February 23, 2015

Summary: The Insurance Services Office has developed a series of nonfiled inland marine coverage forms. This article discusses the Processors Coverage Form, IH 00 93 12 13. The insuring agreement, the exclusions, and other parts of the form are listed and analyzed.

Topics covered: Introduction Coverage Additional coverages Exclusions Conditions Definitions

Introduction

A processor is one who receives the property of others in order to perform some work on that property. As an example, a restoration business takes a customer's aging work of art and restores it to its original beauty. Another example is an auto customizing shop takes a customer's standard auto and installs custom chrome or custom furnishings or a surround-sound video entertainment system. And still another example would be a clothes repair shop that needs to send a customer's property off-premises to another store or business in order to have the required work properly completed.

Whatever the situation, if the insured has the property of others in his possession for the purpose of performing work upon the property, the exposures to a loss create a risk for the insured. The Building and Personal Property Coverage Form, CP 00 10 10 12, provides some coverage for the insured for the loss of or damage to the personal property of others that is in the care, custody, or control of the insured. There are also inland marine forms that provide coverage for the insured for specified items (e.g., cameras, film, musical instruments, and signs). But, the Processors Coverage form, IH 00 93, handles the coverage that is offered to the insured in a unique way and is considered to be part of the nonfiled commercial inland marine premium coverages. (A nonfiled inland marine policy is one that is not standardized and is drawn up and rated in accordance with the specific underwriting philosophy of the insurer. IH 00 93 is part of the ISO's nonfiled inland marine program that serves to simplify and generalize this process.)

Coverage

IH 00 93 pays for the loss of or damage to covered property from any covered cause of loss. All risks of direct physical loss or damage are covered unless there is a specific exclusion that would prevent the coverage.

Covered property as described in IH 00 93 is property described in the declarations that is owned by the named insured or is owned by others but for which the named insured is legally liable. Such property is covered only while it is in the care, custody, or control of a processor or in due course of transit to or from a processor for the purpose of performing work upon the property.

There are several points to consider in this description of covered property.

The property must be described in the declarations. This is not to say that the description cannot be general in nature. For example, if the insured is a clothes repair shop, the described property can be “customers' clothes” or some such generic term. But the property must be noted in the declarations in some manner.

The covered property must be either owned by the named insured or property of others for which the named insured is legally liable. When the insured takes in the property of a customer for processing, he becomes legally liable for the safety of that property. A bailment has been created, and the named insured has accepted a legal duty to the property owner to return the owner's property in an acceptable condition.

The covered property must be in the care, custody, or control of a processor or in transit to or from a processor. This means that the named insured is not always required to have care, custody, or control of the property. If the property must be sent out to another processor in order for the required processing work to be done, IH 00 93 will still consider the property as covered property. So, not only is property covered while on the premises of the named insured, it is also covered off-premises, while in transit, and while in the custody of someone other than the named insured—as long as that other person is another processor like the named insured.

IH 00 93 does list certain items that are not considered covered property. Some of these items are not out of the ordinary for a property form, such as accounts, bills, currency, deeds, evidences of debt, money, notes, securities, contraband or property in the course of illegal transportation or trade, and property while in the mail. Other items are unique to this form, such as property at, or in transit to or from, a processor that the named insured owns, leases, or operates. In other words, IH 00 93 requires the named insured and his risk exposures to be known upfront in order to prevent any fraud or collusion.

Additional Coverages

IH 00 93 contains the following additional coverages:

Debris Removal. The insurer will pay the insured's expenses to remove debris of covered property caused by or resulting from a covered cause of loss. The loss must occur during the policy period, and the expenses must be reported to the insurer in writing within 180 days of the date of loss or damage. The most the insurer will pay is 25 percent of the amount paid for the direct physical loss or damage to the covered property, plus the deductible applicable to the loss or damage. There is an additional $5,000 available in any one occurrence if the sum of the direct physical loss and debris removal expense exceeds the limit of insurance stated in the declarations; this is also true if the debris removal expense itself exceeds the amount payable under the 25 percent limitation. The additional coverage for debris removal does not apply to costs to extract pollutants from land or water, or the costs to remove, restore, or replace polluted land or water.

Preservation of Property. If it is necessary to move covered property from the processing address to preserve it from loss or damage by a covered cause of loss, the insurer will pay for any direct physical loss or damage to that property while it is being moved. This coverage also applies while the covered property is being temporarily stored at another location. For example, if the insured was in Florida and had to move the property he was processing to prevent a loss due to hurricane winds, and the property was damaged in a car accident while the insured was moving it, IH 00 93 will cover that loss. There are two points to note about this coverage. The coverage is there only if the loss or damage occurs within thirty days after the property is first moved. And, the coverage does not increase the limit of insurance; so, any payment made for this additional coverage depletes the limit of insurance the insured has on the covered property.

