ISO Market Segments Program

Summary: Insurance Services Office (ISO) has developed a market segments program providing specialized coverages for certain specialty insurance markets. This program offers “wrap-around” endorsements that are used to enhance the coverages provided by standard coverage forms, like the commercial property and general liability forms. The form and some endorsements have been updated. Those updates will be highlighted in this discussion.

Eligible risks for the supermarkets segment include stores, a majority of whose sales are grocery products, total annual receipts (including concessionaires' receipts) of $500,000 or more and total area of 3,000 square feet or more.

This treatment provides information on the supermarkets coverage form, MS SM 01. The endorsement modifies the CGL forms, the building and personal property coverage form, and the causes of loss—special form. These policies are analyzed in the following pages: see CGL Coverage Form—Coverage A; see CGL Coverage Form—Coverage B; see Medical Payments; see General Provisions of the CGL; see Building and Personal Property Coverage Form; and see Causes of Loss.

Topics covered: Introduction Changes to the commercial property form Changes to the causes of loss—special form Changes to the CGL form Definitions Endorsements

Introduction

Endorsement MS SM 01 modifies the CGL form, the commercial property form, and the causes of loss—special form. The modifications tailor these forms to the needs of the supermarket risk. The endorsement adds property and crime coverages and modifies the premium audit section of the CGL form. An endorsement is also available to add mechanical breakdown coverage. This endorsement is discussed later in this treatment. ISO's promotional material says that this program is “designed for stores that sell mostly grocery products and occupy a total area of 3,000 square feet or more, with $500,000 or more in annual sales.”

Changes to the Commercial Property Form

The commercial property form (CP 00 10 10 12) covers the building and business personal property of the insured and property of others that the insured has in his care. It also specifies several items as property not covered. One category of property not covered in the CP 00 10 is accounts, bills, deeds, evidences of debt, money, notes, and securities. The MS SM 01 adds an exception to that category by providing some money and securities coverage.

The 2007 supermarket form no longer excludes the following property while outside of buildings:

1.     Grain, hay, straw, or other crops; and

2.     Fences, signs, antennas, trees, shrubs, and plants.

The new MS SM 01 completely removes the debris removal additional coverage. Therefore the provisions listed in the CP 00 10, the added amount of $10,000, is the most that is available for debris removal.

The MS SM 01 adds coverage for loss of money and securities, but emphasizes that the insurer will cover only theft, disappearance, or destruction of such property. The 2007 form has removed the definition of occurrence from this section of the form and moved it to the definitions.

The MS SM 01 provides additional coverage under fire extinguisher systems expense. The amount of coverage has been expanded in the 2007 form to cover up to $15,000 for any one occurrence. Like the CP 00 10, it pays the cost of recharging such systems if they are discharged on the premises. The MS SM 01 also pays for damage done by such a discharge to covered property – something not covered by the CP 00 10. However, the supermarket endorsement adds the caveat that no coverage applies if the discharge occurs while the system is being installed or tested.

A reward payment of up to $5,000 is insured for information that leads to the conviction of anyone damaging covered property. The supermarket endorsement adds the following additional coverages:

1.     Money orders and counterfeit paper currency in the amount of $5,000.

2.     $5,000 coverage for forgery or alteration of checks, drafts, etc.

3.     $10,000 for damage to outdoor signs.

4.     $25,000 for employee dishonesty.

5.     $25,000 to remove brands and labels from damaged merchandise.

6.     Covered equipment will be repaired or replaced if subject to an ordinance or law.

7.     $5,000 for replacement of locks, due to loss or theft of keys. A $100 deductible applies.

8.     Damage to computers caused by artificially generated electrical current.

9.     $10,000 for business income and $10,000 for extra expense incurred as a result of food contamination.

The provision for outdoor signs now states that the provision supersedes all other outdoor sign coverage references in the Building and Personal Property Coverage Form. The exclusions for wear and tear, rust, hidden or latent defect, corrosion or mechanical breakdown have been removed from the current form. This broadens coverage for outdoor signs.

