AAIS Patterns And Dies Floater

AAIS PATTERNS AND DIES FLOATER ANALYSIS

(February 2024)

 

Introduction

Eligibility

Policy Construction

IM 7508–Schedule of Coverages–Patterns and Dies Floater

IM 7502–Patterns and Dies Floater Analysis

   Agreement

   Definitions

   Property Covered

   Property Not Covered

   Coverage Extensions

   Supplemental Coverages

   Perils Covered

   Perils Excluded

   What Must Be Done in Case of Loss

   Valuation

   How Much We Pay

   Loss Payment

   Other Conditions

Endorsements and Schedules

Underwriting Considerations

INTRODUCTION

This floater covers patterns, dies, molds, and forms, but only while they are off the named insured’s premises. Patterns and dies are extremely valuable to the named insured because they are used to make the named insured’s products. They can be very small or quite large. They are custom made and usually meant to be long-lived with their lifespan depending on the materials they are made of and the total number of products to be made from them.

This article analyzes AAIS IM 7502–Patterns and Dies Floater 04 04 edition.

ELIGIBILITY

Any commercial business with patterns, dies, molds, and forms at locations away from its premises is eligible.

POLICY CONSTRUCTION

AAIS Patterns and Dies Floater coverage requires at least these four forms:

Related Article: CL 0100–AAIS Commercial Lines Common Policy Conditions

IM 7508–SCHEDULE OF COVERAGES–PATTERNS AND DIES FLOATER (01 12 changes)

This Schedule of Coverages is used with IM 7502–Patterns and Dies Floater. IM 7508 contains the following information:

Policy Number (01 12 addition)

The 01 12 edition added a space to enter the policy number.

Covered Property

The 01 12 edition added quotation marks around the word Limit (“Limit”) because Limit is a defined word.

The item number(s), property description(s), and limit(s) are entered in the spaces provided.

Coverage Extensions

The limit on the Schedule of Coverages for this coverage applies to all covered locations:

The limit is $5,000 unless a different limit is entered.

Supplemental Coverages

This coverage provides additional coverage.

The limit is $10,000 unless a different limit is entered.

Deductible

A deductible amount must be entered in the space provided.

Coinsurance

One of the following coinsurance options must be selected:

Additional Information (01 12 change)

This section of the schedule of coverages lists endorsements and forms included when the policy is issued.

The previous edition referred to this section as Optional Coverages and Endorsements.

IM 7502–PATTERNS AND DIES FLOATER COVERAGE FORM ANALYSIS

This analysis is of the 04 04 edition.

Agreement

The insurance company agrees to provide the coverage described in the coverage form and in the schedule of coverages, and the named insured agrees to pay the premium. This agreement is subject to all the coverage form's terms, conditions, endorsements, and definitions.

Definitions

Defined terms are used throughout the coverage form. Restricting their meaning to their definition is how all parties have a clearer understanding of the intended coverage. The definitions can increase or decrease coverage, so they should be carefully reviewed. Nine terms are defined:

1. You and your

The party(ies) named on the declarations as the insured.

2. We, us and our

The insurance company that is providing the coverage.

3. Limit

The amount of coverage that applies to the insured property.

4. Pollutant

This is a broad and expansive term. It is solids, liquids, thermal or radioactive contaminants, and irritants. It includes, but is not limited to, acids, alkalis, chemicals, fumes, smoke, soot, vapor, and waste. Waste includes materials intended for recycling, reclamation, and reconditioning, as well as for disposal. Visible and invisible electrical or magnetic emissions and sound emissions are also considered pollutants.

5. Schedule of coverages

Any page that is labeled as such and that contains coverage information. Declarations and supplemental declarations are included in this definition.

6. Sinkhole collapse

A sinkhole is created when an underground opening is created by water acting on limestone or other rock formation. The earth’s surface suddenly settling or collapsing into that sinkhole is sinkhole collapse. Sinkhole collapse does not include either the land’s value or the cost to fill sinkholes.

