A GENERAL DISCUSSION

Summary: Difference in Conditions (DIC) policies are most commonly used to provide additional limits of coverage for certain property perils or to fill in coverage for perils that are excluded in standard property policies. They also may be used to supplement international policies that are written by admitted carriers in the applicable foreign countries. The DIC policy form excludes causes of loss that are better insured on other forms, such as standard property policies, equipment breakdown policies, or employee dishonesty bonds. Carriers who write DIC policies use their own proprietary coverage forms, so policy language should be reviewed carefully before a DIC policy is selected.

We conclude with a brief discussion of ISO Difference in Conditions Coverage Form, IH 00 80 12 11.

Topics covered:

General information

Purpose

DIC policy structure

Areas requiring special review

Usage examples

ISO form IH 00 80

General Information

There is no standard DIC coverage form. Carriers who are willing to provide the coverage draft their own forms, and some underwriters may even use language that is manuscripted to fit a particular exposure situation. Therefore, policy wording should be carefully reviewed before it is put into place. This lack of an industry standard and various carriers' willingness to manuscript policy language can present both a blessing and a curse to those using DIC forms. The language can be artfully tailored to fit an individual exposure.

However, when policy language is manuscripted, those reviewing the policy must be very careful not to overlook new coverage holes that may be created by the very language that was designed to more fully insure the exposure. The form used must also be carefully reviewed in connection with the standard policy forms it complements to be sure that they dovetail properly.

DIC policies usually provide catastrophic coverage for perils that present severe property exposures, such as flood and earthquake. DIC policies also can be used to supplement coverage in operations with unusual transit, burglary, and international exposures. The form is not meant to respond to frequency losses, so high deductibles usually are employed.

Purpose

The DIC policy is not designed merely to increase property limits; that can be accomplished by excess property forms. Rather, the DIC policy is designed to broaden coverage by:

1. Providing additional limits of coverage for specific perils when standard markets won't provide adequate limits of coverage, and

2. Providing coverage for perils that are excluded on standard coverage forms.

In some situations, an insurer may decline to offer the catastrophic limits of coverage that are needed. In other situations, even though a broad special causes of loss form is offered, certain perils—such as flood and earthquake—are excluded.

An example of the first situation would be when the standard market only offers a $250,000 limit for open stock burglary to a distributor that needs a limit of $2,000,000 for this peril. A DIC policy could be structured to bring the burglary limit of coverage up to the needed $2,000,000.

One of the most common illustrations of the second situation is flood coverage for a facility that is in a flood zone. Flood normally is excluded on standard property policies and may be specifically excluded on HPR property forms when the insured is in a flood zone. A DIC policy can be used to provide flood coverage for this insured, as well as business income coverage otherwise not covered by the underlying policy because flood is an excluded cause of loss. Note, as well, that the flood policies written by the NFIP (National Flood Insurance Program) do not cover loss of business income.

DIC Policy Structure

DIC policies commonly are constructed on one of three platforms:

1. An “all-risk” primary coverage form that excludes perils that are being provided by a standard policy,

2. A specified peril primary coverage form with only the perils that are to be covered on the DIC form listed, or

3. An excess property form with underlying policies scheduled and standard property causes of loss excluded.

In the first type of policy structure, the perils excluded on the DIC policy will be those normally covered on standard policies, such as fire, lightning, windstorm, and hail. One policy that was reviewed included an “all-risk” perils exclusion that listed certain perils that were excluded and then stated that “any other causes of loss as provided under special causes of loss set forth in the standard broad (ISO) insurance form CP 10 30 10 12 or its equivalent” were excluded.

This type of structure, which is commonly employed in DIC forms, backs into the needed coverage by first giving blanket “all risks” coverage and then excluding those perils that are not excluded on the standard coverage form that the DIC policy is supplementing. The coverage that is left with this type of policy structure responds to perils that are excluded and perils that are not mentioned on the standard property form. The fact that perils that are not mentioned on the standard form are covered with this structure could provide unanticipated coverage for damages arising from causes of loss that are not contemplated when coverage is being arranged.

This policy may include additional exclusions that pertain specifically to the DIC policy, such as fraud, intentional damage, or pollution. It operates much like the ISO special causes of loss form. Coverage is inferred unless an exclusion or limitation is found that voids coverage.

