UPDATED SECTION 8. (If you are testing on or after July 1, 2006 please study this in place of Section 8 in your book) 2006 Businessowners Policy

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1 UPDATED SECTION 8 (If you are testing on or after July 1, 2006 please study this in place of Section 8 in your book) 2006 Businessowners Policy The BOP (Businessowner's Policy) is a package policy especially designed for limited cooking or fast food restaurants, convenience stores with gasoline pumps, service or processing type businesses, small office buildings, apartment buildings, and retail stores, sometimes called mercantiles. Like all package policies, the BOP must contain at least two coverage sections: Property and Liability. However, like the CPP, many optional coverage sections are available. So, the CPP is a package policy designed for large businesses. The BOP is a package policy designed for small businesses. The insurance companies have identified the six types of businesses that have been the most profitable for them to insure over the years. They designed the BOP as a package policy specifically for these types of businesses. In effect, the insurance companies targeted these six types of businesses by introducing the BOP with very competitive rates coupled with direct-bill renewal procedures. You could say that the BOP is very similar to the Homeowners policy, except it is for small businesses. The BOP continues to be very popular, with very low minimum premiums. Both Property and Liability coverages are included in the BOP, but the insured need not own the building. In fact, most purchasers of BOPs are tenants in small office buildings or small retail shopping centers. For example, you own a small office building. As owner, you might purchase a BOP to cover it in case of fire, etc. Of course, your BOP would also cover your business liability in the event someone sued you due to an injury sustained on your premises. However, your tenants would also be eligible for BOPs. Even though they don't own the building, they still need to insure the business personal property located in the space they lease from you, and they still need Liability coverage in case someone is injured in the space they occupy. So, as a new agent, you should realize that whenever a new office building or strip center is going up, you have the potential of selling BOPs to the owner plus all of the new tenants! Of course, all those new clients also need personal insurance on their homes and autos, as well. This is why the insurance companies came up with the BOP. This policy helps new agents break into the Commercial area of Property/Casualty. Remember, there really isn't anything new here. The Property coverage on a BOP is very similar to the Property coverage on a CPP, which we have already discussed. The Liability coverage on a BOP is also very similar to the Liability coverage on a CGL. Prior to the introduction of the BOP, small-business owners purchased these same coverages on a monoline basis, usually paying higher premiums. Remember, the BOP is a package policy, sold at a discount to certain small businesses that have few claims. The BOP allows the policyholder great flexibility, as well, permitting insureds to add additional coverages, such as Crime or Boiler and Machinery, to the package. INSURANCE AND SECURITIES SCHOOLS OF AMERICA 1

2 I.S.S.A. Eligibility requirements for the BOP are contained in the businessowners subdivision of the Insurance Services Office (ISO) Commercial Lines Manual (CLM). Apartment buildings of any size, including residential condominium associations are eligible for coverage. Office buildings may not exceed six stories or have more than 100,000 square feet. Retail or service businesses may not have more than 25,000 square feet and/or gross annual sales in excess of $3,000,000. Office condominium associations are also eligible, as are processing-type businesses. Taverns, auto dealers, repair shops, banks, credit unions, manufacturing companies, and contractors are NOT eligible. BOP COMMON POLICY CONDITIONS FORM Regardless of the type of business, the BOP contains conditions similar to those found in other Commercial Insurance contracts. One of these conditions addresses cancellation, which states if the insurance company cancels, it usually must give at least 60 days' advance notice, unless the cancellation is for nonpayment, in which case only 10 days' advance notice need be given. BOP PROPERTY COVERAGE FORM The BOP Property Coverage Form is All-Risk, however it can be made into a Named Peril form by adding an endorsment. The BOP provides Property coverage for the building (Coverage A) and/or business personal property (Coverage B) including property in or on the described premises, in a vehicle or in the open within 100 feet of the described premises. A limit of insurance must be shown in the Declarations for each type of property to be covered. If the insured adds the Named Peril endorsement to the BOP Property Coverage Form it will cover fire, lightning and removal, extended coverage, vandalism, sprinkler leakage, sinkhole collapse, volcanic action, and the peril of transportation (loss to business personal property in transit due to collision, derailment, or sinking of vessels). These causes of loss are similar to those covered in the Commercial Property Basic Cause of Loss Form. Since the BOP is All-Risk it covers everything except what is excluded. Theft of business personal property is covered, since the All-Risk coverage applies to both the building and the contents. Remember, to determine what an All-Risk policy covers, you must look at the policy's exclusions and/or limitations. The BOP Property Coverage Form provides additional extensions of coverage, such as debris removal. The most the insurer will pay for debris removal is 25% of the amount paid for the direct loss (such as a fire). If the amount of the direct loss plus the amount payable for debris removal exceeds the policy limit, then only an additional $10,000 is available. The BOP Property Coverage Form also automatically include coverage for Loss of Business Income due to a covered loss and Extra Expense incurred during a period of restoration after a covered loss for the purpose of minimizing a suspension of operations. Both of these indirect coverages are included without any maximum policy limit. In other words, they are covered up to the amount incurred by the insured within 12 consecutive months after the date of loss. Also, if a covered loss causes the Discharge of Pollutants, the BOP will pay up to $10,000 of the expense of extracting these pollutants from land or water at the described premises. Fire Department Service charges are covered up to $2,500 in addition to limits. 2 INSURANCE AND SECURITIES SCHOOLS OF AMERICA

