January 15, 2014

Summary: The essential purpose of any reporting form is to allow an insured with property that fluctuates in value, or who has property at changing locations, to be fully protected at all times and to pay a premium based on the values actually at risk—provided values are reported correctly and promptly and a sufficient limit of insurance is maintained to cover the highest value at any one time. In other words, if the insured lives up to the policy requirements, he or she will have complete and automatic coverage, will avoid the dangers of both underinsurance and overinsurance on the property, and will be spared the necessity of increasing and decreasing amounts of insurance as values move up and down. This discussion is based on the language and rules recommended by the Insurance Services Office (ISO) for reporting form, CP 13 10 04 02. (See Value Reporting Form for a discussion of this specific form). Much of this treatment, dealing with the general principles of reporting policies, has equal application to any of the reporting versions of other programs or policies. It should also be noted that while some of the court decisions cited here were based on other, older forms, they remain clearly applicable to forms incorporating reporting principles in current use.

Topics Covered: Major features Provisional amount—provisional premium Limit of liability Specific insurance Reporting Failure to make reports Penalty for incorrect reports Reporting for additional locations—reported, acquired and incidental Adjusted premium Caution The meaning of “filed”

Major Features

The important features of all reporting forms, which distinguish them from other forms, are:

1. Provisional amount of insurance.

2. Limit of liability.

3. Treatment of specific insurance.

4. Reporting requirement.

5. Penalties for not complying with this requirement.

6. Adjustment of premium.

There are, of course, other features that should be checked carefully, such as the exact property covered, locations covered, etc., but these are relatively basic to the analysis of any property policy, reporting or specific. The features mentioned are common to all reporting forms.

Provisional Amount—Provisional Premium

A reporting form is written with a provisional amount of insurance, and the provisional (or deposit) premium is determined by applying the proper rate to this amount. The rules provide how the provisional amount shall be determined, this requirement varying with the exact form used.

In most cases, the provisional amount is the sum of the limits of liability for all current locations. A separate limit is usually set for locations acquired after the inception of the policy. The provisional premium for most new insureds is determined by applying the rates times the limit of liability at each location times 75 percent. For a seasonal risk—one for which “a suspension of operations or a period of inactivity during part of each year is usual and incidental” to the type of operation involved—the provisional premium may be figured by using a percentage factor of .30 instead of .75. Renewal accounts' rates are based on the values reported in the previous year.

The provisional premium is adjusted at expiration in accordance with the insured's actual values as indicated by the periodic value reports. These actual values are averaged with the result multiplied by the rates established for the risk. If the final premium is less than the provisional premium, the excess is returned to the insured. If it exceeds the provisional premium, the insured must pay the additional amount.

Limit of Liability

Each reporting form contains a limit of liability, and this limit is the absolute limit of recovery. That is assuming the insured has reported values correctly and otherwise complied with policy conditions—the insured may recover up to, but may not recover more than, the limit of liability.

Like all insurance policy limits, the limit of liability applies as of the time of the loss, regardless of whether a report has been made or is due. Hence, if the values have increased beyond the limit between reporting dates, it is important to increase the limit of liability at once. This may be done by endorsement at any time.

In calculating the limit of liability for a reporting form, two points should be kept in mind: (1) subtract specific (i.e. nonreporting) insurance from the estimated peak values in computing the limit of liability, (2) if insurance under the reporting form is divided among two or more insurers, show the limit of liability in the form attached to each policy as the total for all reporting contracts. The percentage of total reporting coverage carried by each insurer should be shown in the proper place in the policy. Note that some rules may require that the percentage of participation for each insurer be the same at each location.

The insured is required to pay a premium based upon the full value of the insured property, less permitted specific insurance, even though this amount may be greater than the limit of liability. This feature of the form may require the insured to pay for more insurance than he or she can collect. The form clearly states, in provision B.3. reports in excess of limit of insurance: “If the values you report exceed the Limit of Insurance: a. We will determine final premium based on all the values you report, less 'specific insurance'; b. In the event of loss or damage, we will not pay more than the Limit of Insurance applicable to the Covered Property.”

