ISO Difference In Conditions Coverage Form

ISO DIFFERENCE IN CONDITIONS COVERAGE FORM ANALYSIS

(April 2024)

 

Introduction

Policy Construction

IH DS 80–Difference in Conditions Declarations

IH 00 80–Difference in Conditions Coverage Form Analysis

Introduction

A. Coverage

   Covered Property

   Property Not Covered

   Covered Causes of Loss

   Additional Coverages

   Coverage Extensions

B. Exclusions

C. Limits of Insurance

D. Deductible

E. Additional Conditions

F. Optional Coverage

G. Definitions

Endorsements

Underwriting Considerations

INTRODUCTION

The Insurance Services Office (ISO) Difference in Conditions (DIC) Coverage Form supplements conventional commercial property coverage forms and policies. Its name comes from the less restrictive coverage provisions it has when compared to the underlying coverage form. The more differences in coverage between the underlying coverage and the DIC coverage form, the more coverage the DIC provides.

POLICY CONSTRUCTION

Difference in Conditions Coverage requires at least the following six forms:

Related Article: IL 00 17–Common Policy Conditions Analysis

Related Article: CM 00 01–Commercial Inland Marine Conditions

IH DS 80–DIFFERENCE IN CONDITIONS DECLARATIONS

The advisory Difference In Conditions Declarations does not have spaces for the named insured, its mailing address and other named insured information, the policy period, or the description of the insured business. That information is on the Common Policy Declarations. IH DS 80 contains the following information:

Insurance Company and Producer Name

The name of the insurance company that provides the coverage and the name of the agent or broker that produces the business are entered in the spaces provided.

Underlying Commercial Property Policy or Policies

This section has spaces to enter underlying policy numbers and the name(s) of the insurance company(ies) that provide the underlying coverages. This section also refers to E. Additional Conditions 2. A. Underlying Insurance that explains the underlying coverage requirements.

We Cover Described Property As Follows

This section has spaces to enter the following:

Sub-limits Applicable

This section has spaces to enter the following:

Optional Coverages

This section has spaces to enter the following:

o    Revised limit. The default limit in the coverage form is $15,000.

o    Revised business income/extra expense number of days. The default number of days in the coverage form is 30.

Either the Yes or the No box must be checked for the Separate Location Option. If the Yes is selected, the separate locations must be entered.

Deductibles

This section has spaces to enter the following deductibles:

Excess Insurance

This section has spaces to list the causes of loss in the underlying policies for which the Difference in Conditions coverage is excess.

Rates and Premiums–Non-reporting

The following are entered when coverage is written on a non-reporting basis:

Rates and Premiums–Reporting

The following are entered when coverage is written on a reporting basis:

Special Provisions

Any special provisions are entered in the space provided.

IH 00 80–DIFFERENCE IN CONDITIONS COVERAGE FORM ANALYSIS

This analysis is of the 12 13 edition. Changes from the previous edition are in bold print.

Introduction

This section encourages carefully reading the entire coverage form to determine what is covered, what is not covered, rights, and duties. It defines we, us, and our as the insurance company that provides this insurance coverage. It also defines you and your as the named insured on the declarations. The reader is also pointed to the Definitions section because certain words or terms used in the form have a more broadened or restricted meaning.

 A. Coverage

The insurance company pays for direct physical loss or damage to covered property but only when that loss is from a covered cause of loss.

1. Covered Property

To determine what covered property is, first, you must read the description of Covered Property and then read the description of Property Not Covered. If it is considered covered property and NOT considered Property Not Covered, it is covered under this policy, but only if there is a limit of insurance on the declarations for that type of property.

Note: This means that there is building coverage only if there is a building limit of insurance, business personal property coverage only if there is a limit of insurance for it, and personal property of others coverage only if there is a limit of insurance for it on the declarations. The last item is especially interesting because the declarations does not have a space to enter a limit for personal property of others.

a. The following is covered property in addition to the actual building or structure listed on the declarations:

The following property is covered as a building but only when not insured elsewhere:

b. Your Business Personal Property:

Coverage applies to the named insured’s business personal property when it is:

Example: Ernie’s Extras adds a body to a truck or van chassis or modifies a customer's machine to add protective guards. In these cases, coverage applies to the value of the services performed. This item covers the labor to do so at the standard rate for anyone involved in the process, the raw materials consumed (including power and chemicals), and any other services provided for which a value can be determined.

c. Personal Property of Others

This property must be both of the following:

The insurance company’s payment for loss or damage to this property is for only the account of the property’s owner.