Pollutant Cleanup and Removal. The insurer will pay up to $10,000 for the sum of all covered expenses to extract pollutants from land or water at the processing address. This is paid if the discharge or escape of the pollutants is caused by or results from a covered cause of loss that occurs during the policy period. The insured must report the expenses to the insurer in writing within 180 days of the date of loss. The $10,000 is in addition to the limit of insurance listed on the declarations page.

Exclusions

There are three sets of exclusions on IH 00 93. The first set contains the concurrent causation language; the other two do not.

IH 00 93 will not apply to loss or damage caused directly or indirectly by any of the following: governmental action, nuclear hazard, and war and military action. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss or damage

IH 00 93 will not pay for seizure or destruction of property by order of governmental authority. It will not pay for loss or damage caused by any nuclear reaction or radiation or radioactive contamination but will pay for direct damage or loss caused by fire resulting from nuclear reaction or radiation. The coverage form will not pay for damage or loss caused by war or any warlike action.

The following are contained in the second set of exclusions:

Improper Packing or Stowage or Rough Handling. IH 00 93 will not pay for loss or damage caused by or resulting from improper packing or stowage or rough handling. This is a rather vague exclusion since how can improper packing, stowage, or rough handling be proven? It does not limit itself to the actions of the insured. If the customer improperly packs the property to be worked on, or the carrier of the property mishandles the property, and the property is damaged, the insured can be facing a denial of coverage. Of course, the insurer has the responsibility to prove the applicability of the exclusion in any case.

Theft. Theft from any unattended vehicle is not covered unless, at the time of the theft, the vehicle's windows, doors, and compartments were closed and locked. There must also be visible signs that the theft was the result of forced entry. So, a mysterious disappearance of covered property from a car or truck will not be a covered loss. If the insured parks his car in a parking lot and leaves it unlocked while he goes to eat lunch, there is no coverage under IH 00 93 if the insured comes back and finds the customer's property missing. This exclusion does not apply to property in the custody of a carrier for hire.

Delay or Loss of Use. If the insured is working on a piece of a customer's property and, for some reason, the work is not finished on time, the customer may lose some business. For example, the insured must finish customizing the customer's limousine in time for a wedding, but problems arise and the work is not finished. The customer loses the business and makes a claim against the insured. IH 00 93 will not apply to that claim. Any loss or damage caused by or resulting from a delay, loss of use, loss of market, or any other consequential loss is not covered. IH 00 93 applies to direct physical loss or damage and these types of losses listed in this exclusion are consequential losses.

Unexplained Disappearance. This exclusion complements the theft exclusion noted previously. Mysterious and unexplained disappearances from vehicles or anywhere else are not covered by IH 00 93.

Inventory Shortage. If the insured finds an inventory shortage, IH 00 93 will not pay for that shortage. This exclusion joins with the theft exclusion and the unexplained disappearance exclusion to prevent the coverage form from paying for mysterious and unexplained disappearances of property. Such disappearances are difficult to underwrite, and providing coverage for them could encourage collusion and fraudulent actions.

Dishonest or Criminal Act. Dishonest or criminal acts—including theft— are excluded when committed by the insured, the insured's partners, employees—including temporary employees and leased workers—officers, directors, trustees, authorized representatives, managers or members (if a limited liability company), or anyone else with an interest in the property, or their employees—including temporary employees and leased workers—or authorized representatives. The acts are excluded whether the perpetrators act alone or in collusion with each other or with another party. The exclusion applies whether the acts occur during the insured's normal hours of operation.

The exclusion does not apply to acts of destruction by the insured's employees—including temporary employees and leased workers—or authorized representatives. Theft by the insured's employees—including temporary employees and leased workers—or authorized representatives is not covered.

The 2013 revision to the form made clear that theft is included as a dishonest act and reiterated that temporary employees and leased workers are considered employees as pertains to this exclusion.

Processing. IH 00 93 does not apply to loss or damage due to the actual processing or work upon the covered property. The named insured is a processor and in the business of working on customers' property. To allow IH 00 93 to cover damage done to property while the insured was engaged in the processing work would be to insure the workmanship of the insured—to insure against the faulty work of the insured. That is not the purpose of this coverage form. This exclusion prevents IH 00 93 from becoming a performance bond.

