Topics Covered:

What is blanket coverage?
Multiple locations
Fluctuating values
Advantage of blanket coverage
Some disadvantages of blanket coverage
Blanket insurance and the courts

What Is Blanket Coverage?

Specific, or scheduled, insurance is a common way of insuring much commercial property. A separate limit of liability applies to the building; another limit applies to business personal property. For example, a policy might have a total amount of insurance of $750,000, with $400,000 applying to a building, and $350,000 to its contents. If a total loss occurs to both building and contents, the limits shown on the policy are applied separately. Debris removal is based on the limit of insurance applicable to the covered property, and is limited to 25 percent of the sum of the deductible plus the amount paid for direct physical damage (with an additional amount of $10,000 for each location if necessary).

The other method is blanket coverage, in which different items are insured under one total amount. It may be “vertical” coverage, which applies to two or more items of property, such as a building and personal property, in a single fire division. It may be “horizontal,” which applies to a single kind of property in two or more buildings in one or more locations. An example is merchandise in three separate warehouses. On the other hand, blanket insurance may be a combination of the two, covering two or more buildings and their contents. A blanket limit of $750,000 for building and contents has the entire amount of insurance available to apply to building, contents, or both in event of a covered loss. For claims adjustment purposes—and particularly for debris removal purposes—there is no distinction between contents and building.

Multiple Locations

If an insured has stock stored at different locations and the values at each location vary, while the total value is relatively constant, horizontal blanket coverage is appropriate. For example: a furniture store has three locations in a city. One of the locations is a warehouse where furniture is received and held until delivered to one of the two stores. Though the inventory at any one location may vary, the annual stock value remains constant. The anticipated average may then be used as the basis for the blanket rate. Providing policy conditions are met, the full blanket amount can be applied to a loss at any location. One policy can provide coverage for the insured's buildings and personal property at all locations, with a minimum of paperwork on the part of the insured.

Consider, for example, an insured with business personal property at two locations, #1 and #2, valued respectively at $200,000 and $150,000. The contents are insured on specific policies for $160,000 and $128,000, with an 80 percent coinsurance clause. Imagine a total fire loss to the contents at location #1. The amount of the uninsured loss is therefore $40,000. Now consider the same two locations insured under one blanket policy, with a limit of insurance of $280,000 and an 80 percent coinsurance clause. Contents at location #1 are destroyed. Under the blanket policy, the entire loss would be payable, because the amount of insurance is adequate to satisfy the coinsurance requirement, and the loss is less than the amount of insurance.

Fluctuating Values

The insured with fluctuating total values or locations can still obtain the benefits of blanket insurance through use of the value reporting form CP 13 10 04 02. Periodic reports of values must be made, and the provisional premium charged at the beginning of the policy year is subject to adjustment at the end of the year based on the values submitted. In event of a covered loss, recovery is dependent upon timely and accurate reports of values as well as adequate limits of insurance.

Advantage of Blanket Coverage

The advantage of blanket insurance is loss settlement. Suppose an insured carries limits of $140,000, with $100,000 for the building and $40,000 for contents. If contents totaling $50,000 are destroyed, the disappointed insured might wonder why coverage remained on the policy for the building, when a total loss to contents was not fully covered. Often, too, questions arise as to the difference between building and contents. Is a hydraulic lift installed by the insured covered under part A building, or part B, your business personal property? If a loss occurs to building and contents, which debris removal expenses are attributable to the building, and which to contents? Uncertainty is eliminated through the use of vertical blanket insurance.

Some Disadvantages of Blanket Coverage

Blanket insurance has disadvantages as well as benefits. Establishing a rate is cumbersome. The building must be written with a minimum of 90 percent coinsurance, with no premium credit. In specific insurance, 90 percent coinsurance earns a 5 percent credit, and 100 percent coinsurance a 10 percent credit. With blanket coverage, only a 5 percent credit for 100 percent coinsurance is possible.

There are two methods of rating. First, the insured can apply the highest 80 percent coinsurance rate applicable to any single item to the entire limit of insurance. This can result in a premium greater than for specific insurance. For example, if a $1.50 rate applies to one item, and a $.50 rate to another, the $1.50 rate must be used on both. If the item with the lower rate is a substantial portion of the total property, the insured will pay significantly more to obtain blanket coverage. If the “highest rate” method is not chosen, the insured is required to file a statement of values CP 16 15 07 88 for each item with the rating authority. A blanket average rate is achieved by taking the average of individual 80 percent coinsurance rates times the value for each item. (ISO rule 34 states that ISO will calculate blanket average rates upon request, using the company's rates or its loss costs and Loss Cost Multiplier.)