Note: The declarations does not have a space to enter a personal property of others limit so an endorsement would be required to add one.

2. Property Not Covered

The following described property is not covered:

a. Accounts, bills, currency, deeds, food stamps, other evidence of debt, money, notes, or securities. Lottery tickets held for sale are not considered securities.

Note: This property is primarily money or substitutes for money. It should be insured under commercial crime coverage forms.

Related Article: Commercial Crime Coverage Analysis

b. Animals. However:

·         Non-owned animals that the named insured boards are covered.

·         Animals that the named insured owns as stock are covered but only while they are inside a building.

c. Automobiles while they are being held for sale

Note: These should be covered under a floor plan coverage.

d. Paved surfaces. Examples are roadways, walks, patios, and bridges.

e. Contraband. Any property that is illegal to own or in illegal trade or transportation is not covered.

f. Costs to excavate, grade, fill, or backfill

g. Foundations of buildings, structures, machinery, or boilers when they are below the lowest basement floor, or when they are below the ground’s surface if there is no basement

h. Land, water, growing crops, and lawns. Land includes the land where the property is located.

i. Personal property when it is airborne or waterborne.

Note: This means that personal property in aircraft is covered as long as the aircraft remains on the ground.

j. Bulkheads, piers, docks, wharves, or pilings

k. Property that is covered under any other coverage form or policy in a more specific way than it is covered under this policy. There is an exception. This policy provides coverage in excess of the more specifically covered property limits, but only when this policy was purchased to provide coverage in excess of that more specific property coverage. If the more specific underlying coverage cannot be collected, this policy remains excess of that more specific covered limit of insurance.

 

Example: Harry purchases the Difference in Conditions policy from Company A as an excess policy over the commercial property coverage form he has with Company B. A fire loss occurs, and Harry asks both Company A and Company B to respond:

Scenario 1: The loss is within Company A’s limit of insurance, Company A pays for the loss, and Company B pays nothing.

Scenario 2: The loss exceeds Company A’s limit of insurance. Company A pays up to its limit of insurance, and then Company B pays the amount of loss in excess of Company A that is within Company B’s Limit of Insurance.

Scenario 3: Company A has become insolvent and cannot respond to the loss. Company B does not respond until Company A’s limit of insurance is exceeded and then pays only that excess amount.

 

l. Retaining walls but only when such walls are not part of a covered building

m. Drains, pipes, or flues when they are below the ground’s surface

n. Vehicles, aircraft, watercraft, or self-propelled machines that are operated primarily away from the insured premises. Vehicles and self-propelled machines that are licensed to operate on public roads are also not covered.

There are three exceptions:

o. When outside buildings:

3. Covered Causes of Loss

Covered causes of loss are direct physical loss or damage to covered property, except as limited or excluded.

4. Additional Coverages

The limits for some of the following additional coverages are in addition to the limits of insurance.

a. Debris Removal

A property damage loss usually creates debris that must be removed. The insurance company pays the cost of removing the debris of a covered loss. The expenses must be reported to the insurance company in writing within 180 days of the date of loss. The most paid is 25% of the sum of the following:

This coverage does not apply to costs to extract pollutants from land or water or to remove, restore or replace polluted land or water.

b. Fire Department Service Charge

The insurance company pays up to $1,000 when the fire department is called to save or protect covered property from a covered cause of loss. The limit can be increased. The limit applies regardless of the number of responding fire departments, fire units, or the number or type of services performed.

This coverage applies to only the named insured's liability for fire department service charges it either contractually assumes before a loss occurs or that a local ordinance or law requires.

This Additional Coverage is not subject to a deductible.

c. Preservation of Property

Covered property may need to be moved from an insured location to keep it from being damaged by a covered cause of loss. In that case, the insurance company pays for any direct loss or damage such property sustains during the move. In addition, coverage applies at the location where the property is stored for up to 30 days after the date it was moved there.

This additional coverage does not increase the limit of insurance.

Notes: There are several important points to consider:

The property removed must be moved back to the covered location or the temporary location must be added to the policy within 30 days from the date of the move. Otherwise, all coverage ends after 30 days.

d. Pollutant Clean Up and Removal

The insurance company pays to clean up pollutants caused by or that result from a covered cause of loss that occurs during the policy period. The most paid is $10,000 per premises as an aggregate amount during each separate 12-month policy period. The expenses are paid only if they are reported to the insurance company in writing within 180 days of the date of loss.