 7. Specified perils

The named perils of aircraft, civil commotion, explosion, falling objects, fire, hail, fire extinguishing equipment leakage, lightning, riot, sinkhole collapse, smoke, sonic boom, vandalism, vehicles, volcanic action, water damage, the weight of sleet, snow or ice and windstorm. Two terms need further explanation.

Falling objects do not include loss to personal property stored in the open. Damage to the interior of buildings or personal property stored in buildings by falling objects is not covered unless the falling object first breaches the building's exterior.

The cracking or breaking of part of a system or appliance holding water or steam that causes a sudden or accidental discharge or leakage of water or steam is considered water damage.

8. Terms

All policy provisions, limitations, exclusions, conditions, and definitions that apply to this coverage.

9. Volcanic action

An airborne volcanic blast or shock wave. It is also ash, dust, and particulate matter along with any lava flow. The term does not include the cost of removing dust, ash, or particulate matter from covered property unless there is direct physical damage to the property.

Property Covered

Coverage applies to the property described below, subject to any exclusions or limitations found later in the form or elsewhere in the policy.

1. Coverage

Direct physical loss by a covered peril to the named insured's patterns, dies, molds, and forms are covered as is such loss to similar property of others that is in the named insured’s care, custody, and control.

 

Example: Metal Goods, Inc. provides several different products. It works with A&J Tool and Die to develop the appropriate dies for its own product and its customers’ products.

Scenario 1: Metal Goods sends owned dies to two machine shops to use in the contracted parts punching that will become part of a product that Metal Goods manufactures under its own name.

Scenario 2: Metal Goods sends non-owned dies to two machine shops to use in the contracted parts punching that will become part of a product Metal Goods is completing for the owner of the dies.

The Pattern and Dies Floater covers the dies in both of these scenarios.

2. Coverage Limitation

Coverage applies to only items listed on the schedule of coverages. A further limitation is that these items are covered only when they are at a premises the named insured does not own, lease, or operate.

Note: This coverage is usually written on a scheduled basis, listing each item of covered property and entering a limit for it. This may not be practical in every case, especially when there are a large number of insurable items. A different approach to resolve this issue, subject to the insurance company's approval, may be to develop a signed and dated schedule of property that lists each item to be covered and its limit. The entry on the schedule of coverages then refers to the schedule, its date, and its location, such as "per schedule of equipment on file with the insurance company" dated MM/DD/YYYY.

Property Not Covered

Three specific types of property are excluded:

1. Contraband

Property that is illegal to possess is not covered. Property that is legal to possess but is being used as part of an illegal trade or transported illegally is also not covered.

 

Example: Paul sent dies to Juniper Machine Shop to make a knockoff of a popular product. A loss occurs at Juniper, and during the investigation, it is discovered that the dies had been stolen from the actual manufacturer of that product. The coverage for the dies is denied, and Paul is arrested for theft.

2. Property at Your Premises

Patterns, dies, molds, and forms located at premises the named insured owns, leases, or operates are not covered.

Note: Patterns and Dies Coverage is off premises only coverage. This Floater does not cover property at the named insured's premises because patterns and dies are considered business personal property under commercial property forms.

3. Waterborne Property

Waterborne property is not covered. The only exception is that such property is covered while in transit in a carrier for hire's custody.

Coverage Extensions

Provisions That Apply To Coverage Extensions

There is one coverage extension. Its limit is either the limit on the schedule of coverages or the default limit included in the coverage form. This limit is part of the applicable limit for covered property and not in addition to it unless otherwise indicated. It is not added to or combined with the limit for any other coverage extension or supplemental coverage and is not subject to any coinsurance provisions that apply elsewhere in the coverage form.

Debris Removal

a. The insurance company pays costs incurred to remove debris created because a covered peril to covered property occurs.

b. Debris removal does not include any costs for removing, restoring, or replacing polluted land or water or extracting pollutants.

c. There are two parts of the Limit section. The first is restricting any debris removal payment to no more than 25% of the amount paid for the actual direct physical loss. The second part is that when the debris removal and the physical damage loss are added together, no more than the limit of insurance is paid.

d. An additional $5,000 (or a higher amount entered on the schedule of coverages) is available if the debris removal expense is more than 25% of the loss amount or if the combined cost of loss and debris removal is more than the limit of insurance for the covered property.

e. The named insured must report debris removal expenses to the insurance company within 180 days of the loss date for this coverage extension to apply.