When using this approach—that of the all-risk form—it is important to be sure that the perils that are excluded on the DIC form are worded exactly like the perils covered on the standard policy that the DIC form is complementing. The exclusions on the DIC policy must dovetail with the perils covered on the standard property policy or serious coverage gaps might inadvertently be created.

In the second type of structure, only perils that are listed on the DIC policy are insured. An example of this is a DIC policy that is drafted solely to cover flood or earthquake. With this type of structure, the policy is limited to only the listed perils. Loss arising from any other peril is excluded. This is similar to the coverage method provided by ISO basic or broad causes of loss forms. Coverage is not implied; the cause of the loss must be specifically listed on the policy as applying to the property in question.

The third approach provides additional limits of insurance only for causes of loss that are limited on the standard policy. This approach combines an excess property form with a DIC form in order to fulfill needed limits of coverage for specific perils. An example of this would be a DIC policy structured to provide additional limits for open stock burglary. In this situation, an excess burglary policy could be purchased. However, an excess DIC form would provide broader coverage than a simple excess burglary form because losses arising from perils that were not specifically excluded on the DIC coverage form would be covered—in addition to open stock burglary.

DIC policies normally do not include coinsurance requirements. This permits the purchase of insurance for only partial values of property. If coinsurance were included in a DIC form designed to cover flood, the insured would have to purchase flood coverage limits equal to the total value of the property insured. Without a coinsurance requirement, a limit sufficient to insure only the property on lower floors, which normally would be the property subject to flooding, can be purchased without fear of an underinsurance penalty.

Areas Requiring Special Review

A review of the entire DIC form should be undertaken to be sure that the policy provides the coverage that is being sought. Although most courts are of the opinion that it is the insured's responsibility to review their insurance policies, agents must be careful to ascertain what coverages are being requested, or to suggest appropriate coverages the insured might not have thought of. For example, in Samia Companies v. United States Fire Ins. Co., 789 So. 2d 706 (Ct. App. La. 2001), the agent was drawn into a suit in which the insured alleged the agent's negligence in obtaining flood coverage on a DIC policy allowed the insurer to deny the claim. The dispute centered on two properties that were not listed on the endorsement providing flood coverage, although they were listed on the underlying commercial property policy. (The declarations page for the DIC referred to the “schedule of locations/values,” and the properties were not listed on this schedule.) Ultimately, the court held it was the insured's duty to inspect the policy and have any errors corrected.

Daniel James Ins. Agency, Inc. v. Floyd West of Louisiana, Inc., 145 F.3d 1330 (6th Cir. Oh. 1998) involved the agent's errors and omissions carrier being called upon to pay a loss when the agent did not request extra expense coverage on a DIC policy obtained by an excess and surplus lines broker. The agent had requested extra expense coverage on the primary policy, but neglected to request the coverage on the DIC policy. When the insured sustained a flood loss, the agent's errors and omissions carrier paid the bulk of insured's extra expense loss, and the agent paid the remainder. The agent then sued the broker, alleging the broker should have reviewed the agent's coverage requests and notified it when the requests were dissimilar. The court, in an unpublished opinion, held that there was no duty imposed upon the broker to review the agent's work, and thus the broker was not responsible for any contribution toward the insured's loss.

The following are certain areas that should receive special attention.

Coinsurance—It is important to be sure that the DIC policy does not include a coinsurance requirement. Most do not—an important feature that was discussed previously. A coinsurance requirement could adversely affect the amount of coverage available at the time of loss.

Definitions of perils covered—The definitions of perils that are needed in the DIC policy should be reviewed. As an example, some DIC policies may define flood as the overflowing of the normal boundaries of water. This definition would not provide coverage for flooding caused by surface water, which is water derived from rain or melting snow that follows no set course as it flows over the ground, so the definition should be amended to include damage caused by surface water.

Wording of exclusions—As discussed previously, the exclusions on an all-risk DIC policy form should match the wording of the causes of loss covered on the complementary standard property form. Even when other DIC platforms are used (specified peril coverage or excess “all-risk” coverage), the standard policies and the DIC policy should be reviewed side-by-side to be sure the language dovetails. As with all policies, the wording of every exclusion on the DIC policy should be reviewed, even if it does not appear to interact with the standard coverage form it is paired with, to be sure that unexpected exclusions are not contained in the DIC form.