This coverage does not apply to costs to evaluate the presence or effects of pollutants. However, it does pay for testing that is part of the extracting of pollutants process from either land or water.

The limit can be increased. This limit is an additional amount of insurance.

Example: A covered cause of loss occurred on 04/01/2024 and caused a floor at Ted’s Tools to collapse. The collapse damaged the concrete basement and cracked an underground oil tank. On 09/01/2024, oil is discovered in and around the private well that provides an auxiliary water supply to Ted’s building. After analyzing all the details and information, the conclusion is that the tank's damage resulted from the covered cause of loss that caused the collapse. The cost to remove the oil-soaked dirt is covered up to the $10,000 limit, provided the expenses are reported to the insurance company in writing by 09/30/2024.

e. Limited Coverage for Fungi, Wet Rot, and Dry Rot (12 13 change)

(1) Coverage applies only if the fungus, wet rot, or dry rot results from a specified cause of loss or flood, if flood coverage is provided. Fire and lightning losses are excepted from B. Exclusions 1.Primary Exclusions d. Fungus, Wet Rot, or Dry Rot. As a result, this Additional Coverage excludes losses that result from them.

This coverage also applies only if the named insured takes all reasonable steps to prevent further damage to property during or following a loss.

(2) Loss or damage includes more than the direct damage to the property by the fungus, wet rot, or dry rot. It also includes the costs to remove them, as well as the costs to tear out and replace walls and other parts of the building to gain access to the problem area. Any testing necessary to verify the property is clean and the situation mitigated is also covered.

(3) The limit of insurance for this coverage is an aggregate limit of $15,000 per policy year. This means that the limit for the policy year is $15,000, regardless of the number of locations and occurrences. There is no additional limit available once the limit is exhausted. If the condition continues over multiple policy years, the limit available in the policy year when the loss occurred that caused the fungus, wet rot, or dry rot is the only limit that applies.

The limit can apply per premises but is still an aggregate limit per policy year. This option is available if it is selected on the declarations.

(4) The $15,000 limit is a sub-limit. It does not increase the limit of insurance.

(5) If business income and/or extra expense coverage is provided, this Additional Coverage provides coverage in two different situations:

Example: A severe thunderstorm causes significant damage to Murphy Manufacturing’s building and some of the contents inside. Murphy worries the building might collapse because of the heavy damage and decides to move all undamaged property outside under protective tarps in a tent he erects. However, some of the property develops mold that must be mitigated and removed. Subject to this coverage’s sub-limit of insurance, the costs to mitigate and remove the mold are covered.

5. Coverage Extensions

The limits for these coverage extensions are in addition to the limit of insurance.

a. Newly Acquired or Constructed Property

Building coverage can be extended to apply to the following:

The most paid for loss or damage to any building under this coverage extension is $250,000.

Business personal property coverage can be extended to any and all of the following:

The most paid for loss or damage to such personal property under this coverage extension at a single building is $100,000.

Coverage ends on the date the policy expires, 30 days after construction begins, the named insured acquires the property, or the date on which the values are reported to the insurance company, whichever occurs first. The insurance company charges additional premiums from the date that construction begins or that the property is acquired.

b. Valuable Papers and Records–Cost of Research

Business Personal Property coverage can be extended to apply to the costs incurred by the named insured to research, replace, or restore the lost information on unduplicated valuable papers or records that sustain loss or damage. The information may be on electronic or magnetic media. The most paid under this extension at a described location is $2,500. This limit can be increased.

This extension applies to only property located on or in the building(s) listed on the declarations or within 100 feet of the premises and either in the open or in or on a vehicle.

B. Exclusions

1. Primary Exclusions

The first group of exclusions applies whether or not the loss event results in widespread damage or affects a significant geographical area and is essentially absolute. Subject to specific exceptions, each is totally excluded, regardless of any other cause or event contributing to a loss, concurrently or in any other sequence. The insurance company does not pay for any direct or indirect loss or damage caused by or results from any of these events.

a. Governmental Action

This exclusion applies to the legal and authorized seizure or destruction of property by a government entity’s order.

Note: This exclusion does not have the exception for orders to prevent a fire from spreading.

b. Nuclear Hazard

Nuclear reaction, radiation, or radioactive contamination is not covered.

Note: This exclusion does not have the exception for fire that ensues.