Supplemental Coverages

Provisions That Apply To Supplemental Coverages

There is one supplemental coverage. It has its own default limit that can be increased by entering a higher limit on the schedule of coverages. Limits for any supplemental coverage are separate from the applicable limit for covered property, not part of it.

The limit available for coverage described under a supplemental coverage is the only limit available for it. It is not the total of the limit for a supplemental coverage and the limit for covered property. The limits are not added to or combined with limits for any other supplemental coverage or coverage extension. They also are not subject to any coinsurance provisions that apply elsewhere in the coverage form.

Pollutant Cleanup and Removal

a. The insurance company pays the named insured's expenses to extract pollutants from land or water if a covered peril that occurred during the policy period caused the pollutants to be released or discharged.

b. This is immediate coverage, so any expenses to extract pollutants are paid only when reported to the insurance company within 180 days of the date of loss.

c. Costs related to testing, evaluating, observing, or recording pollutants are excluded except for those costs that are part of the extraction process.

d. The most paid at any one location is $10,000 for all such expenses that a covered peril that occurs during each separate 12-month policy period causes. This limit can be increased.

Perils Covered

Coverage applies to risks of direct physical loss unless the loss is limited or caused by an excluded peril.

Perils Excluded

1. Primary Exclusions

The first group of exclusions is essentially absolute. Subject to specific exceptions, loss or damage by each is totally excluded, regardless of any other cause or event that contributes to the loss, either concurrently or in any other sequence. The insurance company does not pay for any direct or indirect loss or damage caused by or that results from any of these events.

Related Article: Concurrent Causation and Anti-Concurrent Causation Clauses–A Discussion

 

a. Civil Authority

There is no coverage for a loss that results from an order any civil or government authority issues. These orders may include seizure, confiscation, destruction, or quarantine of property, but this exclusion is not limited to only these. The only exception is when the loss or damage is caused by a civil authority destroying property to control a fire. This exception applies only if the fire is the result of a covered peril.

b. Nuclear Hazard

The insurance company does not cover loss or damage caused by or resulting from any nuclear reaction, radiation, or contamination. This is absolute and applies whether or not the nuclear incident was controlled, and by whatever means caused. Any loss the nuclear hazard causes is not treated as a loss that fire, explosion, or smoke causes. The only exception is when a fire results from the nuclear fire. Direct loss or damage from that fire is covered, but the damage from the nuclear hazard remains excluded.

c. War and Military Action

The insurance company does not pay for loss or damage caused by any act of war. Undeclared and civil war or warlike actions by a military force are all considered war. All actions taken to hinder or defend against an actual or expected attack by any government or sovereign authority that uses military personnel or other agents are also considered war and excluded. In addition, acts of insurrection, rebellion, revolution, or unlawful seizure of power and any action any government authority takes to prevent or defend against any such acts are excluded. If any action within the terms of this exclusion involves nuclear reaction, radiation, or contamination, this exclusion applies in place of the nuclear hazard exclusion.

Note: This means that the exception for resulting fire under the nuclear hazard is not covered when it results from war.

2. Secondary Exclusions

The second group of exclusions applies to loss or damage caused by or resulting from any of the following loss events. Some of these exclusions have exceptions, conditions, or limitations that should be noted and reviewed carefully. The insurance company does not pay for any loss or damage caused by or that results from any of these events.

a. Contamination or Deterioration

Loss or damage that is caused by contamination or deterioration is excluded. This applies to corrosion, decay, fungus, mildew, mold, rot, and rust. It also applies to any quality, fault, or weakness in covered property that causes it to damage or destroy itself.

b. Criminal, Fraudulent, Dishonest, or Illegal Acts

Coverage does not apply to loss caused by, or that results from criminal, fraudulent, dishonest, or illegal acts that any of the following commit alone or in collusion with another:

Coverage applies if employees destroy property. It does not apply if employees steal.