The forgery or alteration coverage now specifically states that the definition of check now includes a substitute check as defined in the Check Clearing for the 21st Century Act and a substitute check will be treated as the genuine check it replaces. Check Clearing 21 is a federal law designed to allow banks to handle checks electronically, thus making processing faster and more efficient. A substitute check is a paper copy of the front and back of the original check; it is slightly larger so that a picture of the original check can be presented. Very specific standards dictate how the substitute check is printed so that it can be used the same way as the original check. With a substitute check, banks can transmit the information electronically instead of physically moving a paper check. This is different than converting checks to electronic payments; different regulations govern electronic funds and paper checks.

Changes have been made to the employee dishonesty coverage as well. The definition of occurrence that appeared in this section has been removed. Again, the definition of occurrence is now found in the definitions section. The employee dishonesty section now excludes loss or damage that is an indirect result of covered acts when the loss or damage results from the insured's inability to realize income that he would have realized had it not been for the loss to money or securities, payment of damages for which the insured is legally liable, and payment of costs, fees or expenses the insured incurs to establish the existence of the loss. For example, a bag boy steals funds the insured had set aside for the new signs and advertising. The loss of potential income that the new signs/advertising would have brought to the store is not covered.

The brands and labels provision has been changed and the limit of $25,000 has been removed; now the form states that the total paid for the value of the damaged property will not exceed the applicable limit of insurance on said property. Also removed is the provision for payment of loss in value of salvaged merchandise due to the stamping or removal of brands or labels.

The extra expenses due to food contamination coverage states that there is no payment if the expense is covered under a Workers Compensation policy. The ninety-day restriction for business income has been removed. A new limit of $5,000 exists for additional advertising expenses; this is the most available for loss in any one occurrence.

A new additional coverage for spoilage has been added. The loss of perishable stock is covered when a change in temperature results from the mechanical breakdown of a cooling apparatus as long as the equipment is at the described premises; loss due to contamination by a refrigerant; or loss due to power outage which creates a change in temperature or humidity when the outage is due to complete or partial loss of power, either on or off premises, due to conditions beyond the insured's control. The value of the stock is the selling price as if no loss had occurred less any discounts and expenses that otherwise existed. The maximum paid out is $50,000 unless a different limit is shown in the declarations.

There is no coverage if the refrigeration or cooling units are disconnected from power, or the switch controlling power to the equipment is turned off, such as when the main breaker is turned off. Also excluded is the inability of the utility to provide power because of lack or fuel or direction or a governmental order, or the inability of the utility to meet demand for power as in a large heat wave, or the breaking of glass that is a permanent part of the cooling control unit. The insured is required to maintain a refrigeration maintenance agreement; the additional coverage is not designed to cover maintenance issues or power supply issues, it is designed to cover loss beyond the insured's control. Also excluded is loss caused by earth movement, governmental action, nuclear hazard, war and military action, and water.

The MS SM 01 provides the following coverage extensions:

1.     Newly acquired property – adds coverage for newly acquired computers.

2.     $5,000 for personal effects and property of others ($2,500 in the CP 00 10).

3.     Valuable papers and records – $25,000 on premises and $10,000 off premises.

4.     Property off premises is extended to cover computers.

5.     $5,000 for outdoor property.

6.     $5,000 for accounts receivable.

The personal effects and property of others has been changed and the clause stating that the maximum paid is at each described premises has been removed. Therefore the limit is $5,000 per occurrence. For example, the insured has multiple premises and a wildfire causes loss to personal property at multiple sites. Under the old form, $5,000 is the maximum available at each location for one occurrence, so if the insured has 4 buildings a maximum of $20,000 will be paid. Under the new form, the clause pertaining to the limit applying to each described premises is removed; therefore $5,000 is the maximum available regardless of how many premises are involved in a loss.

In the property off premises coverage the ninety-day restriction for coverage to computers off site or in transit has been removed. Now there is no time limit to the coverage.

Two sections have been added to the accounts receivable section. The form now states that when coverage is provided under this extension the provisions for property not covered in the coverage section do not apply. This section also states that regardless of provisions for the determination of the value of covered property, the replacement cost option will be used for appliances used for refrigerating, ventilating, cooking, dishwashing, or laundering equipment.

