Chapter 25, Rejda (13th ed.

)
Commercial Property Insurance
• ISO Commercial Property
Program
• Building and Personal Italy cruise ship Costa Concordia accident
Property Coverage Form January 13, 2012

• Causes-of-Loss Form 2012 Lamma Island ferry collision

• Value Reporting Forms BREAKING: 34 presumed dead in California boat fire

• Business Income
Insurance
• Equipment Breakdown
Insurance
• Transportation Insurance
• Businessowners Policy

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Exhibit 25.1 Components of the ISO
Commercial Package Policy

Insurance Service Office (ISO)

– http://www.iso.com/
– ISO provides statistical
information, actuarial
analysis, policy language,
and technical information to
participants in property and
liability insurance markets.
ISO has drafted a
considerable number of
commercial policy forms. 2
ISO Commercial Property Program

• Business firms can purchase a commercial

package policy
– The package policy is tailored to meet the specific
needs of the business
– The policy combines two or more coverages into a
single policy
• Advantages include: fewer gaps in coverage, lower premiums,
and convenience
– The policy contains:
• Common policy declarations
• Common policy conditions, e.g., cancellation terms
• Coverage parts, e.g., commercial property, crime

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Building and Personal Property (BPP)
Coverage Form
• The building and personal property (BPP)
coverage form is a commercial property
coverage part that is widely used to cover a
direct physical damage loss to commercial
buildings and personal property
– The form covers the buildings described in the
declarations, including fixtures and permanently
installed machinery and equipment
– Business personal property, such as furniture
and computers, is covered
• Includes the insured’s interest in improvements
and betterments as a tenant
– Personal property of others in the care, custody,
or control of the named insured is also covered
– Can select 1 or all 3 coverages.

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Building and Personal Property (BPP)
Coverage Form
– Additional coverages include debris removal, the cost of preserving
property, fire department charges, and the cost to replace data
destroyed by a covered loss
– Under certain conditions, the insurance can be extended to cover
other property, such as the personal effects of employees, newly
acquired property, and property off the premises
• The declarations page must show a coinsurance requirement of 80% or
greater or a value-reporting period symbol
– A standard deductible of $250 applies to each occurrence
– If applicable, the coinsurance requirement must be met to avoid a
penalty
– The policy can be endorsed to cover losses on an agreed value or
replacement cost basis, or to add an inflation guard

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BPP: Examples
• Most business firms do not require coverage in
all three categories. For example,
– Worldwide Realty (WR) Inc., is the owner of a building rented
to others. It purchases coverage for the building only.
– A law firm operates in WR’s building, purchases coverage
only for its own business personal property because it does
not have an insurable interest in the building and does not
have any personal property of others in its possession.
– Sue’s Jewelry Shop operates in WR’s building. As a tenant, it
has no need for building coverage. The shop purchases
coverage for its own business personal property and for the
personal property of others in her care, custody, or control.
– City Laundry, Inc., a commercial laundry, owns and occupies
the building adjacent to WR’s building. It purchases coverage
for the building, its business personal property, and the
personal property of others in its care, custody, or control. 6
Valuation of Property

7
 Application Question: Wilson’s BPP

• Wilson Manufacturing Company insures its

factory and business personal property under a
BPP with the following limits, which satisfy the
policy’s 80% coinsurance provision:
– Building $500,000
– Business Personal Property $800,000
• Wilson’s property was badly damaged by a
covered peril. Indicate how much, if anything,
Wilson’s BPP should pay for each of the
following aspects of the loss. Ignore any
deductible.
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 Application Question: Wilson’s BPP

• Several underground pipes, valued at $5,000, were

destroyed.
• $1,300 cash was destroyed.
• Wilson was required by local ordinance to pay a $500
service charge to the local fire department.
• Plans and blueprints owned by Wilson were destroyed.
The cost of research to replace these valuable papers
was $6,000.
• Patterns owned by a customer of Wilson’s were
destroyed. Their actual cash value was $5,000.
• The damaged property included a quantity of finished
goods that had been sold but not delivered at the time
of loss. The cost for Wilson to manufacture the goods
was $5,000, and their selling price was $10,000.
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 Application Question:
Coinsurance and Deductible

