Variations from Form to Form

Summary: Insurance Services Office (ISO) publishes thirteen commercial marine coverage parts, the commercial articles coverage form CM 00 20 09 04 and twelve that specify a particular type of property to be covered:

1. CM 00 21—Camera and musical instrument dealers

2. CM 00 22—Equipment dealers

3. CM 00 26—Physicians and surgeons equipment

4. CM 00 28—Signs

5. CM 00 29—Theatrical property

6. CM 00 42—Commercial fine arts

7. CM 00 45—Film

8. CM 00 52—Floor plan

9. CM 00 59—Jewelers block

10. CM 00 60—Mail

11. CM 00 66—Accounts receivable

12. CM 00 67—Valuable papers and records

Often times a loss under one of these forms leads to confusion on the part of the insured about how much he is really entitled to be paid. Often, the property is listed with values being assigned to each piece. If the insured doesn't receive that scheduled value, often times disagreements arise. This article offers a discussion of how the various forms decide upon the valuation of lost or damaged covered property.

Topics covered:
CM 00 01—General conditions
CM 00 21—Camera and musical instrument dealers
CM 00 22—Equipment dealers
CM 00 26—Physicians and surgeons equipment
CM 00 28—Signs, CM 00 29—Theatrical property
CM 00 42—Commercial fine arts
CM 00 45 – Film
CM 00 52—Floor plan
CM 00 59—Jewelers block
CM 00 60—Mail
CM 00 66—Accounts receivable
CM 00 67—Valuable papers and records

CM 00 01—General Conditions

The commercial inland marine conditions form, CM 00 01 09 04, gives the insurer three options to value lost or damaged property. It promises to value the property at the least of the following:

1.     Its actual cash value (ACV).

2.     The cost to reasonably restore the property to its preloss condition.

3.     The cost to replace the property with property that is substantially identical.

What may be a problem is that the form does not go on to further define any of these methods. Actual cash value may be determined using any one of the following three methods:

1.     Fair market value, usually described as the price a willing buyer would pay to buy property from a willing seller in a free market.

2.     Replacement cost less depreciation, generally accepted to mean the cost to replace property at the time of the loss minus its physical depreciation.

3.     The broad evidence rule described in the previous paragraph, i.e. a judicious application of either 1 or 2 to the unique circumstance of the claim, whichever is more favorable to the insured.

For a further discussion of actual cash value see,Actual Cash Value.

Since the policy does not define ACV, it certainly can't be expected that the insured would understand the concept. “Replacement cost less depreciation” is the most used method. It has been suggested that if insurers want to define ACV in this method, they should say so in their policies. In fact, that was the suggestion of the California Court of Appeal in Cheeks v. California Fair Plan, 61 Cal. App. 4th 423 (1986), when it said: “If it [the insurer] wants to determine 'actual cash value' on the basis of replacement cost less depreciation, all it has to do is say so in the policy.”

CM 00 21—Camera and Musical Instrument Dealers

CM 00 21 01 13 takes into consideration the various types of property that might be present at a camera or musical instrument dealer. The valuation provision describes these four:

1.     Unsold property.

2.     Sold property.

3.     Property of others.

4.     Negatives, positives, or prints.

The form values unsold property using the three-pronged condition from the general conditions form. Since these are usually retail stores, the insured may have some items around that have been sold but not yet delivered. If damaged, the policy values those items at the insured's net selling price less any applicable allowances and discounts. The piano dealer may have a $5,000 price tag on a baby grand, but if he has sold it for $3,000 prior to its being destroyed in a fire, he may not collect any more than $3,000 for it – even if that price may represent the store owner's taking a loss on the item.

A camera or musical instrument dealer may have the property of others in his care. The CM 00 21 covers the insured for the lesser of the amount for which he is liable or the property's ACV plus any costs added by the insured.

The final type of property that would be at a camera dealer is developed film. Such property may exist as negatives, positives, or prints. This property's value is the cost of the undeveloped film plus the cost of any labor or materials the insured had in the prints as a result of the film being left at his store for processing.

The question may arise: what about a customer who takes his European vacation pictures to a dealer for processing, only to have them destroyed in a fire? Shouldn't the store not only refund the price of the film and processing, but shouldn't the owner also send the customer back to Europe so that he can re-take the same pictures? The simple answer is “no.” The policy promises to pay the insured for any direct damage to the covered property. The cost of returning to Europe is an indirect loss to the store owner. Besides, the fourth category specifies that “negatives, positives, or prints” are not included in any of the above three categories. Thus, even if the insured is ordered by a court to send the customer back to Europe, the insurer is not going to pay for the trip.

CM 00 22—Equipment Dealers

An equipment dealer faces many of the same exposures as a camera or musical instruments dealer. Thus, the valuation clause in the CM 00 22 01 13 is just like that in the CM 00 21 with one exception: the CM 00 22 contains no provision for negatives, positives, or prints.

CM 00 26—Physicians and Surgeons Equipment

The valuation provision in the CM 00 26 01 13 defines two types of property: improvements and betterments; and all property other than improvements and betterments. Thus, it covers the physician's portable equipment – like his stethoscope and other items that can be carried in his black bag.