Deductibles and percentage insured—Most DIC policies feature higher deductibles because they are targeted toward catastrophic losses and not frequent small losses. In addition to a dollar deductible, some DIC forms may include payment for only a percentage of the loss above the deductible. As an example, a DIC policy that was structured to provide $10,000,000 of earthquake coverage over all locations may include a $250,000 deductible per occurrence plus an endorsement limiting the insurer's exposure to a percentage—such as 75 percent—of each earthquake occurrence. Even though the policy covering all of this insured's property is written with a $10,000,000 limit for earthquake, the damage to an individual building valued at $8,000,000 would be limited as follows:

Building value$ 8,000,000

Deductible- 250,000

Percentage (25%) not insured- 2,000,000

Loss settlement paid$ 5,750,000

Valuation—The DIC policy may provide for either replacement cost or actual cash value settlement. It makes sense to have the valuation clauses on the DIC policy and the standard property policy the same; either both should be based on replacement cost, or both should be based on actual cash value.

Coverage territory—The policy territory should be reviewed, especially when property in foreign countries is being addressed with a DIC form, to be sure it is broad enough to insure the risks contemplated.

Other insurance clause wording—Most DIC policies are not meant to provide excess coverage. They are structured so that causes of loss insured on a standard policy are not insured on the DIC form, so that the DIC policy provides primary coverage only for specific perils. However, there are possibilities for duplication. Because of this, special attention should be given to the other insurance clauses of both the standard property policy and the DIC policy. The standard form should state that the coverage found there is primary. The DIC policy should specify that it is excess over other insurance and will not be considered contributing insurance in the event of duplicate coverage.

Usage Examples

Flood and earthquake—Probably the most common purpose of a DIC form is to provide either flood or earthquake, or both flood and earthquake coverage. These causes of loss normally are excluded on standard property policy forms. When an underwriter will not endorse these coverages onto the standard policy, a DIC form often can be used to provide them.

The National Flood Insurance Program (NFIP) provides limited coverage for buildings and business personal property. However, the amount of coverage available to businesses is limited to $500,000 for buildings and $500,000 for business personal property. The NFIP does not offer any coverage for business income losses. A DIC policy can respond to both the need for higher real and personal property limits and for business income coverage. For example, a steel mill located in flood zone A has a recognizable flood exposure. In addition, its prime mortgage lender may require that $10,000,000 of flood coverage, including coverage for business income and extra expense, be carried. The standard property market might not provide the coverage, so an NFIP policy providing $500,000 each for real and personal property can be purchased. A DIC policy then can be used to provide blanket $10,000,000 of flood and surface water coverage for real property, business personal property, business income, and extra expense excess of a $500,000 deductible per flood (the amount of coverage under the NFIP policy). Similar situations can arise with other perils, such as earth movement or volcanic action.

Transit coverage—The standard inland marine market may not be willing to provide high limits of transit coverage for a computer manufacturer. A DIC policy could be structured to fill this void, providing higher per conveyance and per occurrence limits than available on the insured's basic property policy.

Burglary and theft exposures—The rates for a filed burglary and theft policy may be prohibitive for an insured with a high burglary/theft exposure. However, that insured may be able to secure an all-risks DIC policy with all but burglary and theft perils excluded with a high deductible and a high limit. This would respond to the catastrophic aspect of this exposure, possibly at a lower rate than available in the standard marketplace.

Foreign exposures—Corporations with foreign installations are often required to purchase primary coverage from an insurer domiciled in the country of operations. However, the insured may not feel comfortable that the policy purchased in this fashion will respond in the same way as its domestic policy. A DIC policy may be purchased to both fill in possible exposure gaps and to increase the limits available from the foreign-domiciled insurer. This type of foreign DIC policy usually wraps around property, non-owned auto, general liability, and employee injury exposures that the insured may face in the foreign country of operation.

Miscellaneous items—DIC policy forms often do not contain exclusions for excavations and foundations. Therefore, these exposures may be covered successfully by a DIC policy. In like fashion, coverage for occurrences such as the breaking of underground municipal water mains, which would flood the underground infrastructure of many buildings and cause utility service to be interrupted, could be insured through a broad DIC policy form.

ISO Form IH 00 80

ISO has developed a Difference in Conditions Coverage Form, IH 00 80 12 11, which is intended to supplement typical property policies by providing coverage excluded in the underlying property policies. It can also be used to provide excess coverage for a cause of loss covered by an underlying policy. In format, it appears much like the CP 00 10 10 12, in that reference is made to covered property as building and business personal property. But unlike the CP 00 10, the DIC form declares that business personal property is covered while in transit as well as in or on the described building, or in the open (or within a vehicle) within 100 feet of the described premises.