• Yeah Café owns a building with an actual

cash value of $100,000. The building is
covered under a BPP with a coinsurance
clause and a $1,000 deductible. How much
will Yeah Café recover under its BPP in each
of the following situations?
– Insurance carried Coinsurance rate required ACV of loss
– A) $80,000 80% $10,000
– B) $60,000 80% $10,000
– C) $80,000 90% $10,000
– D) $100,000 80% $50,000
– E) $80,000 80% $90,000
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Application Question:
Improvements and Betterments
• A tenant in IFC insures its personal property
and its use interest in improvements and
betterments (i&b) under a BPP. A fire in the
tenant’s premises destroyed the tenant’s
business personal property as well as the i&b
that had been installed by the tenant when it
first occupied the building. Because the
tenant’s 5-year lease had only one year
remaining at the time of the loss, the tenant
decided not to replace the i&b. If the original
cost of the i&b was $100,000, how much, if
anything, would the tenant be able to recover
for the i&b under its BPP? 11
Application Question:
Agreed Value Option

• A building and its contents

are insured under a BPP with
the agreed value option in
effect. The limit of insurance
carried is $100,000 with a
$500 deductible. If the
agreed value shown in the
policy is $150,000, how much
will the insurer pay if the
insured sustains $30,000 loss
by an insured peril?
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CAUSES-OF-LOSS Forms
• A cause-of-loss form must be added to the
policy to have a complete contract.
• Four forms:
– Cause-of-loss basic form
– Cause-of-loss broad form
– Cause-of-loss special form
– Cause-of-loss earthquake form
• Deduction is usually 2~5 % of the value of the
insured property.
• Aftershocks within 168-hour period are considered to
be a single event.
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Causes-of-Loss basic Form
• A causes-of-loss form • Fire • Riot or civil
must be added to the • Lightning commotion
• Explosion • Vandalism
policy to have a complete • Windstorm or • Sprinkler leakage
contract hail • Sinkhole collapse
– The form specifies the • Smoke • Volcanic action
covered perils for the • Aircraft or
business and personal vehicles
property coverage
– The causes-of-loss basic
form provides coverage for
11 basic causes of loss:

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 Fire Peril

• Friendly Fire: a
fire that stays in • Hostile fire: a
fire that leaves its
its intended place. intended place.
E.g., a fire in a E.g., if a sparkle
fireplace is a escapes the
friendly fire as fireplace and sets
long as it remains the carpet on fire,
contained in the the fire becomes
fireplace. hostile fire.

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Causes-of-Loss broad Form
• The causes-of-loss broad form includes all
causes of loss covered by the basic form
plus:
– Falling objects
– Weight of snow, ice, or sleet
– Water damage
– Also, collapse is covered for certain causes,
such as hidden decay

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 Crime Perils

• Note that crime perils are not always included in

the policy.
– Burglary is the taking of property from inside a building
by someone who unlawfully enters the building.
– Robbery is the taking of property from a person by
someone who has caused or threatened to cause the
person harm.
– Theft is a broad term that means any act of stealing.
– A break-in is a burglary; a purse snatching or a holdup
is a robbery; and both are thefts.

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 Example: Insured Perils

• Suppose you have purchased a property

insurance policy that covers ONLY the
following perils: fire, lightning, vandalism,
aircraft & vehicle damages, falling objects,
and windstorm.
• For each of the following loss scenarios
given below, indicate whether you would be
reimbursed by the insurance company
underwriting your policy.

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Example: Insured Perils
• a) While having a fire in your fireplace one evening, your
girlfriend (boyfriend) throws your expensive FIN3240 textbook
into the fireplace. When the book catches on fire, a spark jumps
out of the fireplace and burns your sofa. Is the damage to your
FIN3240 textbook covered? Is the damage to your sofa covered?
Damage to the textbook Circle one: Yes No
Damage to the sofa Circle one: Yes No
• b) Your neighbor's teenage daughter intentionally spray-paints
offensive words on the side of your house. It costs you $200 to
have the siding of the house cleaned. Is this cost to restore the
siding of your house covered? Circle one: Yes No
• c) A tornado destroys your neighbor's car, which was parked in
front of your house at the time it was destroyed. Is this auto
physical damage covered? Circle one: Yes No
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Example: Insured Perils
• d) A light fixture falls from your ceiling because of several loose screws.
The light fixture itself breaks and also damages the glass table upon
which it lands. Is the damage to light fixture covered? Is the damage
to glass table covered?
Damage to the light fixture Circle one: Yes No
Damage to the glass table Circle one: Yes No
• e) While on vacation, your home is burglarized. In the process of
breaking into your home, the burglar damages your back door. The
burglar also escaped with some of your valuable personal property. Is
the damage done to your back door covered? Are the items stolen
during the burglary covered?
Damage to the back door Circle one: Yes No
Items stolen Circle one: Yes No