3 Businessowners Policy The BOP covers the cost to replace or restore electronic data if the data is corrupted or destroyed by a covered cause of loss. The same covered causes of loss apply to this coverage as apply to business personal property. This coverage provides up to an annual aggregate of $10,000. The BOP covers damage caused by fungi, wet or dry rot, or bacteria if it results from a specified cause of loss, other than fire or lightning. This coverage is not in addition to limits and provides up to $15,000 for loss or damage caused by fungi, wet or dry rot, or bacteria. In addition, the form provides for six extensions of coverage, which are in addition to the policy limits. Business personal property is automatically covered at any newly acquired premises, up to $100,000 for 30 days. All covered property (except for money or securities) is also automatically covered while off premises, up to a maximum of $10,000. Outdoor property, such as unattached signs, fences, antennas, trees, shrubs and plants are covered for certain specified perils up to a maximum per loss of $2,500. However, the insurer will not pay more than $500 for loss to any one tree, shrub, or plant. $10,000 coverage is also provided for the cost of replacing the lost information contained on valuable papers or records, including those stored on electronic media and $10,000 for the reconstruction of Accounts Receivable records and $1,000 for signs attached to the building. The BOP excludes coverage for aircraft, autos, money and securities, and water craft. Of course, the standard exclusions apply, such as war, earth movement, nuclear hazard, power failure and flood. The BOP is an All-Risk Form that has many exclusions, since if the peril is not excluded, it is covered. The BOP limits theft coverage to furs, jewelry, and watches to a maximum of $2,500. Property coverages on the BOP also have a built-in automatic increase (inflation guard) that applies to the building limit. At renewal, the limit of insurance will automatically increase by 8%, unless a different percentage was selected by the insured on the Declarations Page. The policy limit on business personal property will also automatically increase by 25% to provide for seasonal variations. This eliminates the need for the Peak Season endorsement found on the CPP. Valuation of buildings and business personal property is on a Replacement Cost basis, without deduction for depreciation. Replacement Cost coverage requires that the policy must be written at 80% insurance-tovalue. Since the insured must be at least 80% insured to value at policy inception, and since the policy limits are structured to keep up with inflation at renewal, it is very unlikely that the insured will ever suffer a coinsurance penalty in the event of a partial loss. A condition in the BOP also states that if the building has been vacant for more than 60 days, there will be no coverage for loss by vandalism, sprinkler leakage, glass breakage, water damage, or theft. According to the property loss condition concerning vacancy in the BOP, the word vacant means that when the policy is issued to a tenant, the building is considered to be vacant when it does not contain enough business personal property to conduct customary operations. However, when the policy is issued to the owner, the building is considered to be vacant unless 31% or more of its total square footage is rented or is used to conduct customary operations. However, buildings under construction or renovation are not considered to be vacant. The standard deductible on a BOP is $500 per occurrence, but no deductible applies to the additional coverages of Business Income Loss, Extra Expense, or Fire Department Service Charges. Higher INSURANCE AND SECURITIES SCHOOLS OF AMERICA 3