There is also coverage for personal property of others in the named insured's care, custody, or control located in or on the described building, or in the open or in a vehicle within 100 feet of the described premises. The property not covered section is identical, with two exceptions. Form CP 00 10 lists electronic data and the cost to replace or restore the information on valuable papers and records as property not covered; the IH 00 80 simply grants coverage in the coverage extensions (up to $2,500; a higher limit may be selected) for the cost to research, restore, or replace the lost information on valuable papers and records.

Additional coverages include debris removal (up to 25% of the limit of insurance plus the deductible); fire department service charge (up to $1,000); preservation of removed property up to thirty days; up to $10,000 for pollutant clean-up and removal; and limited coverage (up to $15,000; a higher limit may be selected) for fungi, wet rot, dry rot or bacteria, unless caused by fire or lightning. Included within this additional coverage is coverage for thirty days' time element loss, but only if business income and/or extra expense coverage applies and all terms and conditions of the applicable business income and/or extra expense coverage form have been satisfied.

Coverage extensions include up to $250,000 for newly acquired or constructed property (at each building) and up to $100,000 at each building for newly acquired business personal property. As noted earlier, up to $2,500 (a higher limit may be selected) is available for the cost to research, restore, or replace lost information on lost or damaged valuable papers and records.

The noteworthy difference, however, between the DIC form and the CP 00 10 is in the provision for covered causes of loss. While the CP 00 10 refers to the “applicable causes of loss form as shown in the declarations,” the IH 00 80 declares that “covered causes of loss means risks of direct physical loss or damage to covered property except those causes of loss listed in the exclusions.” And, in exclusion 2., the form states that the insurer “will not pay for loss or damage caused by or resulting from any of the following: fire, lightning, windstorm, hail or any other cause of loss if the cause of loss is covered by the Underlying Policy(ies) described in the Declarations; except this exclusion does not apply to any cause of loss specified in the Declarations to be excess insurance. When a cause of loss is specified as excess insurance, coverage is excess of coverage provided by the Underlying Policy(ies), whether that insurance is collectible or not.”

These are the causes of loss identified as being covered causes of loss in, say, the CP 10 20 10 12. Thus, the policy's intent is to cover those causes of loss, such as earthquake and flood, which are clearly excluded by the underlying policy, or to provide excess coverage over causes of loss specifically identified in the declarations.

Other exclusions, prefaced by anti-concurrent causation language, include governmental action; nuclear hazard; war and military action; fungi, wet rot, and dry rot; and virus, bacterium, or other microorganism. Loss or damage caused by or resulting from the following is excluded: explosion of steam boilers; delay or loss of use or market; mechanical breakdown, artificially generated electrical, magnetic, or electromagnetic energy that damage, disrupts, disturbs, or interferes with any electrical or electronic wire, device, appliance, system, or network or device, appliance, system, or network using cellular or satellite technology; wear and tear, rust, corrosion, hidden or latent defect, fungus, decay, or deterioration; settling, cracking, shrinkage or expansion; shortage found on taking inventory; unexplained disappearance; marring or scratching of personal property; nesting or infestation, or discharge or release of waste products or secretions by insects, vermin, birds, rodents, or other animals; dishonest acts committed by the named insured, managers, partners, or employees; voluntary parting; unauthorized instructions to transfer property; rain, snow, ice, or sleet to property in the open; discharge, dispersal, seepage, migration, release, or escape of pollutants (but if this results in a covered cause of loss, that loss is covered); and neglect of an insured at the time of loss to use reasonable means to protect and save property. Excluded as well is coverage for: acts or decisions; faulty, inadequate, or defective planning, zoning, development, surveying, siting, design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction, maintenance, or materials used in repair, construction, renovation, or remodeling; and rust or other corrosion, dampness, dryness, or extremes of temperature. But if one of these results in loss by a covered cause of loss, that loss is then covered. Notably, there is no exclusion, as on most commercial property policies, for weather conditions, if the conditions contribute to a cause or event already excluded (such as earth movement or flood).

Form IH 00 80 can be used in conjunction with commercial inland marine conditions form CM 00 01 09 04 and common policy conditions form IL 00 17 11 98.