The blanket rate is good for a year from its effective date, or until there is a general revision in rates, whichever occurs first. Additional insurance or renewals during that year use the same rate, even though the distribution may have changed. This is often a simpler transaction than a specific insurance adjustment. If there is a significant change in values, the insured can apply for a new blanket rate to reflect this change.

Besides the cumbersome rating procedures, another disadvantage of blanket insurance is the amount of coinsurance required. Eighty percent coinsurance can only be used when personal property of others in the care, custody, or control of the named insured is covered. And then, 80 percent can only be used if the property of others is:

1.the same type of personal property as the insured's;

2.located in the same building; and

3.subject to the same rate as personal property of the insured.

Tenants improvements and betterments located in the same building as personal property of the insured may also be written at 80 percent coinsurance. A building must be insured for a minimum of 90 percent of its value. An insured faced with this choice may decide that any possible loss will not exceed 80 percent of the insurable property value, and opt for the (perceived) less expensive specific insurance.

Elimination of uncertainty at the time of a loss was noted earlier as the advantages of blanket coverage. However, in event of a loss, the insurance company may require the insured to provide “a complete inventory of damaged and undamaged property,” including “quantities, costs, values, and amount of the loss claimed.” This is necessary to determine whether the coinsurance requirement has been met. It can be a laborious process, since, under the blanket, all covered property at all locations must be inventoried. (Blanket insurance requires that coinsurance apply to all the property under the blanket, not just the property at the loss location.) This problem can be solved by writing more than one blanket policy on the property, taking care to cover enough locations on each policy to get the spread needed for full coverage at any one location. The drawbacks to this solution are that values at a location may fluctuate without the insurance being adjusted accordingly, and that, in event of a loss, which policy responds.

The optimal approach is to eliminate the task of inventorying the property at the time of the loss through use of the optional agreed value clause of the CP 00 10 04 02. Under this optional coverage, the insured agrees to carry insurance equal to at least 90 percent of the value of the property. The insured must complete the statement of values endorsement, indicating the full actual cash values (or replacement cost values, if the replacement cost coverage option is requested). The agreed value provisions are effective for up to one year. When the agreed value clause is used, however, the insurance company, the insured, and the insurance agent must be alert. Because the statement of values endorsement can indicate separate items and values, it must be clear that blanket, not specific, insurance is requested. Any question as to what coverage is being provided should immediately be answered. In the absence of the agreed value clause, coinsurance applies, so care must be taken to make sure it appears on the policy at each renewal.

Finally, valued policy laws must be considered when writing blanket coverage. Three states—Florida, Georgia, and New Hampshire specifically exempt blanket insurance from application of the law. In the other eighteen states with valued policy laws, it would appear that all buildings insured under the blanket must be destroyed in order for the law to be invoked. The matter has not, however, been resolved by the courts. See Valued Policy Laws.

Blanket coverage may also be used for business income. For further information, see Business Income Information.

Blanket Insurance and the Courts

Blanket insurance coverage has been the subject of dispute in the court. One case (Forrest v. Northland Casualty Company, 213 F. Supp. 2d 1023 [W.D. Ark. 2002]) involved the Arkansas valued policy laws, and the use of the CP 16 15 statement of values to obtain a rate. The insureds owned three poultry houses and equipment insured on a blanket commercial property policy. One of the houses was totally destroyed by fire, and the insureds made a claim under the policy. The replacement cost of the poultry house and equipment was estimated to be $171,000; the insureds did not rebuild and so received an actual cash value settlement of $97,256 plus $7,000 for debris removal, less the $1,000 policy deductible.

The insureds contended that the statement of values they had submitted gave the value of the destroyed poultry house as $162,000, and that they were therefore entitled to the difference. They argued that the statement of values was made a part of the insured contract by operation of the Arkansas Code, and that the valued policy law gave them the right to the full value of the poultry house. The court applied Arkansas law and disagreed, saying that the Arkansas Code specifically referred to any “rider, endorsement, or application made a part of the policy.” In this instance, the statement of values (and application) was not attached to the policy and so it was not a part of the policy. Thus, there could not be an agreed-to amount for the poultry house. The court noted that the application specified a value for the other two poultry houses, and that with blanket policies, statements of values were simply furnished to the insurer to establish an average rate.