Changes to the Causes of Loss—Special Form

The MS SM 01 removes the ordinance or law exclusion to the extent that the coverage is provided in the additional coverages. It also specifies that the mechanical breakdown exclusion does not apply to computers.

However, the endorsement does add the following exclusions for computers only:

1.     Errors and omissions.

2.     Electrical disturbance.

3.Computer-related losses. These include the failure, malfunction, or inadequacy of hardware and software.

4.Computer advice or consultation.

There are two changes to the causes of loss special form; one is that the utility services exclusion that appears in the exclusion section does not apply to the spoilage coverage in the additional coverage in section I of this endorsement. Added to the exclusion section for computers is anti-concurrent causation language; any loss that occurs sequentially or concurrently with an excluded loss does not override the exclusions as listed. If a magnetic storm causes a loss to computers and there is a fire immediately after that storm, there is still no coverage for the damage due to the magnetic storm.

Exclusions have been added to the employee dishonesty additional coverage as follows: governmental action, nuclear hazard, and war and military action. The prior form did not include these exclusions for employee dishonesty.

A new exclusion has also been added for valuable papers and records (other than electronic data) and the accounts receivable coverage extensions. The exclusion states that for certain exclusions, if the excluded cause of loss results in a covered cause of loss, that ensuing loss will be covered. The first excluded cause is weather conditions, but only if the conditions contribute in any way to a loss caused by the following excluded causes: ordinance or law, earth movement, governmental action, nuclear hazard, utility services, war and military action, water, and fungus, wet rot, dry rot, and bacteria. For example, a tornado occurs simultaneously with an earthquake; the earthquake damages the building and the tornado causes even further damage; under this exclusion the damage from both causes is excluded. If a tornado occurs without any earth movement and damages the building, there is coverage.

Included in the new exclusion is the exclusion for acts or decisions of any person, group, or governmental authority, and the exclusion for faulty, inadequate or defective planning, zoning, design, workmanship, materials, maintenance, etc. These are standard policy exclusions. Again, while these causes of loss are excluded, if they result in an ensuing loss that is not excluded, that loss will be covered.

Changes to the CGL form

The MS SM 01 adds two liability coverage agreements: delivery errors and omissions and merchandise withdrawal expenses. Delivery E&O covers the insured in the event that the insured or any employee fails to deliver an item or misdelivers such item. The policy agrees to pay any damages the insured is obligated to pay as a result of such misdelivery. Also insured for this coverage is any concessionaire who is trading under the insured's name. The agreement allows the insurer to investigate and settle any claim at its discretion. This coverage is subject to an annual limit of $10,000 and a per occurrence deductible of $250.

Three exclusions apply to the delivery E&O coverage:

1.     Intentional error or misdelivery.

2.     BI, PD, or PI. The only damages the coverage responds to are economic damages.

3.     Discrimination.     

Sometimes a grocer faces a merchandise withdrawal, such as the cyanide-laced Tylenol pills of the early 1980's. Even though there is no coverage for the actual merchandise that has to be withdrawn, the MS SM 01 does cover the insured's expenses that result from the withdrawal.

withdrawn because it has already caused (or is expected to cause) injury or damage. The withdrawal may be initiated either by the insured or by government order. This coverage has a per occurrence limit of $25,000 and a $250 deductible. In the 2007 form the initiation of a merchandize withdrawal has been modified and has removed the parameters for a withdrawal initiated by a third party. Also removed is the specification that a separate merchandise withdrawal is deemed to begin with each new determination of a different defect when the withdrawal is initiated by the insured or a governmental entity. For example, Frosty Fruity-O's are recalled because of contaminants in the flavoring. Then it is discovered that filings from the machine have also entered some Fruity-O's. Under the prior policy this would be deemed two separate recalls; in the current policy, there is no indication that this would be considered two recalls and not be one recall because Frosty Fruity-O's are the product being recalled.

Merchandise withdrawal expense coverage is subject to the following exclusions:

1.     Failure of the product to accomplish its intended purpose. This includes breach of warranty. However, the exclusion does not apply if the product has caused (or may cause) injury or damage.