Example: Helping Hands Hospital's radiation unit is located next to the boiler room. An earthquake causes the boiler room walls to crack, resulting in radioactivity being released into other areas of the hospital. There is no coverage for the damage the radioactivity caused.

c. War and Military Action

This exclusion lists three specific warlike activities.

d. Fungi, Wet Rot, and Dry Rot

Loss or damage caused by or that results from the existence or any activity of fungi, wet rot, or dry rot. There are three exceptions:

Note: Refer to F. Definitions 1. Fungi for a list of items that Fungi includes.

e. Virus, Bacterium, or Other Microorganism

Virus, bacterium, or other microorganism means any of these that induces (or is capable of inducing) any physical distress, illness, or disease. This exclusion does not apply if the loss or damage is caused by or results from fungi, wet rot, or dry rot.

This exclusion (or the application of its terms to a specific loss) is not intended to create coverage for any loss otherwise excluded. It also applies to all coverages included in this coverage form, including forms and endorsements that cover business income, extra expense, or acts of civil authorities.

2. Secondary Exclusions (12 13 changes)

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 resulting from any of these events.

a. Fire, lightning, windstorm, hail, or any other cause of loss

Loss or damage caused by fire, lightning, windstorm, hail, or any other cause of loss that is covered by the underlying policy or policies listed on the declarations is excluded. There is one exception. If an entry is made in the Excess Insurance box on the Declarations that this policy is excess of a listed cause of loss, coverage is provided for such a cause of loss, even if this exclusion lists it, but only as excess over the underlying coverage. It remains excess, even if the underlying limits cannot be collected.

b. Explosion of steam appliances

Loss or damage caused by or that results from steam boilers, steam pipes, steam engines, or steam turbines exploding. This exclusion is limited to only when the named insured owns, leases, or operates these objects.

c. Delay, loss of use, and loss of market

These are consequential or indirect losses that develop as a result of a direct loss or damage.

d. Mechanical breakdown

This is loss or damage caused by or that results from machines, tools, or mechanisms failing to operate or function properly.

e. Artificially generated electrical, magnetic, or electromagnetic energy

Loss or damage that is caused by or that results from artificially generated electrical, magnetic, or electromagnetic energy damaging, disturbing, disrupting, or interfering with any of the following:

Examples of this excluded energy are electrical current, charges a magnetic or electromagnetic field produces, and microwaves, but is not limited to just these.

Note: There are no exceptions.

f. Wear and tear, depreciation, any quality in the property

This is loss or damage due to rust, corrosion, fungus, decay, hidden or latent defect or other qualities of the property that causes it to damage or destroy itself.

Notes:

Rust and corrosion are low-temperature oxidation processes that result in deterioration over time due to inactivity or neglect.

Wear and tear is damage that occurs naturally as a result of aging or normal wear.

Depreciation is loss of value due to wear.

g. Settling, cracking, shrinkage, or expansion

Any loss, damage, or condition that arises out of any covered property settling, cracking, shrinking, or expanding.

h. Shortage found upon taking inventory

A loss discovered as a result of an inventory shortage and is similar to an unexplained disappearance. This is sometimes referred to as "inventory shrinkage."

i. Unexplained disappearance

An unexplained or mysterious disappearance of covered property when it is simply gone, and there is no obvious cause or explanation of what happened to it.

j. Marring or scratching of personal property

This is loss or damage to covered personal property due to marring or scratching.

Note: It also includes related acts, such as chipping or denting.

k. Nesting or infestation

The loss or damage that is due to animals, including insects, vermin, birds, and rodents nesting, infesting, or discharging waste products or other secretions.

l. Dishonest or criminal acts (12 13 changes)

These are any dishonest or criminal acts the named insured, its partners, employees, temporary employees, leased workers, officers, directors, trustees, authorized representatives, or members and managers of a limited liability company commit. This also includes theft.

Such acts committed by anyone with an interest in the property, their employees, temporary employees, leased workers, or authorized representatives who act alone or who act in collusion with other parties or with each other are also excluded. This exclusion also applies whether or not the acts take place during regular working hours.

The 12 13 edition removed the part of the exclusion in the previous edition that applied to dishonest or criminal acts committed by anyone entrusted with the property for any reason.

Note: There are no exceptions.

m. Voluntary parting

When the named insured or anyone else entrusted with the property is tricked or deceived into giving it away.

n. Unauthorized instructions

When covered property is transferred to another person or place because of unauthorized instructions to do so.

o. Rain, snow, ice or sleet

Loss or damage to personal property caused by being in the open that rain, snow, ice, or sleet causes.

p. Pollution

Loss or damage caused by the discharge, dispersal, seepage, migration, release, or escape of pollutants. There are two exceptions:

q. Neglect

Neglect on an insured’s part to take reasonable efforts to preserve and protect covered property from subsequent damage during and after the time of loss.

r. Theft (12 13 addition)

Theft by any person the named insured entrusts covered property to for any reason, whether they act alone or act in collusion with any other party. This exclusion applies whether or not the acts take place during regular working hours. There is an exception for covered property in a carrier for hire’s care, custody, or control.