Although at one time insurance producers questioned the enforceability of this clause, believing that, if the insurer collects a premium on values greater than the limit of liability, it might be compelled by a court to pay the greater sum in case of a severe loss. However, the principle has been upheld in the courts. Even where an insured alleged he did not know he would be charged additional premium even if the value submitted was in excess of the limit, the court nonetheless upheld the principle—see Tripp, Inc. v. Kenneth A. Murray Insurance, Inc., 600 P.2d 1361 (Alas. 1979). And, in Lakeside Plywood and Building Materials, Inc. v. Aetna Casualty and Surety Co., 250 N.W.2d 1 (Wis. 1977), the plaintiff argued that premiums were collected based on the actual value of the property, and so that value should be the basis for coverage. The court said “this contention is not relevant where the policy does state limits of liability.”

The obvious lesson is to check values regularly, and to increase the limit of liability whenever the actual values exceed this amount. It is also advisable to make the limit of liability somewhat higher than the estimated peak values (less specific insurance) to guard against unforeseen increases.

Specific Insurance

Reporting forms are always excess over specific insurance. The forms define specific insurance as other insurance that covers the same property as the reporting form but does not carry the same terms and conditions as the reporting form. If a loss involves both reporting and specific insurance, the loss is first adjusted under the specific policies as though there were no other insurance in force. If the specific insurance contains a coinsurance clause, this is, of course, considered in determining its liability. Ordinarily this means that the specific policy will not cover the entire loss, and the balance is assigned to the reporting coverage.

When specific insurance is written without coinsurance, it pays up to the applicable limit of liability, and the balance, if any, is assigned to the reporting form. This principle was upheld in Gilles v. Michigan Millers Mutual Fire Ins. Co., 221 P.2d 772 (Ca. App. 1950). Here there were two specific policies totaling $30,000, neither with a coinsurance clause, and reporting coverage with a limit of liability of $115,000. There was a $34,417 loss and the specific insurers were held liable for their full $30,000, the balance of $4,417 being paid under the reporting form. The latter form contained an excess clause and the court rejected the argument that the provision in standard fire policies for pro-rating with other insurance counteracts the effect of the excess clause.

If specific insurance expires and is not renewed, it is necessary to increase the limit of liability under the reporting form at once if the existing values warrant such action. The insured should never wait until the next reporting date for this. Naturally, specific insurance will pay only if it is in force at the time of the loss. Consequently, failure to increase the limit of liability as soon as the specific insurance terminates can cause the insured to fail to collect a loss in full. Peters v. Great American Ins. Co., 177 F.2d 773 (4th Cir. 1949), discussed later in this article, held that specific insurance reported and in force at the date of the report is considered in determining penalties for incorrect reports under the reporting form, even though it may have expired before the loss actually occurred. This, however, does not affect the liability of the specific insurance—it obviously must be in force when a loss occurs.

Reporting

The value reporting form requires a report of values for each location insured not later than thirty days after each reporting period. In other words, the report for the month of October must be filed no later than the thirtieth of November.

The form makes a distinction between a reporting period and a report date. Reporting periods may be monthly, quarterly, or annual. If they are monthly, each report is due within thirty days after the last day of the calendar month. If they are quarterly, reports are due within thirty days after the last day of March, June, September, or December; no matter what the anniversary date of the policy. If the reporting period is annual, the reports are due within thirty days of the last day of the policy year.

Report dates, on the other hand, are the days as of which the values reported are to be taken. They can be daily, weekly, or monthly. For example, if the daily report date option is chosen, reports must show values as of each day, but the reports are submitted monthly. Likewise, weekly report dates require values as of the end of each week, and the reports are submitted monthly. Monthly report dates submit values as of the end of each month, and the reports are submitted monthly. If quarterly or annual reporting periods are chosen, they each require values to be reported as of the end of the calendar month with the reports submitted quarterly (the last day of March, June, September, and December) or annually (the policy anniversary date).