This exclusion does not apply to covered property in the custody of carriers for hire.

c. Electrical Currents

Electrical arcing or currents caused loss or damage is excluded unless lightning is the cause. When the excluded arcing or currents result in the occurrence of a specified peril any resulting loss from that specified peril is covered.

d. Loss of Use

There is no coverage when delay, loss of use, or loss of market cause a loss.

e. Mechanical Breakdown

Note: This is a particularly important exclusion for this coverage form because the covered property is exposed to damage from mechanical breakdown.

When mechanical, structural, or electrical breakdown or malfunction causes a loss, it is excluded. The loss is excluded even if a breakdown results from a structural, mechanical, or reconditioning process. The only exception is when a covered peril occurs, which results in loss or damage caused by that covered peril.

Example: The punch press malfunctions and begins making punch passes at a higher rate of speed than called for in the specifications.

Scenario 1: The die in the punch press is damaged. There is no coverage because the loss was due to a malfunction.

Scenario 2: The machine heats up rapidly and ignites the nearby oily rags. The loss to the die caused by the fire is covered. However, there remains no coverage for loss from the damage solely based on the malfunction.

f. Missing Property

The unexplained or mysterious disappearance of covered property is excluded when there is no physical evidence to suggest what happened to it, and the only proof that a loss occurred is based on an audit or physical inventory. The one exception is that this does not apply to covered property in the custody of carriers for hire.

g. Pollutants

There is no coverage for loss caused by or resulting from any release, discharge, seepage, migration, dispersal, or escape of pollutants. There are three exceptions:

h. Processing Work

Loss or damage due to any processing or other type of work done on the property is not covered. The only exception is that fire or explosion results from the processing, coverage applies to the fire or explosion loss.

Example: Klevor and Sons sends its die to Jonestown Dies to be refurbished. Jonestown makes a mistake in the tempering process, and the die becomes useless. There is no coverage for this loss.

i. Temperature/Humidity

Loss that dryness, dampness, humidity, changes in or extremes of temperature causes is excluded. The exception is that when a specified peril occurs due to any of these, coverage does apply but only to the loss or damage that the specified peril causes.

j. Theft from an Unattended Vehicle

Coverage does not apply to theft of covered property from an unattended vehicle. There are two exceptions. Coverage does apply to such theft if the vehicle was locked, its windows securely closed, and there was visible evidence of forced entry into the vehicle. Coverage also applies when the covered property is in the custody of carriers for hire.

k. Voluntary Parting

Loss to covered property voluntarily given to others is not covered, even if the surrender was due to a fraudulent scheme, trick, or false pretense.

l. Wear and Tear

Loss caused by wear, tear, marring, or scratching is excluded. The only exception is when a covered peril occurs as a result of any of these. However, only the loss or damage caused by that covered peril is covered.

Example: Johnson’s pattern is at Matthew’s Shop. The pattern has been in use for 90 days. Matthew tells Johnson that the pattern no longer produces acceptable parts and asks for a new pattern. The pattern’s damage is due to wear and tear and is not covered.

What Must Be Done In Case Of Loss

1. Notice

The named insured must give prompt notice of a loss to the insurance company or its agent. The notice must include a description of the property lost or damaged. If a criminal act caused the loss, the appropriate law enforcement agency must also be notified. The insurance company has the right to require that any notice to it be in writing.

2. You Must Protect Property

During and after a loss, the named insured must take all reasonable steps to protect covered property from further loss. The insurance company pays reasonable costs the named insured incurs, but to do so, the named insured must maintain accurate records to substantiate the costs. Paying these costs is not in addition to the policy limits. There is no coverage for any repairs or emergency measures performed on property not already damaged by a covered peril.

Note: It is important to realize that any such costs incurred will reduce the amount available to pay the actual loss.