It also covers larger, more complex equipment that may be built into his office. Such equipment might include x-ray machines, vision and hearing testing equipment, and exam tables.

If the insured sustains a loss to property other than improvements and betterments, the policy again responds according to the three-pronged approach described above.

Regarding improvements and betterments: these are made to a building by an occupant who cannot take them with him. Thus, the occupant/insured can only be a renter. If he owned the building, there would be no need to break them out as improvements and betterments. They would just all be included as part of the building. See Improvements and Betterments Coverage.

Valuation of improvements and betterments first depends on whether or not the insured replaces or repairs the property. If the insured physician spends his own money to repair or replace the damaged improvements, the policy values the property at ACV. If the physician chooses not to replace these items, their value is calculated according to how much time is left on his lease.

For example: an insured doctor has installed $120,000 of improvements in the office he rents. Eight months into his lease, a fire occurs and does $75,000 damage to the improvements. If the physician chooses not to replace these items, he will receive 33.3 percent of the loss ($25,000), because he only has 33.3 percent of his lease remaining.

Note that if someone other than the insured (like the landlord) should pay to repair the improvements, the CM 00 26 pays nothing at all.

CM 00 28 —Signs, CM 00 29—Theatrical Property

Loss to property insured under CM 00 28 01 13 and CM 00 29 01 13 is valued according to the three-pronged system of the CM 00 01 09 04.

CM 00 42—Commercial Fine Arts

On the CM 00 42 01 13 the insured may choose to schedule some items. The value of those scheduled items is the limit of liability shown. Anything not scheduled (including newly acquired property) is valued according to the three-pronged system of the CM 00 01 09 04.

For those items that are scheduled it is important for the insured to have accurate and up-to-date appraisals.

CM 00 45—Film

The CM 00 45 01 13 is intended for those actively involved in making a motion picture. The two types of property covered by it are:

1.     Exposed motion picture film and its sound track or other sound record; and

2.     Properly recorded magnetic or video tape and its sound track or other sound record. Tape is considered to be properly recorded if it has been replayed and checked after recording.

The property is covered when used in the production indicated on the declarations page. It is also covered if owned by the insured or in the insured's care, custody, or control.

In the event of loss or damage to the covered property, the form values the property at the sum of these two amounts:

1.     The cost of reproducing the lost or damaged property; and

2.     The reduction in value of undamaged parts of a production.

It is important for the insured to keep good, up-to-date records. The policy limits its payment to value of the production as shown in the insured's books at the time of loss.

The form specifies that the value of the following items is not included in the valuation of the covered property: the cost of the story, scenario, music rights, continuity, permanent sets, owned wardrobes and props. Clearly, it covers only the value of the film involved and how that value ties to the value of the production.

CM 00 52—Floor Plan

A CM 00 52 01 13 is written on merchandise held for sale that has been financed. It covers the interest of either the dealer or the lender; or the interests of both. The covered property must be specifically identifiable as having a lien against it from the lending institution and the dealer's right to sell the property must be conditioned upon its being released by the lending institution.

The valuation provision has three sections:

1.     Unsold property is valued at the least of these three: the cost to restore the property to its pre-loss condition; the cost to replace the property with “substantially identical” property; or the dealer's purchase price.

2.     Property that the dealer has sold but not delivered is valued at the selling price less discounts.

3.     If this policy covers only the single interest of either the dealer or of the lender, the property is valued at the amount of that person's interest. For example: a bank lends an appliance dealer $10,000 and takes out a CM 00 52 to cover its single interest in those refrigerators. With that $10,000, the dealer is able to purchase $20,000 worth of refrigerators. If those refrigerators are damaged by a covered peril the bank will be paid no more than the $10,000 it loaned to the dealer.

CM 00 59—Jewelers Block

The jewelers block form, CM 00 59 01 13, values its covered property according to the three-pronged system of the CM 00 01 09 04. However, it adds a fourth category. The damaged property will be valued at the lowest of those three amounts or the lowest figure at which the insured carries the property on his books at the time of loss. Because jewelry often has antique or historical value, the form specifically excludes those from consideration in the valuation at the time of a loss.

CM 00 60—Mail

The CM 00 60 03 10 covers certain shipments when sent via the U.S. Postal Service. Loss or damage to such property is valued at ACV, but no less than its market value on the day it was shipped.

CM 00 66—Accounts Receivable

The CM 00 66 01 13 replaces the valuation provision with one entitled “Determination of Receivables.” It outlines how the value of the receivables will be established if the insured cannot accurately establish a value on his own. The insurer calculates the monthly average of receivables for the previous 12 months and then applies a fluctuation factor (up or down) based on the results of the same month the previous year.

From the amount figured in the first paragraph, the insurer then subtracts these four items to arrive at the amount receivable:

1.     The amount of the accounts not damaged.

2.     The amount of the accounts that you the insured can reestablish or collect.

3.     An amount to allow for probable bad debts that the insured is “normally unable to collect.”

4.     All unearned interest and service charges.

The insured must turn over to the insurer any money that he later collects which has already been paid by the insurer. However, any excess that he collects from the bad accounts is his to keep.

CM 00 67—Valuable Papers and Records

The CM 00 67 01 13 adds one provision to the valuation section. Any item that is specifically scheduled on the declarations is valued at the amount shown.