3. Other Exclusions

This group of exclusions applies to loss or damage caused by or resulting from any of the following loss events. In every case, if loss or damage by a covered cause of loss occurs as a result of one of these excluded events, coverage applies to the loss or damage the resulting covered cause of loss causes. The insurance company does not pay for any loss or damage caused by or that results from any of these events.

a. Acts or decisions

These are acts or decisions any person, group, organization, or government entity makes, resulting in loss or damage. Failing to act or to make decisions is also excluded.

b. Faulty, inadequate, or defective

With respect to all or part of any property wherever located, coverage does not apply to any of the following faulty, inadequate, or defective:

Example: The Coopersville City Council decides to delay performing preventive maintenance on a floodwall. The wall collapses and floods Casey’s Food and Gas. Casey cannot collect for its damages from this coverage form because the loss was due to the floodwall being maintained improperly.

c. Rust (or other corrosion), dampness, or extremes of temperature

This is rust, other corrosion, dampness, or extremes of temperature that cause loss or damage to covered property.

Notes:

Rust and corrosion are low-temperature oxidation processes that result in deterioration over time due to inactivity or neglect.

Dampness and temperature extremes can affect the oxidation process that affects different forms of property and can also have other effects on the same and other forms of property.

4. Valuable Papers and Records

The costs the named insured incurs to research, replace, or restore information on valuable papers or records. The information may be on electronic or magnetic media. There is an exception. This exclusion does not apply to the limited coverage that 5. Coverage Extensions 2. Valuable Papers and Records–Cost of Research provides.

C. Limits of Insurance

The most the insurance company pays for loss or damage in a single occurrence is the limit of insurance for the applicable coverage on the declarations.

1. Earthquake and Water Damage

These coverages have separate limits of insurance. They are on the declarations.

2. Additions to the Limit

The limit that applies to 4. Additional Coverage d. Pollutant Cleanup and Removal and the limits that apply to all Coverage Extensions are in addition to the Limit of Insurance.

3. Other Additional Coverages

The limit that applies to 4. Additional Coverages a. Debris Removal does not increase the limit except when the sum of the direct physical loss or damage PLUS the debris removal expense is more than the limit of insurance. In that case, the insurance company pays up to an additional $10,000 at each location for each occurrence under 4. Additional Coverages a. Debris Removal. This $10,000 is also available when the debris removal expense is more than the debris removal amount calculated in 4. Additional Coverages a. Debris Removal. However, the $10,000 is available for only a specific loss.

The limits that apply to 4. Additional Coverages b. Fire Department Service Charge, and c. Preservation of Property do not increase the Limit of insurance.

D. Deductible

The insurance company does not pay for loss or damage until the amount of the adjusted loss or damage (before capping with the limit of insurance that applies) exceeds the deductible on the declarations. It then pays the amount of the adjusted loss or damage that exceeds the deductible up to the limit of insurance that applies.

Water Damage and Earthquake have separate deductibles. All earthquake shocks that occur within 168 consecutive hours after the initial earthquake are treated as a single earthquake event and, therefore, subject to only a single deductible.

Examples:

  • The loss is $1,000 and the deductible is $5,000. There is no payment.
  • The loss is $5,000 and the deductible is $1,000. The amount paid is $4,000.
  • The limit of insurance is $100,000. The loss is $110,000 and the deductible is $5,000. The full $100,000 limit is paid because the loss exceeds the deductible, and the amount of loss is more than the limit of insurance.

Note: All examples assume that the coinsurance clause does not apply.

Example: The policy period is 01/01/2024 to 01/01/2025. An earthquake shock occurs on 2/31/2024. The named insured’s porch separates from the building on 2/31/2024. The building’s brick veneer falls off following an aftershock on 03/02/2024. Only one deductible applies to the two losses because both occurred within 168 hours of the initial shock.

E. Additional Conditions

1. Valuation

This condition replaces the Valuation General Condition in the Commercial Inland Marine Conditions. The value of lost or damaged property is the following:

a. Actual cash value at the time of the loss or damage, except as the other items in this condition describe

Note: This coverage form does not define actual cash value, but court decisions state that it is replacement cost new minus accumulated depreciation.

b. Costs to repair or replace loss or damage to the building. This applies only if the loss is $2,500 or less. There is no coverage for increased building costs because of enforcing or complying with any ordinance or law that regulates the construction, use, or repair of any property.