3. Proof of Loss

The named insured must complete and return the insurance company's prescribed proof of loss forms within 60 days after the company requests it. The information provided must include the time, place, and circumstances involved with the loss and information on any other insurance coverage that may apply. It must also include the named insured’s interest and the interest of others with respect to the property involved, including lienholders, loss payees, and mortgagees. Any changes in the title to the property during the policy period must be disclosed, in addition to providing any other reasonable information the company may require to adjust and settle the loss.

4. Examination

Examination under oath may be required in matters that relate to the loss. The insurance company may request these examinations more than once, but such requests must be reasonable. If multiple persons are examined, the company has the right to examine each individual separately.

5. Records

The named insured must produce any records related to the loss. The insurance company must be allowed to make copies and take extracts of them as often as it reasonably requests. Records include tax returns and bank microfilms of all related cancelled checks, but records are not limited to just these.

6. Damaged Property

Damaged and undamaged property must be made available for the insurance company's inspection as often as reasonably necessary. It must also be allowed to take samples of the property to the extent necessary to adjust and settle the loss.

7. Volunteer Payments

The named insured may not voluntarily make payments, assume obligations, pay or offer rewards, or incur other expenses without the insurance company's express approval. If it does, it does so at its own expense. The only exceptions are those costs incurred to protect property, as item 2. above describes.

8. Abandonment

The named insured may not abandon damaged property to the insurance company without its written consent.

 

Example: Priestly had 30 different dies at the Peppy Machine Shop. A loss occurred that damaged the dies but did not destroy them. Peppy demanded that Priestly remove the dies from its premises immediately, and Priestly told the insurance company to move the damaged property. The insurance company refused to accept the damaged property as salvage. Priestly was responsible for paying the costs to move the dies as Peppy required.

9. Cooperation

The named insured must cooperate with the insurance company and perform all acts this coverage form requires.

Valuation

1. Actual Cash Value

The value of the covered property is its actual cash value at the time of loss. Actual cash is replacement cost new minus depreciation.

2. Pair or Set

The value of a loss that involves damage to or loss of one part of a pair or set is based on a reasonable proportion of the value of the entire pair or set. However, the loss of one part of a pair or set is not considered a total loss.

Note: This recognizes that the value of the whole is greater than the value of individual parts but that the remaining parts still have value as separates.

3. Loss to Parts

The value of a lost or damaged part of property that consists of several parts is the cost to repair or replace only the lost or damaged part.

How Much We Pay

1. Insurable Interest

The insurance company does not pay more than the named insured's insurable interest in the covered property at the time of loss.

Note: Insurance is meant to restore a person’s pre-loss financial position, not improve or enhance it.

2. Deductible

The insurance company pays only the amount of loss that exceeds the deductible amount on the schedule of coverages.

3. Loss Settlement Terms

Subject to other items in this section, the insurance company pays the least of the following:

4. Coinsurance

a. When coinsurance applies to a coverage provided, the insurance company pays only part of the loss if the limit is less than the percentage of the value of the covered property on the schedule of coverages.

b. The following are the three steps to determine the amount of loss to be paid:

Step 1. Multiply the percentage on the schedule of coverages by the covered property’s value at the time of loss.

Step 2. Divide the covered property’s limit by the result determined in Step 1.

Note: There is no coinsurance penalty if the result is 1.00 or higher.

Step 3. There is a coinsurance penalty when Step 2. is less than 1.00. Subtract the deductible from the amount of loss and then multiply the total amount of loss by the percentage determined in Step 2.

The insurance company does not pay more than the amount determined in step 3. or the limit, whichever is less. It does not pay any remaining part of the loss.

c. If there is more than one limit on the schedule of coverages, this procedure applies separately to each limit.

d. If there is only one limit on the schedule of coverages, this procedure applies to the total of all covered property insured under that limit.

e. This coinsurance provision does not apply unless a coinsurance percentage is entered on the schedule of coverages.

5. Insurance under More Than One Coverage

Two or more coverages in the coverage form may apply to the same loss. In that case, the insurance company does not pay more than the value of the actual claim, loss, or damage sustained.

