP and COP XL Coverage Forms

AAIS’s COP and COP XL are designed and intended for larger, more complex property insureds. However, use of the COP is not necessarily intended for properties historically referred to as highly protected risks (HPRs), though the COP can be used for some HPR properties ( the COP XL is better suited for these properties). The COP’s and COP XL’s prime target class appears to be property risks that are more complex than those for which either the ISO or AAIS “standard” property forms are designed; but not as complex nor with as high of values as the largest HPR property. The COP and COP XL fits as a connector between the two extremes – between simple, relatively low value property and very large, complicated property with very high values. From this point forward, reference to the COP means COP version 3.0 (version 2.0 is used in only two states) and includes coverage extended from the COP XL unless otherwise noted.

Because of the COP’s place and purpose in property insurance, it often provides coverage broader than what is found in the “standard” property forms. This is true even in regard to coverage for some types of water damage. The COP grants incrementally broader protection for water damage than the ISO’s or AAIS’s “standard” policies detailed in the previous section.

The COP is an open peril coverage form (meaning a loss is covered unless specifically excluded), and the water-related exclusions are narrower than either ISO’s CP 10 30 or AAIS’s CP-85 (the special cause of loss forms used by the respective bureaus). This simply means there is more coverage for water damage in the COP form.

Following are the water-related exclusions or limitations found in AAIS’s CO 1000 (the primary COP property coverage form) and OP 1000 (AAIS’s COP XL form):

Flood: Exclusion “1.f.” under Perils Excluded. Note this excludes “flood” not “water damage” (which is excluded in the “standard” open peril forms). Flood is defined in this policy to mean, “flood, surface water, waves, tidal water, or the overflow of a body of water, all whether driven by wind or not. This includes spray that results from any of these whether driven by wind or not.” This definition differs from the definition of “flood” found in the NFIP policy and ISO’s flood endorsement (CP 10 65). The COP definition of “flood” does not include damage caused by mudslide or mudflow and it does not require that 2 properties or 2 acres be flooded for the incident to be considered a flood (a NFIP requirement).
Utility Failure: Exclusion “1.g.” within Perils Excluded removes coverage for the lack of utility service to an insured location; this includes the lack of water for operations that require water. However, there is an exception to the exclusion found in the Coverage Extensions (giving coverage back). The CO 1000 states that there is coverage for damage caused by the interruption of an off premises utility if there is physical damage to covered property at the covered location, and (meaning both must apply) the lack of water (as the covered utility) is the result of physical damage to the utility caused by peril that would be covered if it happened to the insured. The policy limit for this coverage extension is $50,000 in the COP; the COP XL does not limit coverage so the entire property limit is available for this type of loss.
Sewer Backup and Water Below the Surface: Exclusion “1.h.” of Perils Excluded. As it states, this exclusion removes coverage for damage caused by the backup of a sewer or drain and/or damage caused by the pressure of water to underground structures (such as basement walls, sidewalks, and foundations). As seen previously, both of these causes of loss are excluded in the “standard” ISO and AAIS special coverage forms. However, there is an exception in the COP exclusion giving back a limited amount of protection for these causes of loss. Supplemental Coverage “11.” gives back coverage for direct physical loss to a covered building caused by the backup of a sewer or drain and the pressure of water below the ground; but coverage is limited to $25,000 in the COP version 3.0. The COP XL provides up to $100,000 as a supplemental coverage for this type of loss.
Seepage: Exclusion “2.n.” in the COP and “2.j.” in the COP XL deletes coverage for loss caused by the continuous or repeated seepage or leakage of water or steam over a period of 14 or more days. This is the same as the seepage exclusion seen in the “standard” forms.
Boilers: Paragraph “3.” within the section titled Additional Property Not Covered or Subject to Limitations excludes coverage for damage to hot water boilers or heaters caused by any condition or occurrence within the equipment, unless damage is caused by an explosion. This same exclusion is present in both ISO and AAIS “standard” open peril coverage forms. Note, however, that this exclusion does not exist in the COP XL.
Tearing Out and Replacing: Paragraph “2.” of the Other Coverages section does not specifically exclude the cost of tearing out and replacing the equipment from which water escapes, but neither does it specifically state that it will replace such equipment. By inference and apparent intent, the cost of replacing the object is excluded. Interestingly, the COP XL specifically excludes coverage for the appliance from which the water escapes, so the COP XL is more specific and may actually be more restrictive. Both COP forms specifically cover the cost to repair fire protection equipment (even if the loss is caused by freezing).