There are exceptions. Actual cash value continues to apply to awnings, floor coverings, outdoor equipment or furniture, and appliances for refrigerating, ventilating, cooking, dishwashing, or laundering, whether or not they are attached to the building.

c. Stock sold but not yet delivered is valued at the selling price the named insured would have received but reduced for discounts, such as prepaid or early payment discounts, and expenses not incurred, such as packing, transport, etc.

d. Damaged glass that laws require be replaced with safety glass is replaced with safety glass, even though the damaged glass was not safety glass.

e. Tenants' Improvements and Betterments are based on the following:

In leases that have a renewal option, the renewal option period’s expiration date replaces the lease’s expiration date in the steps above.

·         There is no payment at all if other parties pay for the replacement or repairs.

f. Valuable Papers and Records valuation is based on the cost of blank materials and of labor to copy duplicate records. This includes those on electronic or magnetic media that are not prepackaged programs. The Coverage Extension provides a limited amount of coverage for the research aspects of this coverage.

2. Other Conditions

These conditions are in addition to the Commercial Inland Marine Conditions and the Common Policy Conditions.

a. Underlying Insurance

The coverage for each underlying insurance policy listed on the declarations page must be maintained and remain in force as long as this insurance is in force. The named insured must renew each underlying policy with limits of insurance and covered causes of loss equal to or greater than the expiring limits and causes of loss.

The named insured is penalized if it does not follow the requirements of the paragraph above. The penalty is that the coverage this insurance provides continues to respond as though the underlying coverage was unchanged from the initial coverage. This means that the named insured is responsible for all losses that fall in that gap.

Example: Simon Wholesale’s underwriting property policy was written with Earthquake and Flood as covered causes of loss. That policy is listed on the DIC declaration. It is renewed with those causes of loss excluded, but the DIC carrier was not notified of the underlying cause of loss change. An earthquake loss occurred, and the primary carrier denied coverage. The DIC carrier refused to pay for the earthquake loss until the loss exceeded the insurance limit under the prior primary policy.

b. Coverage Territory

The coverage territory is the United States of America, its territories and possessions, Puerto Rico, and Canada.

c. Protective Safeguards

Note: This condition could be considered a warranty because of how it results in denial of coverage.

The named insured is required to maintain and keep all protective safeguards it stated as being in effect at a location as of the inception date operational at all times when the business is closed. If this requirement is not met, coverage is automatically suspended at that location from the time the alarm is inoperative until the time it is back in operation.

Note: The suspension is a total suspension, so even if the reason for the alarm is theft prevention and the loss is due to wind, there is no coverage for the wind loss because the coverage had been suspended.

Example: Feldman’s states on its application that an all perimeter central station alarm is in place and operational. The policy is priced and issued based on that understanding. The owner needs to cut costs and decides to eliminate the central station monitoring even though the alarms are kept in place. The owner does not notify his agent or the insurance company of this change. When a windstorm occurs, the adjuster discovers that the alarm is no longer monitored and denies the claim.

F. Optional Coverage–Replacement Cost

Note: A note should be added to this optional coverage that states that it applies only if there is an entry on the declarations for it.

1. Replacement cost replaces Actual Cash Value in the Valuation General Condition in the Commercial Inland Marine Conditions. It does not have a deduction for depreciation.

Note: This wording is incorrect. It should replace the Valuation Condition in this coverage form.

2. Replacement cost valuation does not apply to personal property of others, contents in a residence, manuscripts, or stock. It also does not apply to works of art, antiques or rare articles, etchings, pictures, statuary, marbles, bronzes, porcelains, and bric-a-brac. There is one exception. If the option to insure stock on a replacement cost basis on the declarations is selected, stock is also covered on a replacement cost basis.

3. The named insured can first make a claim on an actual cash value basis and then make a claim based on replacement cost at a later date. The named insured has up to 180 days following the loss to notify the insurance company of its intent to use the replacement cost option.

4. The insurance company does not pay for any loss or damage on a replacement cost basis until the property that sustained loss or damage is actually repaired or replaced. This is the reason for item 3. above. The rebuilding and/or replacing must be completed as soon as reasonably possible after the date of the loss or damage.

5. The insurance company does not pay more than the least of the following for loss or damage on a replacement cost basis:

The building may be rebuilt at a different location. In that case, the insurance company will pay is will pay no more than the cost that would have been incurred if the building were rebuilt at the location where the loss occurred.