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Causes-of-Loss special Form
• The causes-of-loss special form insures against
“risks of direct physical loss” unless specifically
excluded
– That is a “all-risks” policy.
– Also, personal property in transit is covered for certain
causes of loss
– Coverage also includes glass damage
• Advantages:
– The burden of proof falls on the insurer.
– Some common perils that are not in Basic and Broad Form
coverage:
• Theft; Friendly Fire; Vehicle damage; …
– Relatively small additional premium charged.
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Examples: Cause of Loss Forms
• Assuming each of the following losses involved covered
property, indicate whether each loss would be covered by
the Cause of Loss-Basic Form, Broad Form, and Special
Form. (Treat each question separately.)
• a) An expensive hand tool was accidentally dropped into a BBQ oven.
Basic Form Circle one: Covered Not covered
Broad Form Circle one: Covered Not covered
Special Form Circle one: Covered Not covered

• b) Vandals spray-painted graffiti on the exterior walls of the insured

building.
Basic Form Circle one: Covered Not covered
Broad Form Circle one: Covered Not covered
Special Form Circle one: Covered Not covered
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Examples: Cause of Loss Forms
• c) A vehicle owned by the insured and driven by one of the
insured’s employees knocked down a garage wall.
Basic Form Circle one: Covered Not covered
Broad Form Circle one: Covered Not covered
Special Form Circle one: Covered Not covered
• d) An air conditioning unit (valued at $600) belonging to the
insured was destroyed by collision while being transported to a
repair shop on the insured’s truck.
Basic Form Circle one: Covered Not covered
Broad Form Circle one: Covered Not covered
Special Form Circle one: Covered Not covered
• e) A shipment of merchandise (value at $5,000) from the insured
manufacturer to a customer was destroyed by a fire that
occurred while the merchandise was being transported in a
truck operated by a common carrier.
Basic Form Circle one: Covered Not covered
Broad Form Circle one: Covered Not covered
Special Form Circle one: Covered Not covered 23
Reporting Forms
• The reporting form is used to insure fluctuations in
business personal property
– Premiums are based on the actual value of the covered
property
– The insured can report inventory on a daily, weekly,
monthly, quarterly or annual basis
– If the insured underreports the property values at a
location, and a loss occurs at that location, recovery is
limited to the proportion that the last value reported
bears to the correct value that should have been
reported
– E.g., if the actual inventory on hand is $500,000, and the
insured reports only $400,000, only 4/5 of any loss will
be paid (less the deductible).
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Application Question:
Value Reporting Form
• Camera Shop occupies a leased building. On December 10 a
fire totally destroyed the building and its contents. The ACV of
the contents was $105,000. Camera Shop’s personal property
was insured under a BPP with the Value Reporting Form with a
$90,000 limit and a monthly reporting requirement. The policy
had been in force since August 1. At the time of the loss,
Camera Shop had made the following monthly reports of values:
August 31 $91,000;
September 30 $79,000;
October 31 $110,000
• Because these reports were accurate and made on time,
Camera Shop believed that it was entitled to receive payment of
$105,000, which was less than the amount last reported.
• How much will Camera Shop be able to recover under its value
reporting coverage, assuming no deductible?
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 Business Income Insurance

• Property losses can lead to any or all of the

following financial consequences:
– Direct Loss: Reduction in the value of the property
– Time Element (Indirect) Loss
• Lost income
• Extra expenses

• Two basic forms:

– Business income and extra expense coverage form
– Extra expense coverage form

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Application Question:
Business Income Loss Exposure

• Mail Order, Inc., suffered a fire loss at its

single warehouse. During the six-month
restoration period that followed, Mail Order’s
sales decreased from an expected $2
million to an actual $1 million, and (mainly
because of extra expenses for temporary
relocation and rental expenses) expenses
increased from an expected $1 million to an
actual $1.5 million.