4 I.S.S.A. deductibles may be written with a reduction in premium. Regardless of the deductible chosen, the maximum deductible applicable to optional coverages purchased under the BOP program (such as crime, fidelity, glass, and outdoor signs) is $500 per occurrence. If needed, the insured may add several optional coverages to the BOP. Of course, these optional coverages must be listed on the Declarations Page and an additional premium paid. These optional coverages include coverage for outdoor signs, glass, fidelity (employee dishonesty) and equipment breakdown protection coverage). Although the BOP covers theft, money and securities are excluded. Clients needing Crime coverage for money and securities may purchase this coverage as an option. Premium discounts may be given if the insured signs a Protective Safeguards Warranty which states that if the sprinkler or fire alarm systems don t work, fire claims will be denied. BOP LIABILITY COVERAGE FORM The Liability coverage provided by the BOP is very similar to that provided by the Commercial General Liability (CGL) policy, as previously discussed. Generally, no deductible applies. Policy limits are standardized, with most insurers offering a minimum of $1,000,000 per occurrence for BI and PD. Medical Payment to Others is also included. Remember, this is a Commercial policy, so your personal liability is not covered. This policy form does not cover liquor liability, Workers' Compensation, pollution liability, liability for failure to render professional services, property damage liability to the insured's own property or property of others in the insured's care, custody, or control, or the cost of a recall or loss of income relating to a recall of the insured's products. These same exclusions are also found in the CGL. Bodily Injury and Property Damage caused by the operation of mobile equipment is covered. Although liability for the operation of owned autos is also excluded on the BOP, Hired Auto and Nonowned Auto liability coverage may be added by endorsement for an additional premium if the client does not have a Commercial Auto Policy. Hired Autos include all autos the insured leases, hires, rents or borrows, but not autos owned by employees, partners or members of their households. Non-Owned Autos include all autos the insured does not own, lease, hire, or borrow which are used in connection with the business, including autos owned by employees, partners and members of their households while being used in the business of the insured. The BOP Liability Coverage form covers the legal liability of the insured for Bodily Injury and/or Property Damage and Personal Injury and Advertising Injury. Fire Legal Liability is also covered up to a specified limit as shown in the Declarations. Supplementary Payments, in addition to the policy limits, such as the cost of bail bonds, attorney fees, loss of earnings up to $250 a day and accrued interest on judgments, are also included. Liability coverage is provided for the named insured, business partners, corporate officers, and employees with respect to their activities as employees. The Declarations will show three separate Limits of Liability. The first is a Combined Single Limit (CSL) for BI, PD, and Medical Payments to Others on an Occurrence basis. Personal Injury and Advertising Injury Liability are also covered here, but only on a Per Person basis, rather than on an Occurrence basis. The second limit shown is for Medical payments to Others, on a Per Person basis that applies within the Overall Liability Per Occurrence limit that was 4 INSURANCE AND SECURITIES SCHOOLS OF AMERICA

5 Businessowners Policy shown first. The third limit is for Fire Legal Liability, which applies on a Per Fire basis, which is within the overall Per Occurrence limit as well. However, the Per Occurrence policy limits shown on the Declarations Page are also subject to Aggregate Limits, as well. For example, the CSL may be written at $1,000,000 BI and PD per occurrence. But the Aggregate Limit for all BI and PD claims during the year may be $2,000,000, which means that once the insurer has paid out $2,000,000 (no matter how many claims were involved), the Aggregate (total) policy limit has been exhausted for the one-year Policy period. At renewal, the Aggregate Limit starts over. In addition, some insurers will limit their exposure on a BOP in the area of Products and Completed Operations by setting a Special Aggregate Limit on those coverages that is only half as much (50%) as the Aggregate Limit that applies to other Liability coverages. INSURANCE AND SECURITIES SCHOOLS OF AMERICA 5