Both the value reporting form endorsement CP 13 10 and the Commercial Lines Manual (CLM) are confusing on these distinctions because they show reporting periods as being daily, weekly monthly, quarterly, or annual (policy year). However, section B.1. of the value reporting form says, “Each report must show the values on the dates required by the 'reporting period'.” These dates are the report dates.

The value reports must show, for the last day of the reported period: (1) all and exact locations, (2) the total value of property at each location, (3) all specific insurance. When final premiums are calculated, specific insurance is subtracted out of the total by the insurance company.

Failure to Make Reports

Most reporting forms provide that if the insured fails to report values within thirty days after the close of the month and a loss occurs, he or she is bound by the latest prior report. The requirement relates specifically to both values and locations. This was upheld in Commonwealth Ins. Co. v. O. Henry Tent & Awning Co., 266 F.2d 200 (7th Cir. 1959), where recovery was held to $14,360, the amount of the last report, despite the fact that the loss was $32,188. An interesting and much publicized aspect of this case was that a lower federal court had held for the insured, because the company had consistently accepted tardy reports. A later case, Alaska Foods, Inc. v. American Manufacturers Mut. Ins. Co., 482 P.2d 842 (Alaska 1971), cites O. Henry in supporting the latest prior report principle, and a similar decision was upheld in Marshall's v. Federal Insurance Company, 421 N.E.2d 87 (Mass. App. Ct. 1981).

Although the value reporting form can include a limit of liability applicable to newly acquired locations by inserting a limit for acquired locations on the declarations, the insured, in effect, loses the benefit of this extension of coverage once the next report becomes delinquent. The acquired locations limit allows the insured to add locations without paying additional provisional premium (as long as the acquired location limit is not exceeded), but it does not relieve the insured of the responsibility of reporting new locations on the next scheduled report.

Where the insured has made no reports since the inception of the value reporting form, the form provides that insurance shall cover only at the described locations—no automatic coverage for newly acquired locations—and not for more than 75 percent of the limit of liability at each described location. Note that this provision applies only if the first report is delinquent, not to a loss occurring before the first report is due.

Penalty for Incorrect Reports

There is no coinsurance clause in most reporting forms, but there is a full reporting clause, sometimes referred to as the “honesty clause.” It provides that if the last value report filed prior to any loss is less than the actual value as of the time of the report, the insured's recovery is reduced in the same proportion that the reported value bears to the actual value.

The language of the full reporting clause was upheld in the federal appellate case of Camilla Feed Mills, Inc. v. St. Paul Fire & Marine Ins. Co., 117 F.2d 746 (5th Cir. 1949). Here the insured's report of values at the end of April, filed during May, proved to be incorrect. A loss occurred early in June, within the time limit for filing the end of May report, but before it had been actually filed. After the fire—still within the limit for reporting—the insured filed his May report, showing much greater values than previous reports. The fifth circuit court of appeals refused to permit this report to control the settlement and penalized the insured on the ground that the “honesty clause” refers to the last report “filed prior to the loss.” Later cases, also upholding the clause, are Albert v. Home Fire & Marine Ins. Co., 81 N.W.2d 549 (Wis. 1957), E. S. Harper Co., Inc. v. General Ins. Co. of America, 430 P.2d 658 (Idaho 1967), and Standard Lumber Co. v. Travelers Indemnity Co., 440 F.2d 545 (7th Cir. 1971).