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Application Question:
Business Income Loss Exposure

• (A) What was Mail Order’s net income for the six-
month period of restoration?
• (B) What would Mail Order’s net income have
been for the same six month period if no loss had
occurred?
• (C) What was the amount of Mail Order’s business
income and extra expense loss for the six month
period?
• (D) Could Mail Order’s business income loss have
continued after it resumed operations in its rebuilt
warehouse? Why or why not?
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Business Income Insurance
• Business income insurance is designed to cover the loss of
business income, expenses that continue during the
shutdown period, and extra expenses because of loss from
a covered peril
– One form is the business income (and extra expense) coverage
form
• This form covers the loss of business income due to suspension of
operations during a period of restoration
– Suspension must result from a covered direct physical loss
• Extra expenses, such as relocation costs, are also covered
• An extended business income provision covers the reduction in
earnings for a limited period after the business reopens
• Business income is defined as the net profit or loss before income
taxes that would have been earned, and continuing normal operating
expenses, including payroll
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Business Income Insurance
– The business income coverage form can be purchased with
coinsurance of 50, 60, 70, 80, 90, 100, or 125%
• The coinsurance percentage selected depends on the length of time it
takes to complete repairs and resume operations
– A higher percentage should be selected if the business expects to be shut
down for a longer period of time
– Some optional coverages include:
• A maximum period of indemnity of 120 days
– Also eliminates the coinsurance requirement
• A monthly limit of indemnity
– Eliminates the coinsurance requirement and limits the maximum monthly
amount that will be paid for each consecutive 30-day period
• Business income agreed value
– This option suspends the coinsurance clause and places no limit on the
monthly amount paid, provided that the agreed amount of insurance is
carried

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BIC Coinsurance Example
When: The Net Income and operating expenses for the 12
months following the inception, or last previous
anniversary date, of the policy would have been
$400,000.
The Coinsurance percentage is 50%
The Limit of Insurance purchased is $150,000.
Assume the amount of loss is $80,000
Step l: $400,000 × 50% = $200,000 (the min. amount of
insurance to meet the coinsurance requirements)
Step 2: $150,000 ÷ $200,000 = .75
Step 3: $80,000 × .75 = $60,000
The insurer will pay no more than $60,000. The remaining
$20,000 is not covered. (Underinsurance Example) 31
Business Income Insurance
• The extra expense coverage form is a separate form that can be used to cover
the extra expenses incurred by the firm in continuing operations during a period
of restoration
– Can be used by firms that must continue to operate after a loss occurs, such as a
newspaper
– The form does not cover loss of business income
– Expenses to continue operations are covered, subject to certain limits
• An endorsement can be added to a business income policy to cover the loss of
business income from dependent properties (contingent business income loss)
– Used when a business depends on a single supplier for raw materials, or relies on a
single customer to purchase its products
– The loss of income must result from direct damage to property of the dependent
property
– Types of dependent properties include:
• Contributing location (sole supplier’s business is interrupted)
• Recipient location (sole customer’s business is interrupted)
• Manufacturing location
• Leader location

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Local Cases –
Business Income Insurance Claims

• The Peninsula:
HK$95m recovered from BIC

• Mandarin Oriental:
HK$120m recovered from BIC

• BIC due to SARS no longer available when

policy renewed

• Should SARS be excluded?

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The Peninsula Hotel and
Mandarin Oriental Hotel

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Other Commercial Property Coverages

• Some firms have certain needs that require more specialized property
coverage
• A builders risk coverage form can be used to insure buildings under
construction
• A condominium association coverage form is used to cover a
condominium building
• Businesses that own units in a condominium building can purchase a
condominium commercial unit-owners coverage form
• The equipment breakdown coverage form can be used to cover losses
due to the accidental breakdown of covered equipment, such as steam
boilers, refrigeration equipment, and computer equipment
• Difference in Conditions (DIC) insurance is an “all-risks” policy that
covers other perils not insured by basic property insurance contracts

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Equipment Breakdown Insurance

• Covers losses due to the accidental breakdown of

covered equipment (formerly known as boiler and
machinery insurance), such as steam boiler, air
conditioning and refrigeration equipment; electrical
generating equipment; pumps, etc…
• The cause-of-loss forms discussed earlier exclude
steam boiler explosion, electrical breakdown and
mechanical breakdown.
• Coverages Provided: property damage; expediting
expenses; business income and extra expenses;
spoilage damage; utility interruption; newly acquired
premises, etc…