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7 Businessowners Policy PRACTICE EXAMINATION 1. Which of the following small businesses would be eligible for a BOP? A. A bank C. A retail store B. A manufacturer D. An auto dealer 2. Business Personal Property coverage under the BOP includes property of the insured located within feet of the building described in the Declarations? A. 25 C. 100 B. 50 D Under the Liability section of a BOP, Fire Legal Liability is subject to: A. The General Aggregate limit B. An Occurrence limit C. A Per Fire limit D. The Products and Completed Operations Aggregate 4. The Liability section of a BOP includes all of the following, EXCEPT: A. Fire Legal Liability C. Contractual Liability B. Pollution Liability D. Products Liability 5. Under a BOP, coverage is extended for property while away from the premises in the amount of: A. $ 500 C. $2,500 B. $1,000 D. $10, The standard deductible on a BOP is: A. $100 C. $ 500 B. $250 D. $1,000 INSURANCE AND SECURITIES SCHOOLS OF AMERICA 7

8 I.S.S.A. 7. In order to have Replacement Cost coverage on a BOP, the insured must select which of the following Coinsurance provisions on the policy? A. 80% C. 100% B. 90% D. No requirement 8. Business Income and Extra Expense coverage is provided in addition to limits on a BOP up to what policy limit? A. $1,000 B. $5,000 C. Whatever limit is stated in the Declarations D. Unlimited during the 12-month Restoration Period 9. All of the following are Additional Coverages on a BOP (provided without premium charge), EXCEPT: A. Business Income and Extra Expense B. Fire Department Service Charge C. Debris Removal D. Employee Dishonesty 10. The Businessowners Liability coverage form on a BOP covers all, EXCEPT: A. BI C. Personal and Advertising Injury B. PD D. Business Auto Liability 11. Businessowners Policies have a built-in Inflation Guard Endorsement that increases the Building coverage limit by: A. A variable percentage each year B. A fixed percentage each year C. A variable percentage every three months D. A fixed percentage every three months 12. Theft is covered by the BOP, which provides a maximum of $ coverage for money and securities: A. $1,000 C. $5,000 B. $2,500 D. None 13. Which of the following is eligible to receive BOP payments for Medical Expenses in the event of injury at the insured's premises? A. The Named Insured B. An employee injured while playing basketball for a company-sponsored team C. A customer who attended a promotional dinner party D. A contractor who was hired to perform work for the insured 8 INSURANCE AND SECURITIES SCHOOLS OF AMERICA

9 Businessowners Policy Practice Examination 14. Which of the following is NOT excluded under BOP Liability coverage for Bodily Injury and Property Damage? A. An injury that is also covered by a Workers' Compensation law B. Liability due to the operation of business autos C. Liability resulting from the accidental escape of pollutants D. Injury or damage caused by the operation of mobile equipment 15. One condition of the BOP policy allows the insurer to examine the books and records of the Named Insured during the Policy Period, and for how long after the policy has expired? A. One year C. Two years B. Three years D. Five years 16. All are optional coverages on a BOP, EXCEPT: A. Business Income Insurance C. Employee Dishonesty B. Money and Securities D. Mechanical Breakdown 17. Under the Accounts Receivable coverage of a BOP, the insured may make a claim for amounts that cannot be collected from a customer due to damaged records up to a maximum of $ : A. $1,000 C. $5,000 B. $2,500 D. $10, On a BOP issued to the owner of a building, the building is considered to be vacant unless % or more of the building's total square footage is rented or is used to conduct customary operations: A. 20% B. 31% C. 40% D. 51% 19. How much coverage is provided by an unendorsed BOP for theft of jewelry: A. $500 C. $2,500 B. $1,000 D. None 20. What is the most a BOP will pay for loss of or damage to outdoor signs attached to buildings per sign per occurrence? A. $500 C. $2,500 B. $1,000 D. None INSURANCE AND SECURITIES SCHOOLS OF AMERICA 9

10 I.S.S.A. 21. A BOP will provide for automatic increases in the business personal property limits up to to provide for seasonal variations in inventory: A. 10% C. 25% B. 20% D. 30% 22. Optional coverages on a BOP include all of the following, EXCEPT: A. Replacement cost coverage B. Employee dishonesty C. Money and securities D. Mechanical breakdown 23. On a BOP, the policy limit for business income insurance coverage and extra expenses incurred within the 12 consecutive months after the date of a covered loss is: A. 10% of the building coverage B. $10,000 C. $25,000 D. No limits apply, the policy will pay the actual loss sustained 24. On a BOP, all volcanic eruptions that occur within any hour period will constitute a single occurrence: A. 24 C. 72 B. 48 D On a BOP, coverage for business personal property is written on what basis: A. ACV C. Replacement cost B. Valued D. Stated amount 26. Trees, shrubs and plants are covered on a BOP up to $2,500, but not more than for any one tree, shrub or plant: A. $100 C. $500 B. $250 D. $1, On a BOP, damage to jewelry is covered up to a maximum of: A. $1,000 C. $5,000 B. $2,500 D. Business personal property limit 10 INSURANCE AND SECURITIES SCHOOLS OF AMERICA