But in a 1950 case, the court held that the insurer had waived the right to limit its liability for a loss under a value reporting policy to that stated in the insured's last report. In Columbia Fire Ins. Co. v. Boykin & Tayleo, Inc., 185 F.2d 771 (4th Cir. 1950), the policy provided for a limit of liability of $20,000. However, at a time when the insured had inventory valued at $24,000, a fire occurred that resulted in a total loss. It had been the insurance agent's practice to submit his customer's monthly reports to the company himself and, thus, relieve the insured from the administrative detail involved. The agent would telephone his customer periodically, inquire of the approximate inventory and submit reports, sometimes for three or four months at a time, to the company. The insurance company knew of and apparently acquiesced in this practice. The court, in ruling that under Virginia law the extent of coverage afforded by the policy could be affected by the doctrine of waiver, found that the behavior on the part of the company constituted a waiver of its right to rely upon the monthly reporting procedure provided for in the policy. The insured was thus allowed to recover his loss in full. Likewise, in American Eagle Fire Ins. Co. v. Burdine, 200 F.2d 26 (10th Cir. 1952), the court, applying Oklahoma law, found that an insured's oral statements to the insurer's agent as to the amount of inventory satisfied the monthly report of values requirement where the insurer had previously accepted such reports.

Both American Eagle and Columbia Fire were cited in a similar case that came to the same conclusion, Mountain View Sports Center v. Commercial Union Assurance Co., 599 P.2d 1382 (Alaska 1979). And, in the case of General Ins. Co. of America v. M.S. Killen, 120 So.2d 887 (Ala. 1960), the court held that since the insurer had not penalized the insured for failure to list specific locations (the insureds listed “Athens, Alabama” in the reporting form) or for failure to submit reports in a timely manner, the insurer could not deny a loss occurring at a newly acquired location.

The federal appellate case of Wallace v. World Fire & Marine Ins. Co., 166 F.2d 571 (9th Cir. 1948), involved a combination of failure to make reports, previous incorrect reports, and renewal of insurance. In this case, insurance (under an older form, but with a similar “honesty” clause) expired in December and was renewed under the same form. Early in January, the insured reported end of December values as being $2,000, although in fact they were over $28,000. No other reports were made until the end of February. Meanwhile, a fire occurred in the middle of February. The insured then reported higher values and claimed that this report should also apply to the values as of the time of the fire. The United States district court for the southern district of California rejected the argument that the report of December values referred only to the old policy and held that, since the insured had made no other report, this report was also binding as to the new policy. Accordingly, it applied the “honesty clause” to the loss and reduced the insured's recovery proportionately. The court refused to support the insurance company's denial of any liability based on voidance for misrepresentation of values—saying that the “honesty clause” was sufficient safeguard—but awarded the insured only a fraction of his loss. The decision was upheld by the United States circuit court of appeals, ninth circuit.

Recall that the values the insured must report on the value reporting form include both property subject to the reporting form and property subject to specific insurance. In earlier-mentioned case of Peters v. Great American Ins. Co., 177 F.2d 773 (4th Cir. 1949), the insured had reported less than actual values. He also reported—correctly—specific insurance in force as of the reporting date. This specific insurance expired between the reporting date and the fire and was not renewed. In enforcing the “honesty clause,” the court held that the specific insurance in force at the reporting date should be subtracted from the actual values, and also from the reported values, to determine the proportionate liability under the reporting form—thus penalizing the insured more than if specific insurance had been left in the calculations.

That full values were reported—but at the wrong location—brings no relief from the operation of the full reporting clause. An insured operated several stores. Following a loss it was disclosed that values at the loss location had been underreported, having been overreported in a corresponding amount at another store. In effect, the insured had reported full values and paid a premium accordingly. Nevertheless, the appeals court upheld a district court in its ruling that the full reporting clause operated to reduce coverage at the location of loss in proportion to the values actually reported for that location. The 1974 case is Kwal Paints v. The Travelers Indemnity Co., 525 P.2d 471 (Colo. Ct. App. 1974) and 536 P.2d 1136 (Colo. 1975).

Reporting for Additional Locations—Reported, Acquired and Incidental

On the declarations, the insured has the option of scheduling separate limits for three types of locations in addition to those included in the value reporting form. The first, reported locations, are defined as “any locations, other than those shown in the Declarations, that have been reported to us at the inception of the coverage under this endorsement.” A separate limit is shown for reported locations when, for example, the insured adds a value reporting form to an in-force policy covering multiple locations with an average rating plan. There may be a few locations that the insured wants to include on the reporting form but not in the average rating plan. These locations would be listed as reported locations.