36
Examples of Equipment Breakdown Losses

37
Application Question

• The insured’s boiler exploded, causing the losses

listed below. If the insured had a typical
equipment breakdown policy, which of the
following losses would the policy cover?
Destruction of the boiler: Covered Not covered
Damage to the insured’s building: Covered Not covered
Damage to a neighboring building owned by another business:
Covered Not covered
Damage to the insured’s business personal property:
Covered Not covered
Damage to customers’ property in the insured’s control:
Covered Not covered
Bodily injury to a member of the public who was walking by the building when
the explosion occurred: Covered Not covered
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Transportation Insurance
• Ocean marine insurance provides protection for goods
transported over water
– It is one of the oldest forms of transportation insurance
• Ocean marine insurance comes in several different forms:
– Hull insurance covers physical damage to the ship or vessel
• A collision liability clause (running down clause) covers the owner’s legal
liability if the ship collides with another vessel or damages its cargo
– Cargo insurance covers the shipper of the goods if the goods are
damaged or lost
• Regular shipments can be covered with an open-cargo policy
– This coverage requires the shipper to report periodically the shipments that
are made

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Transportation Insurance
– Protection and indemnity (P&I) insurance is usually written as a
separate contract that provides comprehensive liability insurance
for property damage or bodily injury to third parties
• Coverage includes liability for damages caused by the ship to piers and
docks, and for illness or injury to passengers and crew
– Freight insurance indemnifies the ship owner for the loss of
earnings if the goods are damaged or lost and are not delivered

40
Transportation Insurance
• Ocean marine insurance is based on certain fundamental
concepts, or implied warranties:
– The owner implicitly warrants that the vessel is seaworthy
– The ship cannot deviate from its original course
• The ship can only deviate to avoid an accident, or to save the life of an
individual on board, or rescue persons from another vessel
– The purpose of the voyage is legal
• The ocean marine policy provides broad coverage for perils
of the sea, such as bad weather, high waves, collision,
sinking, and stranding
– Includes losses from fire, pirates, and jettison (to save the ship)
– The policy can be written on an “all-risks” basis
• Common exclusions are losses due to delay and war

41
Transportation Insurance
• A particular average is a loss that falls entirely on a
particular interest
– Under the free-of-particular average (FPA) clause, partial losses are
not covered unless the loss is caused by certain perils, such as
stranding or sinking
• The insurer pays the full amount of a loss only if it exceeds a certain
percentage specified in the FPA
• A general average is a loss that falls on all parties to the
voyage, incurred for the common good
– Each party must pay its share of the loss based on the proportion
that its interest bears to the total value in the venture
– Conditions for a general average loss include imminent peril,
voluntary sacrifice, preservation of at least part of the value
• All parties claiming contributions must be free of fault

42
Transportation Insurance
• Inland marine insurance provides protection for goods shipped on land
– The coverage grew out of ocean marine insurance
– Conflicts between fire and marine insurers were resolved with a nationwide
marine definition in 1933, to define the types of property that marine insurers
could write
– The current definition includes imports, exports, domestic shipments, means
of transportation and communication, personal property floater risks, and
commercial property floater risks
– Some examples of property that can be insured include:
• Losses to domestic goods in transit
• Property held by a bailee, such as dry cleaner
• Mobile equipments, such as a tractor
• Property of certain dealers, such as jewelry and fine art
• Means of transportation and communication, which is property at a fixed location
that is used in transportation or communications, such as a bridge or television
tower

43
Transportation Insurance
• Inland marine contracts are classified as either filed or
nonfiled forms
– Filed forms are filed with the state insurance department, and are
typically used in situations where there are a large number of
potential insureds
• Forms under the ISO simplified commercial inland marine program
include, for example:
– Accounts receivable coverage
– Camera and musical instrument dealers coverage
– Film coverage form
– Mail coverage form
– Signs coverage form
– Theatrical property coverage form

44
Transportation Insurance

– Nonfiled inland marine forms are used to meet

specialized needs
• An annual transit policy can be used to cover the shipment of
goods on public trucks, railroads, and coastal vessels
– Both incoming and outgoing shipments can be insured on a
named perils or “all-risks” basis
• A trip transit policy is used by firms to cover a single shipment
• A business floater covers property that frequently moves from
one location to another, such as contractors equipment and
garments in the process of manufacturing