If the processing or work upon the property results in fire or explosion, the insurer will pay for the direct loss or damage caused by the fire or explosion. This exclusion can be deleted if the insured and the insurer agree and it is marked on the declarations page.

Pollution. IH 00 93 does not pay for loss or damage caused by the discharge, dispersal, release, or escape of pollutants (a defined term). However, if that discharge or escape is caused by specified causes of loss (also a defined term), the exclusion does not apply. Conversely, if the pollution spill causes a loss by the specified causes of loss, the insurer will pay for the resulting damage. For example, if a pollution spill on the insured's premises causes fire or smoke damage, IH 00 93 will pay for the damage caused by the fire or smoke. Or if a fire or a windstorm causes the release of pollutants on the insured's premises that damages customers' property; IH 00 93 will pay for the pollution damage.

Artificially Generated Electrical, Magnetic, or Electromagnetic Energy. The form does not apply to loss or damage caused by artificially generated electrical, magnetic, or electromagnetic energy that damages, disturbs, disrupts, or interferes with electrical or electronic wires, device, appliance, system, network, or such apparatuses that use cellular or satellite technology. For example, if the insured is working on an electric motor or uses an electrical tool in his processing work, and that motor or tool creates any kind of electrical disturbance that damages covered property, IH 00 93 will not respond to a claim for damages.

There are two things to point out about this exclusion. If a fire or explosion results from loss or damage caused by artificially generated electrical, magnetic, or electromagnetic energy that damages, disturbs, disrupts, or interferes with electrical or electronic wires, device, appliance, system, network, or such apparatuses that use cellular or satellite technology, the form will pay for the direct loss or damage caused by that fire or explosion. This exclusion applies only to loss or damage to that article in which the disturbance occurs. In other words, if an electric motor (property of a customer) or the tool (property owned by the named insured) is damaged by the electric current, the exclusion applies. If other property is damaged by that current, the exclusion does not apply.

Voluntary Parting. If the named insured or anyone entrusted with covered property is induced to voluntarily part with the property due to any fraudulent scheme, trick, device, or false pretense, IH 00 93 does not cover that loss. The purpose of the exclusion is to prevent coverage for a loss due to the insured being swindled. The issue of whether voluntarily parting with covered property is a theft is thus sidestepped: there is simply no coverage for such an action.

Unauthorized Transfer. This exclusion complements the voluntary parting exclusion. If an unauthorized instruction is made to transfer property to someone or to some place, the resulting loss is not be covered by IH 00 93. The exclusion does not define an unauthorized instruction, so the application of the exclusion may be difficult. If an employee receives an order from the named insured employer to move a customer's property to another location or to release that property to someone other than the customer, is a resulting loss due to an unauthorized instruction? If someone calls the insured and claims to be the customer and wants the property to be released to a messenger sent by the caller, is a resulting loss due to an unauthorized transfer? It would seem that a denial of coverage would be stronger based on the voluntary parting exclusion than on this one, but the exclusion is present on the coverage form in any case.

Neglect. Loss or damage due to the neglect of an insured to use all reasonable means to save and preserve property from further damage at and after the time of loss is excluded. But, the question then arises: what does the phrase “all reasonable means” mean? The phrase is ambiguous enough to call its effectiveness into question. If the insured's premises is hit by a fire, does the insured have to run into the building to try and save covered property from complete destruction?

Theft. An exclusion was added with the 2013 revision for theft when committed by any persons, except carriers for hire, to whom the insured entrusted property for any purpose, whether acting alone or in collusion with any other party and whether or not the act occurs during the insured's normal hours of operation.

The third set of exclusions state that loss or damage caused by the exclusions is not covered, but if loss or damage by a covered cause of loss results, the insurer will pay for that loss. If, for example, the malfunction of a covered piece of property causes a fire or an explosion, the loss due to the fire or explosion is covered, regardless of the fact that the excluded cause of loss—a malfunction—started the whole problem. There following exclusions are listed in this set:

Wear and Tear. Wear and tear and depreciation are normal happenings. They are not accidents or occurrences in that they are expected to happen. All manufactured items wear out over time and most items depreciate in value over time simply due to normal, everyday use. An insurance policy is not meant to cover such normal, expected losses, and IH 00 93 is no exception.

Latent Defect. A loss due to any quality in the property that causes the property to damage or destroy itself or due to a hidden or latent defect or gradual deterioration is not covered by IH 00 93. This exclusion aims to prevent coverage for damage to covered property that results from something within that property itself as opposed to some outside force. If, for example, a wedding dress sent to the insured to preserve contains a defect in the material that causes the dress to split or change color, that is not something for which the insured should be held liable. The dress itself caused its own damage, and IH 00 93 does not pay for such a loss.