Compared to the “standard” open peril cause of loss forms available from both ISO and AAIS, COP forms are broader in several key areas:

Damage caused by the backup of sewers or drains is covered as is damage caused by the pressure of underground water on basements, foundations, sidewalks, etc. However, the coverage limit for these causes of loss is $25,000.
When certain conditions are met, the lack of water from the water authority leading to direct physical damage is covered up to $50,000 in the COP and limited only by the property limit in the COP XL.
There is no specific “freezing” exclusion in the COP forms. However, it is reasonable to postulate that Exclusion “2.i. Increased Hazard” in the COP and “2.f. Increased Hazard” in the COP XL could apply to a freezing loss. The Increased Hazard exclusion reads, “‘We’ do not pay for loss occurring while the hazard has been materially increased by any means within ‘your’ knowledge or ‘your’ control.” If the insured does not take the necessary steps to secure the building from freezing which leads to bursting pipes, this could be considered an increased hazard within the insured’s knowledge or control so the coverage may be no broader than the “standard” cause of loss forms.

ISO’s Flood Endorsement

ISO’s optional Flood Coverage Endorsement (CP 10 65) is available to nearly every writer of commercial property coverage that uses ISO forms – theoretically. But availability does not necessitate or even indicate “allowable” (from an underwriting perspective). The CP 10 65, to some extent, acts like a wrap-around flood coverage for an underlying NFIP policy (when the property is eligible for an NFIP policy).

Obviously the CP 10 65 adds “flood” to the list of covered perils. However, the endorsement is not intended to be used in place of an NFIP-issued flood policy when the property is eligible for coverage through the NFIP/ In fact, the conditions of the policy essentially require an NFIP policy when the insured is eligible for the protection (unless a specific waiver is allowed and attached by the underwriter).

Flood, as covered by ISO’s CP 10 65, is defined as: A general and temporary condition of partial or complete inundation of normally dry land areas due to: 1) the overflow of inland or tidal waters; 2) the unusual or rapid accumulation or runoff of surface waters from any source; or 3) mudslides, or mudflows which are caused by flooding (a mudslide or mudflow involves river of liquid and flowing mud on the surface of normally dry land areas as when earth is carried by a current of water and deposited along the path of the current).This definition is very similar to the definition of “flood” found in the NFIP General Property form (discussed in a later section).

Some of the key limitations, exclusions and provisions found within the CP 10 65 endorsement that are shared with NFIP coverage forms include:

Coverage does not extend to include loss or damage caused by or resulting from the destabilization of land arising from the accumulation of water in subsurface land areas (underground water).
Land is not covered property. However, damage to buildings or covered personal property caused by the collapse or sinking of land along the shore of a body of water as a result of erosion or undermining caused by waves or currents of water exceeding normal levels causing a flood is covered.
The endorsement does not extend coverage to properties subject to any of the provisions of the Coastal Barrier Resources Act (CBRA) or the Coastal Barrier Improvement Act (CBIA) (CBRA and CBIA Zones are areas where Federally-backed flood coverage (an NFIP policy) is not allowed. The NFIP cannot provide flood coverage in these areas. ISO follows suit and specifically excludes coverage for properties located in these zones).
There is no coverage extended to buildings or structures (or their contents) located over a body of water.

Key provisions of the CP 10 65 unique to the endorsement include:

A 72-hour waiting period applies (NFIP uses 30 days under most circumstances – unless coverage if for a loan closing or a few other specific reasons). No coverage is provided until 72 hours after the inception of the policy. There is also a 72-hour waiting period following an insured’s request to increase coverage limits. ISO introduced new wording in the 10 12 edition to clarify the intent of this limitation by stating that the waiting period does not apply to renewal policies (whether with the same or a different carrier). Regardless of the edition date of this endorsement, this intent is as clarified above, but the edition date should be checked to assure the most current edition is being used.
Coverage for damage caused by flood is extended to foundations below the lowest basement floor or the subsurface of the ground and underground pipes, flues and drains.
Flood protection is not extended to bulkheads, pilings, piers, wharves, docks or retaining walls that are not part of a building (the NFIP policy excludes coverage for all such property, the CP 10 65 only excludes coverage for these types of property when they are not part of the building).
Flood coverage does not extend to the backup of sewers or drains unless such backup is directly related to and results from a flood (and for up to 72 hours after the flood).
Coverage limits can be lower than the total limits provided by the underlying policy.
Coverage can be written on a blanket or scheduled basis.
The endorsement contains an option to apply an annual aggregate limit.
Deductible differences. Only one deductible applies to the loss for damage to building and/or business personal property; the NFIP policy applies separate deductibles to each class of property. Also, if flood and another covered cause of loss jointly cause damage, the insured is only responsible for the higher of the property or flood deductible, but not both (like would be required if coverage is with NFIP).
If the loss is covered by an NFIP policy, the NFIP policy is primary up to the maximum amount available through NFIP (even if the maximum amount was not purchased).
If the property is eligible for an NFIP policy but no such policy was in place at the time of the loss, the CP 10 65 responds as excess over the maximum amount that could have been purchased through the NFIP. The insurance carrier has the right, according to the policy language, to waive this requirement by providing an Underlying Insurance Waiver. The CP 10 65 should only be considered an alternative for an NFIP policy if the property is located in a “low hazard” area (non-SFHA).

Four key coverage areas where the CP 10 65 endorsement provides or potentially provides broader protection than an NFIP policy are: 1) valuation; 2) time element and ordinance or law coverage; 3) business person property (BPP) in a basement; and 4) the definition of flood. First, NFIP’s General Property Form (the most commonly used form for commercial structures) extends coverage on an actual cash value (ACV) basis only. The Flood Coverage Endorsement does not limit valuation to ACV; it follows the valuation method applied by the underlying property form to which it is attached, even if replacement cost (RC) is the valuation method.

Secondly, the NFIP General Property Form is direct loss coverage only, meaning that there is currently no coverage for any indirect loss such as business income and/or extra expense (though the addition of such coverage options through NFIP has been considered). However, when the CP 10 65 is attached to an underlying property policy that provides business income and extra expense coverage, the loss of business income and increase in expenses (when the CP 00 30 is attached) is covered when an insured business is shut down by a defined flood. Likewise, when the underlying property policy includes ordinance or law protection (CP 04 05 and/or CP 15 31), the same protection is extended to provide ordinance or law protection when damage is caused by flood.

Third, the CP 10 65 does not exclude flood damage to BPP in the “basement” (as defined by the NFPA form) of buildings located in Special Flood Hazard Areas (SFHAs) (A Special Flood Hazard Area (SFHA) is an area having a 1 percent chance of being inundated by flood waters in any given year. On flood maps they are commonly delineated by either an “A” or a “V.” “V” zones generally border coastal waters or waters that have wave action. “A” zones generally surround “V” zones and/or lakes, rivers, streams and other bodies of water). NFPA defines a “basement” as, “any area of the building, including any sunken room or sunken portion of a room, having its floor below ground level (subgrade) on all sides.” Once defined, the NFIP goes on to specifically exclude coverage for most BPP located in these SFHA “basement” areas (there are specific exceptions related to property necessary for the operation of the building such as HVAC, sumps and similar equipment). When the CP 10 65 is attached, the insured gains protection for any BPP located in any area of the building, even the area defined as a “basement.”

Fourth, the definition of “flood” used by both the CP 10 65 and the NFIP General Property Form are similar, with one noticeable (and possibly major) difference, what and how much “has” to be flooded to meet the definition of “flood.” The CP 10 65 definition of a qualifying “flood” requires only that there be “a general and temporary condition of partial or complete inundation of normally dry land.” NFIP’s definition of flood (presented in its entirety in the NFIP discussion) requires that this “general and temporary condition” cover “two or more acres” or “two or more properties.”

The difference between “general condition” provided in the CP 10 65 and the defined “2/2” general condition provided by the NFIP may be minor; in fact, this may be a difference without distinction. But if the insured is on an acre-and-a-half of low-lying land and it is the only property to suffer flood damage, this difference might create major coverage implications because now there are two reasonable interpretations.

One last “fact” to remember when considering extending flood as an endorsed cause of loss: the CP 10 65 is a “named peril” endorsement. This simply means that it provides coverage only for the named peril of flood as strictly defined in the form, no “flood” or “water damage” coverage exists beyond what is specifically stated in and limited by the endorsement.

Part III picks up from here next week. See you then.

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