6. Insurance under More Than One Policy

a. Proportional Share

The named insured may have other coverage subject to the same terms as this coverage form. In that case, this coverage form pays only its share of the covered loss. That share is the proportion that its limit of insurance bears to the limits of insurance of all insurance that covers on the same basis.

b. Excess Amount

There may be other coverage available to pay for the loss other than as described in 6. a. above. In that case, this coverage form pays on an excess basis. It pays only the amount of covered loss that exceeds the amount due from the other coverage, whether collectible or not. Any payment is subject to the limit of insurance that applies.

Loss Payment

1. Loss Payment Options

a. Our Options

The insurance company has the following four loss payment options if a covered loss occurs.

b. Notice of Our Intent to Rebuild, Repair, or Replace

The insurance company must notify the named insured of its intent to rebuild, repair, or replace within 30 days after it receives a properly completed proof of loss.

2. Your Losses

a. Adjustment and Payment of Loss

The insurance company adjusts all losses with and pays the named insured unless another loss payee named in the policy is involved.

b. Conditions for Payment of Loss

The insurance company pays a covered loss within 30 days after it receives a properly prepared proof of loss and the amount of loss is established. The amount of loss is determined either through a written agreement between the company and the named insured or after an appraisal award is filed with the company.

3. Property of Others

a. Adjustment and Payment of Loss to Property of Others

The insurance company has the option to adjust and pay losses involving property of others to either the named insured acting on behalf of the property owner or to the property owner.

b. We Do Not Have to Pay You if We Pay the Owner

The insurance company is not obligated to pay the named insured when it pays the property owner. In addition, if the property owner sues the named insured, the company has the option to defend the named insured in that suit.

Other Conditions

1. Appraisal

The insurance company and the insured may not always agree on the value of a covered claim. This condition provides one method to resolve disputed claims.

Either party can request an appraisal to determine the value of a disputed claim. Once requested, the parties have 20 days to obtain their own independent and competent appraisers and give their appraiser's name to the other party. The two appraisers then have 15 days to select a competent impartial umpire. If they cannot agree on an umpire within that time period, either can request that a judge in the court of record in the state where the property is located appoint one.

The appraisers then determine the claim’s value. They submit any differences to the umpire. Once any two of the three parties agree, the amount of loss is set.

Each party pays its own appraiser. Both parties share the umpire’s cost and other expenses equally.

2. Benefit to Others

The insurance provided does not directly or indirectly benefit any party with custody of the named insured's property.

3. Conformity with Statute

Any condition in this coverage form that conflicts with any applicable law is amended to conform to that law.

4. Estates

Note: This condition only applies if the named insured is an individual.

a. Your Death

If the named insured dies, the person who has custody of the named insured's property is an insured until a qualified legal representative is appointed. The named insured’s legal representative becomes an insured once he or she is appointed. Both are insureds, but only with respect to the property this coverage form insures.

b. Policy Period is not Extended

This coverage does not extend past the policy’s expiration date.

5. Misrepresentation, Concealment, or Fraud

This coverage is void if any insured at any time willfully concealed or misrepresented a material fact that relates to the insurance provided, the property covered, or its interest in the property. It is also void if fraud or false swearing by any insured took place concerning the insurance provided or the property covered.

Note: The named insured must deal with the insurance company honestly. Its rights of recovery may be voided if it intentionally misrepresents or conceals a material fact or information. This means the insurance is treated as simply having never existed versus denying a particular claim.

6. Policy Period

Only covered losses that occur during the policy period are paid.

Note: It is important to recognize the time and date of loss are based on the mailing address on the declarations, not the location where the covered property is.

7. Recoveries

Paying the loss does not end the obligations of the named insured and the insurance company toward one another. Additional provisions apply if the insurance company pays a loss and the lost or damaged property is subsequently recovered, or the parties responsible for the loss pay for it.

Either party that recovers property or payment must inform the other. Recovery expenses that either party incurred are reimbursed first. If the named insured keeps the recovered property, it must refund the amount of the claim the insurance company paid unless the company agrees to a different amount. If the claim paid is less than the agreed loss due to applying a deductible or another limitation, any recovery is prorated between the named insured and the insurance company based on the company's respective interest in the loss.