Breakdown. IH 00 93 does not apply to loss or damage due to breakdown of covered property. This is similar to the two previous exclusions. If property is going to break down, it is usually due to a latent defect or wear and tear, and this coverage form is not meant to cover that type of loss.

Malfunction. Loss or damage due to malfunction or failure of covered property to operate is excluded. This exclusion can be seen as a complement to the three previous exclusions noted here and the processing exclusion described in the second set of policy exclusions. If loss or damage is caused by a malfunction of covered property, that malfunction is probably caused by wear and tear, defect in or deterioration of the property, or a breakdown. Since these causes of loss are excluded, it is reasonable to exclude the resulting malfunction or failure of the property to operate properly as a cause of loss. And, since damage due to the processing operation is often caused by a malfunction or the operation failure of the insured's property, it follows that those actions should also be the subject of an exclusion.

Insects, Vermin, Rodents. Damage caused by these creatures is normally excluded in any property policy, and IH 00 93 is no exception.

Corrosion, Rust, Dampness, Extremes of Temperature. Loss or damage due to corrosion, rust, dampness, or extremes of temperature is not covered.

Conditions

This section of IH 00 93 contains the limits of insurance, the deductible, valuation, the coverage territory, and coinsurance provisions.

The most that the insurer will pay for loss or damage in any one occurrence is the applicable limit of insurance shown in the declarations.

As for the deductible, the insurer will not pay for loss or damage until the amount of the adjusted loss exceeds the deductible shown in the declarations. Then, the insurer will pay the amount of the adjusted loss that is in excess of the deductible, up to the applicable limit of insurance on the policy.

IH 00 93 adds some information to the valuation general condition that is found on the Commercial Inland Marine Conditions form (a form that must be attached to all inland marine coverage forms). IH 00 93 declares that the value of property that is unfinished at the time of loss will include the value of labor, material, or services furnished by the processor. This is so if the named insured has paid the processor for such labor, materials, or services. However, the value of property will not exceed the cost to replace such property.

The coverage territory is the usual—the United States, Puerto, and Canada . IH 00 93 also covers property that is being shipped by air within and between points in the declared coverage territory.

If a coinsurance percentage is shown in the declarations, IH 00 93 presents a formula for how the coinsurance payment is to be made. The insurer will not pay the full amount of any loss if the value of covered property (except property in transit) at the time of loss times the coinsurance percentage shown in the declarations is greater than the limit of insurance listed for the lost or damaged property. Instead the insurer will use the following steps to determine the most to be paid: (1) multiply the value of the covered property at the time of loss by the coinsurance percentage; (2) divide the limit of insurance of the property by the figure determined in step 1; (3) multiply the total amount of loss (before the application of any deductible) by the figure determined in step 2; and (4) subtract the deductible from the figure determined in step 3. This formula states that the insurer will pay the amount determined in step 4, or the limit of insurance, whichever is less. For the remainder of the loss, the named insured is on his own.

Definitions

IH 00 93 provides some coverage for pollutant cleanup and removal so it is fitting that the term be defined. A pollutant is defined on this coverage form as it is on just about every insurance policy. Pollutants are any solid, liquid, gaseous, or thermal irritants or contaminants, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned, or reclaimed.

Specified causes of loss is a defined term and is used in the exception to the pollution exclusion. The following items are included in this definition:

1. Fire

2. Lightning

3. Explosion

4. Windstorm or Hail

5. Smoke

6. Aircraft or Vehicles

7. Riot or Civil Commotion

8. Vandalism

9. Leakage from Fire Extinguishing Equipment

10. Sinkhole Collapse

11. Volcanic Action

12. Falling Objects

13. Weight of Snow, Ice, or Sleet

14.Water Damage

Sinkhole collapse is defined as the sudden sinking or collapse of land into the underground empty spaces created by the action of water on limestone or dolomite. This cause of loss does not include the cost of filling sinkholes or the sinking or collapse of land into manmade underground cavities (such as mines, which would call for some type of mine subsidence coverage).

The category of falling objects is further clarified as not including loss or damage to personal property in the open or to the interior of a building or structure (or the property inside) unless the roof or an outside wall of the building or structure is first damaged by a falling object.

Water damage is limited to accidental discharge or leakage of water or steam as the direct result of the breaking or cracking of any part of a system or appliance containing water or steam.