6. The costs to repair or replace do not include any increased costs as a result of enforcing or complying with any ordinance or law that regulates the construction, use, or repair of any property.

G. Definitions

There are four definitions.

1. Fungi

These are any type or form of fungus. Fungi include mold, mildew, mycotoxins, spores, scents, or any by-product that fungi produce or release.

2. Pollutants

These are any solid, liquid, gaseous, or thermal irritants or contaminants. Pollutants also include smoke, vapor, soot, fumes, acids, alkalis, chemicals, or waste. Waste is any material intended to be recycled, reconditioned, or reclaimed.

3. Stock

Merchandise that is held in storage or for sale, raw materials, goods that are in the process of being manufactured, and finished goods. Supplies used to pack and ship the stock are also considered stock.

4. Water Damage

This means the following:

a. Flood, surface water, waves, tides, tidal water, tidal waves, tsunamis, overflow of any body of water (including spray from any of these), all whether wind-driven or not. It also includes storm surge.

b. Mudslide or mudflow

c. Water that backs-up, overflows, or in any way discharges from a sewer, drain, sump, sump pump, or any related equipment

d. Water below the ground’s surface that exerts pressure on or flows or seeps through foundations, walls, floors, paved surfaces, paved or unpaved basements, doors, windows, and other openings

e. Waterborne material that any of the above moves or carry in any way

ENDORSEMENTS

ISO has developed one specific endorsement for exclusive use with the Difference In Conditions Coverage Form.

IH 80 01–Exclusion of Property in Transit

The insured may have a separate motor truck cargo or transit coverage form or policy to cover loss or damage to property in transit. In that case, this endorsement is used to exclude property in transit from coverage under the Difference in Conditions Coverage Form.

ISO has developed five other endorsements that can be used to respond to specific situations.

IH 99 06–Schedule

Additional items can be listed on this schedule when they do not fit on the Declarations.

IH 99 08–Value Reporting Form

This endorsement converts coverage from a non-reporting to a reporting basis. Reports of value can be provided on a daily, weekly, monthly, quarterly, or policy year basis.

IH 99 14–Mortgageholders

This endorsement is used to outline the mortgagee’s rights and duties when the covered property is subject to a mortgage.

IH 99 19–Additional Covered Property

This endorsement is used to include coverage for types of property ordinarily excluded.

IH 99 20–Additional Property Not Covered

This endorsement is used to exclude certain types of property the coverage form insures.

IH 99 21–Ordinance or Law Coverage

This endorsement adds coverages that respond to losses as a result of enforcing ordinances or laws that regulate demolition and/or restoration of a building or structure after direct physical loss or damage to another part of the building or structure. It includes three separate coverages.

IH 99 22–Loss Payable

Loss payees who have insurable interests in covered property are listed on this endorsement along with the property in which they have that interest.

Note: No commitment is made to notify them of any cancellation.

IH 99 23–Theft from Unattended Vehicle Exclusion

This restrictive endorsement eliminates theft coverage from unattended vehicles. The only exception to this is if the vehicle is locked, compartments closed and windows up AND there is evidence that a forcible entry had occurred.

IH 99 27–Increased Cost of Loss and Related Expenses for Green Upgrades

When a property is being built to green certifications, this endorsement should be attached to provide the needed green upgrades. This is particularly needed if the certification had been received prior to the loss and must be recertified.

IH 99 28–Business Income and Extra Expense Coverage

When business income and/or extra expense coverage is needed, this coverage endorsement can be added.

UNDERWRITING CONSIDERATIONS

Underwriting Difference in Conditions coverage involves a number of distinct types of exposures:

Primary exposures

The DIC provides drop down coverage for differences in conditions (coverages) between the primary policy (or policies) and the DIC. According to the Nationwide Inland Marine Definition, the DIC must not cover fire or explosion. As a result, underwriting those coverages and exposures is confined to the primary policy. Because most DIC policies are written over policies subject to Special Causes of Loss, only a few coverages must usually be considered with respect to the drop down feature.

One essential element of underwriting is analyzing all underlying coverage forms and endorsements. If standard ISO coverage forms are used, the review should be fairly simple and straightforward. If manuscript coverage forms or unusual endorsements are involved, a much more careful and thorough review is needed. Rating and premium calculations for the DIC do not contemplate any part of it dropping down and being primary on a cause of loss or peril that the primary or other excess underlying policy should cover.