11 Businessowners Policy Practice Examination 28. Debris removal on a BOP is covered as an additional coverage up to of the amount paid for the direct physical loss: A. 10% C. 50% B. 25% D. Unlimited 29. Liability coverage on a BOP is most similar to that found on: A. Business Auto C. CGL B. Homeowners D. Garage Liability 30. Regarding the period of restoration relating to Business Income and Extra Expense coverages on a BOP, it ends when: A. The policy expires B. When the property should be repaired with reasonable speed C. When the business resumes operations D. In 180 days after the date of the loss INSURANCE AND SECURITIES SCHOOLS OF AMERICA 11

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13 Businessowners Policy PRACTICE EXAM ANSWERS AND RATIONALES 1. C A retail store, like a small drug store, would be eligible for a BOP. Remember, the BOP is a package policy for small business, combining commercial property coverages and the CGL. However, only certain types of businesses are eligible: service & processing, mercantile (retail), small office buildings, small apartment houses, limited cooking or fast food restaurants and convenience stores with gas pumps. 2. C Business personal property located in or on the buildings at the described premises or in the open (or in a vehicle) within 100 feet of the described premises is covered by a BOP. 3. C The most a BOP will pay for damages due to property damage to premises rented to you arising out of any one fire is the Fire Legal Liability limit shown in the Declarations. Let s explain this better. The liability portion of a CGL (which is included in the BOP) has an exclusion for property of others while in your care, custody or control. So, if your business rents an office and you negligently cause fire damage to that office, there is no coverage for the damage you did. Landlords know this, and will ask tenants to buy a coverage called Fire Legal Liability. This can be added to a CGL to provide coverage for your legal liability in this situation. 4. B Pollution liability is excluded by virtually all liability policies, but coverage can be added by endorsement for an additional premium charge. However, a BOP will pay up to $10,000 for the expense of extracting pollutants at the described premises if the release of pollutants was caused by a covered loss. This is a property coverage, not a liability coverage. 5. D A BOP provides an extension of coverage to apply to Business Personal Property, other than money and securities, off premises up to $10,000. This extension is in addition to limits. 6. C Although the standard deductible on a BOP is $500, insureds may choose deductibles of either $250, $1,000 or $2,500. The higher the deductible, the lower the premium. 7. A The BOP contains the same valuation clause as seen on a HO-3. In order to have replacement cost coverage, the insured must insure for at least 80% to value. If he does, all partial losses are paid in full without deduction for depreciation. If he doesn t, then a co-insurance penalty will apply. 8. D The BOP covers both business income and extra expenses incurred during a period of restoration occurring within 12 consecutive months after the date of loss without any maximum policy limit, although coverage for payroll expenses is limited to 60 days. INSURANCE AND SECURITIES SCHOOLS OF AMERICA 13