Acquired locations, the second type, are those that are acquired by the insured in the policy territory after the inception date of the reporting form. A separate limit of liability may be shown for their anticipated value during the policy year so that each newly acquired location does not have to be individually endorsed onto the policy, thus incurring an additional provisional premium. Acquired locations must be shown on all reports that are submitted after their acquisition, however.

Third, incidental locations are “any locations not shown in the Declarations, other than 'acquired locations' and 'reported locations', with values of $25,000 or less.” The values at these locations may be lumped together by state when reported to the insurance company at the end of each reporting period.

Adjustment of Premium

The final premium is based upon the average values at risk at each location as indicated by the monthly reports. Subject to the minimum premium, if the final premium is less than the provisional (deposit) premium, the excess is returned to the insured, while if the final premium is greater, he or she pays the proper additional premium.

The premium adjustment clause requires the insured to pay a premium based upon the full reported values, less permitted specific insurance, even though this amount is greater than the limit of liability. While the insured must pay premium on the values reported regardless of the policy's limit of liability, the insured is not required to pay premium on unreported values. The “penalty” for underreporting is the apportionment of any loss as provided for in the full reporting clause. With that protection, the insurance company cannot collect premium on unreported values in excess of the limit of liability.

Caution

The experience of underwriters, producers, and adjusters who have handled reporting forms to a material extent indicates that the most important—and often most difficult—task is to emphasize the necessity of making reports on the dates required. Beyond doubt, failure to comply with this requirement has caused more trouble with reporting forms than all errors and omissions combined.

Probably the penalties for incorrect reports—while they are real and should not be ignored—have been overstressed in discussing these contracts, while the penalties for not making reports as required have not been stressed sufficiently. The average insured is honest. He or she will not lie about values. But he or she may carelessly neglect to make reports. It should be emphasized that if a report is not made on or before the required date, the figures in the last report of values filed prior to the loss will control. This means that the insured, by failing to turn in a report, runs a grave risk of being underinsured at the time of loss—and it was to avoid this very condition that reporting coverage was purchased. This is exactly what happened in the O. Henry case mentioned earlier. The insured's loss was over $30,000, but the latest report showed only slightly more than $14,000. The court, reversing a much publicized holding for payment of the larger amount, held that the lower amount should be paid, because reports had not been made on time.

The Meaning of “Filed”

When does a report of values become “filed” with the insurer? When it is mailed by the insured or when it is recorded at the office of the insurer? The answer to this seemingly innocent question cost one insured some $13,000 in the case of Reilly-Benton Co., Inc. v. Liberty Mutual Ins. Corp., 260 So. 2d 797 (La. App. 4 Cir. 1973), and another insured considerably more in Moultrie International, Inc. v. Universal Underwriters Insurance Co., 545 F.2d 543 (5th Cir. 1977). Both cases involved reports showing substantial increases in value, with the reports arriving at the offices of the insurance companies after a substantial loss had taken place. The insureds argued that the act of mailing the reports constituted “filing” with the insurance company. The insurance companies contended that the report was not “filed” until received. The courts agreed with the insurance companies.

In Reilly-Benton, the insured prepared and mailed reports for January (late) and February on March 20. They both showed values of some $38,000 at the location in question. Sometime after March 20, the bookkeeper discovered that additional values, reported as being at another warehouse, were in reality at this location and that the $38,000 figure was consequently too low. This was corrected in the March report, prepared on April 18, and it showed values increased from $38,000 to $53,000. Two days later, the insured suffered a $57,000 loss. Unfortunately for the insured, the March report did not arrive at the insurer's office until April 24, six days after the preparation and four days after the loss.

The dilemma: if the loss were adjusted on the basis of the incorrect (undervalued) report for February, then the “honesty clause” discussed earlier would be invoked, and the insured's recovery would be in the same proportion as the underreported values at the end of February bore to the actual values. If, on the other hand, the insurer were held to adjusting on the basis of values reported for March (now correctly showing values at 100 percent), the insured could recover his loss in full. (The limit applying at the location of loss was $75,000).