45
Businessowners Policy (p.586-7, Rejda 2017)
• A businessowners policy (BOP) is a package policy specifically
designed for small- to medium-sized retail stores, office buildings,
apartment buildings, and similar firms
– The ISO BOP provides both property and liability coverage in one policy
– Businesses are ineligible if their loss exposures are outside those
contemplated for the average small- to medium-sized firm
• e.g., auto repair shops and bowling alleys
– Property losses are covered on an “all-risks” basis
• Coverage includes buildings described in the declarations, fixtures, permanently
installed machinery and equipment
– Business personal property, including property in the insured’s care, is also
covered
• A peak season provision provides for a temporary increase of 25% of the
amount of insurance when inventory values are at their peak
– Some addition coverages include debris removal, collapse, and interruption
of computer operations

46
Businessowners Policy
– For an additional cost, businessowners can also cover:
• Outdoor signs
• Money and securities
• Employee dishonesty
• Mechanical breakdown
– A standard deductible of $500 per occurrence applies to all
property coverages
– The BOP also includes business liability coverage similar to the
commercial general liability policy (CGL)
• The businessowner is insured for bodily injury and property damage
liability, and advertising and personal injury liability
• Medical expense insurance is also provided

47
Application Question: BOP

• Sam’s Shoe Store is located in a building owned

by the store’s proprietor. The building and its
contents are insured under a BOP including the
special property coverage form for $160,000 on
the building and $100,000 on the contents,
including merchandise. The policy does not
include any optional coverages or endorsements.
What amount, if any, will the insurer pay for each
of the following losses? Ignoring deductibles.

48
Application Question: BOP
• (A) A robbery occurred at Sam’s Store. The robber took
$400 in cash.
• (B) Sam suffered a reduction in net income because of
his inability to obtain merchandise from his main
supplier following a fire at the supplier’s warehouse.
• (C) Vandals smashed the plate glass window in the front
of Sam’s Show Store. The cost to replace the window
was $300.
• (D) Sam rented space in a nearby mall to open a
second store. After Sam had moved $20,000 worth of
merchandise to the new location, a fire in the mall
destroyed the merchandise.
• (E) Sam’s part-time sales clerk stole $2,000 worth of
merchandise over a two-month period. 49
Application Question: BOP

• Julia’s Bridal Shop is insured under a BOP

policy with a limit of $200,000 on the building
and $120,000 for personal property, both on an
replacement cost basis. The policy includes the
businessowners special property coverage form
with all optional property coverages except
mechanical breakdown. For each of the losses
described below, indicate how much should be
paid under Julia’s BOP. And why? Ignoring
deductibles.
50
Application Question: BOP

• A typhoon damaged Julia’s shop and its contents.

– (1) Business income and extra expense loss was $100,000 during the
period of restoration, which lasted seven months. The calculation of
business income loss included $5,000 per month for ordinary payroll.
– (2) Julia’s business did not return to the normal level for 3 weeks after
reopening. The reduction in net income during those 3 weeks was
$1,000.
– (3) The replacement cost of personal property lost in the fire was
$130,000. Average value of covered personal property for the 12
preceding months were $115,000.
– (4) The cost to repair the damage to the building was $150,000. The
ACV of the damaged property was $100,000. The replacement cost
of the whole building immediately before the loss occurred was
$300,000.
51
Property All Risks, Business Interruption
and Money Insurance @ CUHK (old)
Section I: Sum Insured: HK$5,347,613,550
• Building: HK$4,044,461,800
• Business Property of Others: HK$748,467,750
• Library Books: HK$270,900,000
• Others ……..
– Sub Limit:
• Burglary: HK$15,000,000 per location
• Landslip: HK$50,000,000 in aggregate per policy year
• Full Theft: HK$5,000,000
– Premium: HK$1,577,546
Section II: Sum Insured: HK$17,970,000
• Staff Quarters: 257 flats in 11 blocks @ HK$25,000 each (2 months) 
HK$12,850,000
• Bank of America Tower (2 months)  HK$1,000,000
• Jockey Club for Positive Aging (3 months)  HK$300,000
• Others ……..
– Premium: HK$5,301.15
52