Earthquake exposures

The DIC usually covers earthquake on a primary basis. The three key factors in underwriting earthquake coverage are the location(s) involved, soil conditions, and building construction.

Some areas in the United States are more susceptible to earthquake activity than others. The San Andreas fault-line is a significant factor for this coverage in much of California and Alaska, with parts of Oregon, Washington, and Nevada also being affected. The New Madrid fault line epicenter is located just south of St. Louis, Missouri, and this fault affects parts of that state, as well as Tennessee, Kentucky, Arkansas, Mississippi, Illinois, Indiana, and Ohio. Some tremors have occurred in the Northeast part of the country, but that activity is comparatively minor and is not usually a matter of great concern.

Soil conditions affect a building’s stability or instability during an earthquake. Solid ground offers a better chance for a building to survive an earthquake. Landfill situations (such as the San Francisco area) are poor foundations for buildings during an earthquake. Sandy soil or loam with underlying limestone or similar rock strata shift and collapse when an earthquake occurs.

The type of construction is also a major consideration. Mixed construction does not hold together well during an earthquake and usually fails. The way these buildings move during an earthquake causes stress fractures that can sever and separate buildings with mixed construction. This factor causes masonry veneer and brick chimneys to separate from frame buildings. Frame buildings are the most flexible type of construction and tend to fare better than most other common types of construction. Masonry construction is usually very rigid, and this resistance factor causes cracks and other construction failures during an earthquake. The best construction uses earthquake resistive technologies that provide sway and movement flexibility to hold up better to strong earthquakes.

Deductibles are used as an underwriting tool for this coverage. More earthquake prone areas may require a deductible of 10% or more of the property limit, while less susceptible areas may be written with a flat deductible or a lower percentage deductible.

Theft

This cause of loss must be considered to the extent that the underlying policies cover or do not cover the exposure. If the underlying policy does not provide coverage, and depending on the nature of the property and the values, the premises should be equipped with a suitable premises burglary system connected to a central station alarm facility. Small, high-valued items should always be kept inside locked cabinets, cases, safes, or vaults. Access to the premises should be limited after working hours through a single entry point with a posted guard and sign-in and sign-out logs and procedures.

Water Damage/Flood

The National Flood Insurance Program (NFIP) is ordinarily used as the primary coverage for buildings located in flood-prone areas as determined by the Army Corps of Engineers. DIC coverage is customarily used as excess coverage over the NFIP and not as primary coverage. Significant flood issues include proximity to oceans, lakes, streams, creeks, rivers, and other bodies of water. Flash flooding after a heavy rain in usually dry rivers or streambeds can be an area of concern. The flood history of an area enters into any decision to write or refuse to write flood coverage in that area. When the DIC is intended to cover some flood exposure, it should cover all locations, not just the ones with an actual flood exposure.

Basements and sub-basement areas are more prone to flood damage, and distribution of values at the property location is important in any loss evaluation. Property sensitive to water should be kept above grade level. If basement storage is required, the goods should be stored on racks or at some level above the floor, and the basements should be equipped with a water detection system.

Deductibles are used as an underwriting tool for this coverage. The more difficult and susceptible areas frequently require a deductible of 10% or more of the property limit, while less susceptible areas may be written with a flat deductible or a lower percentage deductible.

Property in Transit

The DIC covers property in transit, but coverage can be excluded by endorsement. If coverage applies, the type of property and the extent of the named insured's exposure to transit losses must be evaluated. If other transit coverage is provided, its limits, coverages, and terms must also be reviewed. The premium charged must be determined after reviewing these and other factors involved with the transit exposure.

Extra Expense

The DIC does not cover any indirect loss. If the policy is endorsed to add business income and extra expense coverage, the details of any other consequential loss coverage provided must be evaluated. Any property that might be difficult or impossible to replace in case of loss or damage must be identified. The number and type of alternate facilities available to the named insured and the amount of time needed to establish operations must be determined to minimize the duration of any indirect loss. The premium charged must be based on analyzing these and other underwriting factors.

Excess coverage

When the DIC is used as an excess coverage policy, the most important part of underwriting is a clear understanding of the coverages, restrictions, and conditions of all underlying policies. Any gaps between the underlying coverage and the excess could cause unplanned and undesirable drop down situations. All underlying policies should be written by financially stable companies able to respond to any loss that could occur. Most insurance companies that write this coverage usually agree to write excess over insurance companies with a certain minimum financial rating by the A.M. Best Company or another financial rating organization. This financial rating requirement also holds true for any company they participate with on an excess basis.