8. Restoration of Limits

Payment of a claim does not reduce the limit available for future claims.

9. Subrogation

The insurance company acquires the named insured's rights of recovery from third parties after it pays a loss. The named insured must help the insurance company secure those rights. The company is not obligated to pay a loss if the named insured hinders or impairs the company's rights of subrogation. However, the named insured can agree in writing to waive recovery rights from others before a loss occurs.

10. Suit against Us

The insurance company cannot be sued by anyone for any coverage until all the terms of the coverage form are met. Suits must be brought within two years after the named insured first knew about a loss. If a state law invalidates this condition, any suit brought must comply with the provisions of that law and begin within the shortest period of time allowed by law.

Note: It is normal for a basic coverage form to be modified by mandatory state-specific endorsements that address issues related to that specific state.

11. Territorial Limits

Covered property must be located in the United States, its territories and possessions, Canada, or Puerto Rico in order for coverage to apply.

ENDORSEMENTS AND SCHEDULES

AAIS has developed the following endorsement for use with this coverage form:

IM 7512–Named Perils Endorsement

This endorsement restricts the perils covered to only the named perils of fire, lightning, windstorm, hail, collision, overturn, or derailment of a transporting conveyance, collapse of a bridge or culvert, theft, and vandalism.

Note: Additional company specific endorsements may be available and used. Each should be examined to determine its effect on coverage, especially when some may impose restrictions or controls that may be minimum requirements or prerequisites for the company to provide coverage or to accept a particular exposure.

UNDERWRITING CONSIDERATIONS

Manufacturers subcontract the manufacture of some parts that go into their finished product to other manufacturers or job shops. The manufacturer develops the pattern, die, mold, or form for a specific part and retains ownership of it. That pattern, die, mold, or form is sent to the subcontractor or job shop and kept at that location as long as the part is being manufactured by them. When the job is done or the contract ends, the pattern, die, mold or form is returned to the manufacturer.

Example: Mortimer’s Machine Shop successfully bids on a three-year contract to manufacture cooling fan blades for automobile engines. Mort has the required punch press to do the work, and the engine manufacturer supplies the die for the press. When the three-year contract expires, it is not renewed because of Mort’s high failure rate. Mort returns the die to the engine manufacturer, as the contract required. While the die was at Mort’s, the engine manufacturer purchased coverage for that die by using the patterns and dies floater coverage form.

The most important underwriting questions involve the actual pattern, die, mold, or form. The type of item must be clearly identified, its details disclosed, and the insurance value established. The amount of time needed to replace it must also be determined. Many are made of metal but some are made of other materials, and the susceptibility of these materials to damage must be determined. They are used in many different applications and require different degrees of precision. If a part requires extremely fine machining or tolerances, a damaged item may not be repairable to the extent needed to meet those requirements. In such cases, it becomes a functional total loss. In addition, if a foreign manufacturer made the item and is now defunct or out of business, the time needed and the cost to repair or replace the item could increase dramatically, and this time element must also be considered and written under other coverage forms and policies.

The contract between the manufacturer of the pattern, die, mold, or form or its owner and the subcontractor or job shop that has and uses the item should clearly establish each party's responsibility toward it. It should also specify the party responsible for insuring it and the degree or amount of damage to it that must occur before it must be repaired or replaced.

Subcontractors such as machine shops, jobbers, and manufacturers with patterns, dies, molds, or forms that belong to their customers might also need this coverage because their contract may require coverage for the items even when they are off the subcontractor’s premises. Because the subcontractor is contractually responsible for the item, this coverage form could be used to cover its off premises exposure.

Manufacturers frequently overlook the need for this coverage because they pay more attention to other insurance issues. However, this can be a significant exposure for certain manufacturers. Not paying proper attention to it could lead to a significant gap in coverage, with no coverage in place when needed. Any business that makes a proprietary product must review its need for this coverage and establish an appropriate insurance solution.