14 I.S.S.A. 9. D Employee dishonesty (sometimes referred to as a fidelity bond) is an optional coverage that can be added to a BOP for an additional premium. Coverage applies to loss of business personal property, including money and securities, resulting from the dishonest acts of employees. 10. D Coverage for business liability on a BOP is very similar to the coverage provided by a CGL. Business autos are excluded but may be covered by purchasing a separate Business Auto policy. 11. B A BOP has a built in automatic increase in the building limit. On each policy anniversary date, the limit of insurance for buildings will automatically increase by 8% unless a lower or higher percentage is shown in the declarations. 12. D Although the BOP does cover theft of business personal property, theft coverage for money and securities must be added by an optional endorsement. 13. C Medical coverage on a BOP is very similar to medical on other liability policies. Coverage is to others, but injury to employees is excluded since that is covered by Workers' Compensation. 14. D Coverage for the operation of mobile equipment is covered, but liability for damage to the property of others in the care, custody or control of the insured is excluded. Pollution liability is not covered, but the policy will pay up to $10,000 under the property section to pay the cost of extracting pollutants from land and water at the described premises if such release or discharge is caused by a covered cause of loss. 15. B The policy states that the insurer may, to the extent that it relates to the insurance, examine (audit) the books and records of the named insured during the policy period and up to three years thereafter. 16. A Coverage for loss of business income and extra expenses incurred within 12 months after a covered loss are automatically included in the BOP without any maximum coverage limit. Money and securities coverage, employee dishonesty (fidelity) and mechanical breakdown (boiler and machinery) coverages are all optional. 17. D The BOP extends coverage under the business personal property section to apply to accounts receivable records which suffer loss or damage. The insurer will pay amounts due from customers that the insured is unable to collect and other reasonable expenses incurred to reestablish the accounts receivable records up to a maximum of $10,000 for loss at the described premises. 18. B Vacancy beyond 60 consecutive days will suspend coverage on a BOP for certain perils, such as vandalism, glass breakage, water damage or theft. On a BOP issued to a building owner, the building is considered vacant unless 31% or more of the building is rented or is used to conduct customary operations. 19. C The BOP covers theft of business personal property, but limits coverage for theft of jewelry, watches and furs to a maximum of $2, INSURANCE AND SECURITIES SCHOOLS OF AMERICA

15 Businessowners Policy Practice Examination Answers & Rationales 20. B If the sign is attached to the building, coverage is limited to $1,000 per sign, per occurrence. If the sign is not attached to the building, the BOP extends coverage to outdoor property including signs, fences, TV antennas and trees, shrubs and plants caused by certain specified perils up to a maximum of $2,500, but not more than $500 for any one tree, shrub or plant. 21. C The limit for business personal property on a BOP will automatically increase by 25% to provide for seasonal variations, but only if the limit of insurance written is at least equal to 100% of the insured s average monthly inventory during the 12 months preceding the loss. There is no additional premium charge for this feature. 22. A Replacement cost coverage automatically applies on a BOP to both the buildings and business personal property if the insured carries at least 80% insurance to value. 23. D This was discussed previously. 24. D This the same as on other commercial property policies. 25. C This was discussed previously. 26. C This was discussed previously. 27. D This is a trick question. Although there is a maximum limit for jewelry of $2,500, that special limit only applies to theft of jewelry. If the jewelry was damaged by fire, coverage will apply up to the business personal property policy limit. 28. B The most the insurer will pay for debris removal is 25% of the amount paid for the direct loss. However, if debris removal expense exceeds such 25%, or if the combined amount of the loss and the cost of the debris removal exceeds the policy limit, the insurer will pay up to an additional $10,000 for debris removal. 29. C If you understand what the CGL covers, then you also understand the liability coverages on a BOP since they are virtually the same. 30. B A BOP defines the period of restoration as the period that ends on the date when the property should be repaired, rebuilt or replaced with reasonable speed and similar quality; or the date when business is resumed at a new permanent location, whichever is earlier. INSURANCE AND SECURITIES SCHOOLS OF AMERICA 15

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17 ADDITIONAL CHANGES TO BE MADE The following page references relate to the changes that will be present in your exam effective July 1, Please study the preceding section thoroughly as it includes the updated information included in the 2006 ISO Businessowners form, which will be included on the exam beginning July 1, Page 158: Change one year to 60 days in the last sentence of the first paragraph under Commercial Crime. Page 231: Remove the words Special Form from the first sentence of the fourth Key Fact from the top of the page. Page 250: Remove the words Special Form from question #37. Page 250: Remove the words Special Form from question #43. Page 254: Disregard question #65 completely. Page 264: Remove the words Special Form from the first sentence of the rationale for question #37. Page 264: Disregard the rationale for question #43. Page 266: Disregard the rationale for question #65. Page 296: Remove the words Special Form from question #9. Page 303: Change question #52 to read An unendorsed BOP does not cover:. Page 311: Remove the words Special Form from the first sentence of the rationale for question #9. Please also delete the last two sentences of the rationale. Page 315: Remove the words Special Form from the second sentence in the rationale for question #52. INSURANCE AND SECURITIES SCHOOLS OF AMERICA 17