2.    Infringement of intellectual property rights.

3.   If the product just transforms chemically. But this exclusion does not apply in the event of an error in the manufacture, design, etc. of the product nor if the product has been tampered with.

4.     If the shelf-life of a product has been exceeded.

5.     Withdrawal due to any known defect.

6.     Recall expenses for any product that is otherwise excluded.

7.     Recall expenses for any product that has been banned from the market.

8.     Any suit against the insured for withdrawal expense.

A new exclusion has been added; the costs of regaining goodwill, market share, revenue or profit or the costs of redesigning your product are not covered. These costs could be extensive, and the policy does not intend to cover such expenses.

The endorsement goes on to detail the insured's duties in the event of loss under either one of the added coverages. Both require the insured to notify the insurer; to record the names of witnesses; and to cooperate with and assist the insurer. The 2007 form no longer lists the duties separately for an error or omission and a defect or merchandise withdrawal; all duties are combined. A new duty is that the insured is to take all reasonable steps to mitigate the expenses when a merchandise withdrawal has occurred. Any profit received from the mitigation efforts will be deducted from the settlement of any merchandise withdrawal expenses.

The who is an insured section has been modified to include any person or organization acting as a concessionaire trading under the insured's name with his permission. The section also modifies the first paragraph in the products completed operations hazard to include bodily injury or physical damage that arises from your products if the injury or damage occurs after the change in possession of the item in question. Part of who is an insured has been rewritten to clarify that a person or organization who grants a franchise to the insured is considered an insured as well.

Definitions

The MS SM 01 adds the following definitions:

A.Computer: programmable electronic that the insured uses to store, process, or retrieve data. It includes other equipment used with the computer, but does not include data or media.

B.Counterfeit: an imitation of a valid original.

C.Defect: includes dangerous condition.

D. Employee: includes furnished employees, but does not include agents or brokers, or leased employees. This definition has been modified extensively. An employee that has been terminated due to theft or other dishonest acts is not considered an employee for the first thirty days after termination. Temporary workers are excluded if they have care or custody of property outside the premises. New to the definition of employee are natural persons leased under a written agreement between the insured and a labor leasing firm except for those leased to temporarily replace a permanent employee. Included are natural persons who are former employees, partners, directors, trustees serving as a consultant to the insured, and employees of an entity merged or consolidated with the insured prior to the effective date of the policy. Students and interns are included in the definition of employees but are excluded when they have custody of property off premises. Managers, directors, or trustees are now considered employees when they are acting as a member of a committee elected or appointed by the board of directors or trustees to perform specific directorial acts on the insured's behalf.

E.Forgery: signing the name of another person. It does not include signing one's own name with or without authority.

F.Manager: a director for a limited liability company.

G.Member is a new definition and applies to Section I for employee dishonesty only. Member is defined as an owner of a limited liability company represented by its membership interest who may also serve as a manager.

H. Merchandise tampering is another newly defined term and is an act of intentional alteration of your product which has caused or is reasonably expected to cause bodily injury. The cyanide in Tylenol capsules is an example of merchandise tampering.

I.Merchandise withdrawal: recall of items held for sale by the insured. The recall must be due to a known or suspected defect. If the withdrawal is due to product tampering, the definition of “merchandise withdrawal” is limited to just those products which the insured knows (or suspects) have been tampered with.

J.Merchandise withdrawal expenses includes the following eight items:

1.Costs of notification.

2.Costs of stationery, envelopes, production of announcements and postage or facsimiles.

3.Costs of overtime paid to the insured's employees.

4.Costs of computer time.

5.Costs of hiring independent contractors and other temporary employees.

6.Costs of transportation, shipping or packaging.

7.Costs of warehouse or storage space.

8.Costs of proper disposal of items held by the insured for sale or products that cannot be reused.

Removed from merchandise withdrawal expenses is the restriction that states these expenses do not include costs of replacement, repair, or redesign of items you hold for sale or the costs of regaining market share, goodwill, revenue, or profit.