The court ruled in favor of the insurance company, holding that the March report was not “filed” before the loss, because the insurance company had not received it. The insured argued that the value reporting clause was ambiguous on this point, and, as is customary, the ambiguity should be resolved in its—the insured's—favor. But the court said no ambiguity existed. Though the value reporting clause in force at the time began by saying only that “the insured shall report (values) in writing,” it went on to say what would happen “if the insured has failed to file . . . reports of value as above required.” Then, the clause continued, the insurance “shall cover only at the locations and not for more than the amounts included in the last report of values filed prior to the loss.” The court said that “filed” in the context of the clause, obviously meant received and recorded in the office of the insurance company.

Moultrie was an appeal to the United States court of appeals, fifth circuit, from a decision of the federal district court for the middle district of Georgia. The circumstances of the Moultrie case closely parallel those of Reilly-Benton—as do the arguments on both sides, and the outcome. Though the trial court found the provision in contention ambiguous and held in favor of the insured, the appeals court, citing Reilly-Benton, overturned the lower court's decision and ruled in favor of the insurance company.

This court said that to rule in favor of the insured would make it possible for any insured to change values after a loss. “The simple act of turning the date back on a postage meter and decreasing the incidence of legible postmarks, combined with the increasing unpredictability of mail delivery, would make it virtually impossible for an insurance company ever to determine whether a report was placed in the mail before or after a loss.”

In a decision reached by another federal court, however, there is indication that “filed with the insurance company” may mean received by the insurance company (or its agent). If it is reasonable to assume the report is in the control of the insurer before the loss, the fact that the insurer does not read the report until after the loss cannot stand as basis for contending the report has not been “filed.” So, at least, was the decision in Jones Wholesale Co., Inc. v. General Accident, Fire & Life Ins. Corp., Ltd., 370 F. Supp. 478 (W.D. Va. 1974).

In this case, the insured had prepared and mailed value reports for August through December on January 19. The envelope containing the reports was postmarked January 19, 1973, and, assuming the usual course of events, was placed in the agent's post office box on Saturday, January 20. The value report as of December 31 indicated increased values at two of the insured's locations. Since the agent did not keep office hours on the weekend, the reports were not actually picked up by the agent until Monday, January 22. On January 21, a fire swept the insured's premises causing substantial damage.

The court was faced with deciding two legal questions. The first was whether the report for December 31—mailed prior to the loss and in the agent's post office box at the time of the fire—was “filed” with the insurer as required by the value reporting clause. The second question was whether a request for increased limits of liability (also contained in the envelope) was accepted by the insurer as of the date it was mailed or placed in the agent's post office box.

With regard to the filing question, the court said that the filing requirement is obviously designed to prevent an insured from undervaluing inventory and paying a lower rate for coverage until a loss occurs; and then correcting the undervaluation after the loss. Since the reports were mailed prior to the loss and had reached the agent's post office box, the court reasoned that all the information contained in the reports had left the insured's control. Once the reports had been placed in the agent's post office box, the insurer had no right to reject that portion of the increase in values that was within the limit of coverage. Hence, the court held that the value report for December was filed with the insurer.

This case is distinguishable from Reilly-Benton and Moultrie by the fact that in those actions, the reports were not received by the insurers until after the loss.

Although the court ruled, in the Jones Wholesale case, that the report was filed with the insurer, it rejected the effectiveness of the requested increase in coverage—on the grounds that the request had not been acted upon or approved by the insurance company. Such a request for increased coverage was not automatic and had to be accepted by the company.

With regard to reporting values, experienced producers strongly recommend discussing the matter of timely and accurate reporting with the insured and also with the bookkeeper or that person who actually prepares inventory reports. If there is any serious doubt that the insured will or can live up to the reporting obligations, it is better to suggest foregoing the advantages of reporting and using some form of specific coverage.