This case serves to illustrate the point that the use of the statement of values must be explained to insureds; an explanation following a loss that the statement is merely a rate determinant and not a guarantee of an amount of insurance might well leave the insured wondering why he or she had paid more for the coverage to begin with. As noted earlier, the optional agreed-value provision in the policy can be requested to provide the amount of coverage shown in the statement, if the insured prefers that approach.

The case of South Carolina Insurance Company v. Fidelity and Guaranty Insurance Underwriters, Inc., 489 S.E. 2d 200 (So. Car. 1997) involved two policies covering the same property and for the same perils. One provided blanket coverage, while the other provided specific coverage. Both contained the same “other insurance” provisions. The question before the court arose from loss occurring to an auto dealership caused by Hurricane Hugo. The dealership had damage to all of its buildings. The dealership turned the claim into South Carolina Insurance Company, which insured the dealership on a specific policy providing crime, general liability, and property coverage for five buildings. SCIC adjusted and paid the claim, and then sought contribution from the insured's other policy. This policy was issued by USF & G and provided blanket coverage for three buildings at the dealership, as well as buildings at other dealerships in other areas. USF & G stated that the policy providing specific coverage had to be exhausted before the blanket policy would pay. SCIC sued. The court said that the question was more properly framed as one of competing “other insurance” clauses rather than as blanket versus specific. There were four common types of “other insurance” clauses, said the court, pro rata, excess, escape, and excess escape.

The pro rata clause provides that the insurer will pay its share of a loss in the proportion its limits bears to the aggregate coverage available. The excess clause states the insurer will pay a loss only after other available primary insurance is exhausted. The escape clause means the insurer will not pay at all if there is other coverage. Finally, the excess escape provides that the insurer is liable for the amount of loss exceeding other coverage, but not when the limits of the other coverage are equal to or greater than its own. In the case before the court, both the SCIC and USF & G policies contained identical excess other insurance clauses. Accordingly, under South Carolina law, the clauses were mutually repugnant (that is, incompatible). Concluded the court, “If two policies both contain 'excess' clauses, but otherwise appear to provide for primary coverage, the excess clauses should be disregarded, and the concurrently covered loss prorated according to the policy limits of the respective policies.”

In reaching its conclusion, the court in South Carolina Insurance Company looked at other jurisdictions that ruled differently. One of these was United Services Automobile Association v. United States Fidelity and Guaranty Company, 555 S.W. 2d 38 (Mo. App. 1997). Here, the court said the other insurance clauses could be given different effect because the policies fell into distinct categories. A homeowner had two policies, one a homeowners policy with USF & G, and the other a floater covering personal property with USAA. The court looked at the coverage of each form. The homeowners covered, beside the dwelling, household goods located at the insured's residence for a stated amount, while the USAA policy covered personal property anywhere in the world. This factor, said the court, turned the USAA policy into a blanket policy because a feature of blanket policies was coverage for property in several different locations.

When the insured's personal property was destroyed by fire, each insurer claimed the other was responsible for payment of the loss; finally, each agreed to pay the insured a pro rata proportion of the loss. At trial, the court held that USF & G was responsible for the loss. USF & G appealed. The appellate court affirmed the ruling, however, saying that despite the presence of the other insurance clauses, the primary factor to consider was that one policy was specific; the other was blanket. Had both been either specific or blanket policies, then the insurers could pro rate their contributions to the loss.

A case which appears to combine elements of both South Carolina Insurance Company and United Services Automobile Association is Monumental Paving & Excavating, Incorporated v. Pennsylvania Manufacturers' Association Insurance Company, 176 F. 3d 794 (U.S. App. 4th, 1999). The insured had one policy which contained four coverage parts: first, commercial property written on a blanket basis for building and business personal property at all locations written on a replacement cost basis; second, commercial general liability; third, commercial crime; and four, commercial inland marine. When a fire destroyed two machines used in repairing potholes that were located in a building that burned, the insured first presented a claim under the inland marine coverage part; and then for the difference between their actual cash value and replacement cost ($325,000) under the personal property blanket. The insurer refused, saying that the insured was only entitled to $75,000, the amount listed on the inland marine schedule. The court looked at an exclusion which stated that “property that is covered under another coverage form of this or any other policy in which it is more specifically described, except for the excess of the amount due (whether you can collect on it or not) from that insurance,” and which the lower court had agreed prevented coverage. But the appellate court ruled that the definition of “covered property” clearly included the machines. The circuit court had erred in not recognizing the characteristics of a blanket policy. The exclusion that the circuit court said prevented coverage was an excess insurance clause, and not an exclusion at all. Therefore, because the blanket limits were adequate, the machines were covered for their replacement value.