K.Money.

L.Occurrence is now specifically defined in this policy and is defined with slight variations for the following parts of Section I: money and securities, money orders and counterfeit money, forgery or alteration, and employee dishonesty. In general an occurrence is an individual act or combined total of all separate acts related or not, and a series of acts related or not committed by a person acting alone or in collusion with others, or not committed by any person during the policy period shown in the declarations, before the policy period or both. The money orders and counterfeit money section includes an event along with an individual act as part of the occurrence; forgery and alterations removes acts not committed by any person and replaces it with “involving one or more instruments”; and employee dishonesty replaces the term person with employee.

M.Perishable stock: stock that might suffer a loss if controlled conditions change.

N. Profit is another newly defined term and is specific to merchandise withdrawal expenses coverage only. It is defined as the positive gain from business operations after subtracting all expenses.

O. Securities: This definition has been revised; no longer included as securities are food stamps, redeemed lottery tickets, and redeemed coupons. What remain are tokens, tickets, revenue and other stamps and evidences of debt issued in connection with credit or charge cards not issued by the insured.

P. Suspension is another newly defined term, and is defined as the slowdown or cessation of your business activities or that part of the premises that is untenantable.

Endorsements

The supermarket program offers the insured the opportunity to purchase four endorsements: mechanical breakdown, hired auto and non-owned auto liability, loss or damage to customers' autos (direct primary coverage), and extortion coverage.

Mechanical Breakdown: Endorsement MS SM 02 11 02 is available for boilers and pressure vessels, as well as for air conditioning/refrigerating units with at least a 60,000 Btu capacity. The endorsement pays for direct damage to covered property caused by accident to an object on the insured's premises and owned by the insured or in the insured's care, custody, or control.

The mechanical breakdown endorsement defines accident as “a sudden and accidental breakdown of the Object or part of the Object. At the time the breakdown occurs, it must manifest itself by physical damage to the Object that necessitates repair or replacement.” The endorsement also lists several situations that are not accidents, such as wear and tear and the breakdown of various apparatuses.

An object includes a variety of boiler and pressure vessels and air conditioning and refrigerating units and piping. The endorsement also lists various apparatuses that are not considered an object under this form.

Coverage is not available for an accident to an object that is being tested, as well as for losses caused directly or indirectly by the failure, inadequacy, or malfunction of computer hardware, software, networks, microprocessors, or any other computerized or electronic equipment, due to the inability to correctly recognize, process, distinguish, interpret, or accept dates or times. Also excluded is loss or damage caused by advice, consultation, design, evaluation, inspection, repair, installation, maintenance, replacement, or supervision conducted by or for the insured to fix any problems with the computer-related equipment and accessories listed earlier in the paragraph. The exclusions apply regardless of any other cause or event that contributes to the loss. However, if excluded damage results in an accident to an object, damage caused by the accident to the object is covered. The costs to repair, replace, or modify the computer-related equipment and accessories listed earlier in the paragraph to correct deficiencies or change features are not covered.

Coverage may be suspended if an object is found to be in or exposed to a dangerous condition.

The exclusions for mechanical breakdown and explosion of steam pipes, steam boilers, steam engines, or steam turbines on the CP 10 30 10 12—Special Causes of Loss form, do not apply to this endorsement. There are no changes to this endorsement.

Hired Auto and Non-Owned Auto Liability: A basic limit of $300,000 is available under endorsement MS SM 03 03 07 for either or both non-owned or hired auto liability coverage. The 2007 form has some very minor rewording but no significant content or coverage changes. Hired auto liability applies to bodily injury or property damage arising out of the maintenance or use of a hired auto by the insured or its employees in the course of business. Non-owned auto liability applies to bodily injury or property damage arising out of the use of a non-owned auto by any person in the course of the insured's business.

Bodily injury or property damage for which the insured is obligated to pay damages due to assumption of liability in a contract or agreement is excluded, but not liability the insured would have assumed without the contract or agreement or if the liability was assumed in an insured contract. Bodily injury to an employee, arising out of and in the course of his employment or while performing business-related duties, and to the spouse, child, parent, or sibling of an employee as a consequence of the employee's employment or business-related duties, is not covered. The exclusion does not apply to liability the insured assumes under an insured contract or to bodily injury to domestic employees not entitled to workers compensation benefits.

Property damage to property owned or being transported by or rented or loaned to the insured or property in the insured's care, custody, and control is also excluded.

The following are insureds under the endorsement: the insured; any other person using a hired auto with the insured's permission; for non-owned autos, any partner or executive officer of the insured's only while the auto is being used in the insured's business; any other person or organization with respect to their liability because of the insured's acts or omissions under the endorsement's exclusions.

The following are not insureds under the endorsement: any person engaged in the employer's business with respect to bodily injury of a co-employee injured in the course of employment; any partner or executive officer with respect to his own auto or the auto of anyone in his household; any person employed in or engaged in performing duties related to an auto business other than an auto business operated by the insured; the owner or lessee of a hired auto, the owner of a non-owned auto or any agent or employee of such owner or lessee; or any person or organization with respect to the conduct of a past partnership, joint venture, or limited liability company that is not shown as a named insured in the declarations.

The most the endorsement pays for all damages resulting from one occurrence is the applicable limit of insurance, regardless of the number of hired or nonowned autos, insureds, premiums paid, claims made, or vehicles involved.

The insurance is excess over primary insurance for hired or non-owned autos.

Three definitions are added by this endorsement:

1. Auto business is “the business or occupation of selling, repairing, servicing, storing, or parking 'autos.'”

2. Hired auto is “any 'auto' you lease, hire, rent, or borrow. This does not include any 'auto' you lease, hire, rent or borrow from any of your 'employees', your partners or your 'executive officers', or members of their households.”

3. Non-owned auto is “any 'auto' you do not own, lease, hire, rent or borrow which is used in connection with your business. This includes 'autos' owned by your 'employees', your partners or your 'executive officers', or members of their households, but only while used in your business or your personal affairs.”

Loss or Damage to Customers' Autos (Direct Primary Coverage): Coverage is available under endorsement MS SM 04 03 07 for loss or damage to customers' autos parked at the described premises. The form promises to pay for direct physical loss or damage to autos or auto equipment in the insured's care, custody, or control while attending to the autos on premises or temporarily away from the premises. Payment for loss or damage is for the account of the auto owner only.

The loss must be caused by a covered cause of loss, which is defined on the form as any cause of loss not excluded. The endorsement lists two exclusions: loss or damage due to theft or conversion caused by any insured or its partners, executive officers, or employees; and loss or damage otherwise paid under the commercial property policy's coverage for personal property of others.

The most the form pays for autos is the limit of insurance shown in the declarations minus the deductible for loss or damage by collision, theft, or mischief or vandalism, regardless of the number of autos. This is a change in the 2007 form from the prior form. The previous form stated that the coverage was for autos left in the insured's care, custody, or control; the removal of this clause in the new form removes any confusion over whether a vehicle was left in the insured's care, custody, or control. If the vehicle was on the insured premises, there is coverage. The maximum deductible stated in the declarations is the most that will be deducted for any one event caused by theft or mischief or vandalism.

Coverage under the endorsement is primary.

Under the endorsement, auto is “a land motor vehicle, trailer or semitrailer.”

Extortion Coverage: The MS SM 05 05 01 endorsement pays for threats of harm to supermarket employees and others. The form pays up to $25,000 for loss resulting from a threat to do damage to the insured's property or premises and communicated to the insured during the policy period. Up to $50,000 is available for loss resulting from a threat to do bodily harm to the insured or the insured's directors, officers, trustees, employees, partners, or invitees who are or are allegedly being held captive if the threat is communicated during the policy period and the captivity takes place within the coverage territory.

The insurance applies to the surrender of money, securities, or other property away from the premises if the person receiving the threat has taken reasonable steps to report the threat to the authorities. The surrender must take place in the coverage territory. Securities are valued at their market value on the day they are surrendered; other property is valued at the lesser of the state limit or the value of the property, without deduction or depreciation, at the time of surrender.