ISO PROCESSORS COVERAGE FORM ANALYSIS

The Insurance Services Office (ISO) Processors Coverage Form is not a bailee processors coverage form. Instead, it insures the named insured’s property while it is at or in transit to or from a processor. Property of others in the named insured’s care, custody, and control is covered on the same basis. There is no limitation as to the type of property this coverage form insures, but it is especially useful to certain industries that often use offsite processors as part of their manufacturing strategy. The valuation is very important because claims are settled based on both the unfinished property’s value at the time of loss and the value of labor, materials, and services the processor furnished, if the named insured is responsible for paying them.

POLICY CONSTRUCTION

Processors Coverage requires at least the following six forms:

IL DS 00–Common Policy Declarations
IL 00 17–Common Policy Conditions

CM DS 02–Commercial Inland Marine Declarations
CM 00 01–Commercial Inland Marine Conditions

IH DS 93–Processors Declarations
IH 00 93–Processors Coverage Form

IH DS 93–PROCESSORS DECLARATIONS

The advisory Processors Declarations does not have spaces for the named insured, its mailing address, other named insured information, the policy period, or the description of the insured business. That information is on the Common Policy Declarations. IH DS 93 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.

Processors

This section has spaces to enter the names and addresses of all processors where covered property is or may be located.

Note: The coverage form does NOT state that coverage applies only to the processors listed on the declarations, but limits are assigned by the processor. This means limits are available only for listed processors. The unnamed processor limit will apply to any processor not listed.

Description of Covered Property

This section has spaces to list or describe covered property. It includes the words "consisting principally of" so coverage is not necessarily denied if a certain type of property is not specifically listed or described.

Limits of Insurance

This section has spaces to enter the following limits of insurance:

In Processor's Care, Custody, or Control

Limits are required for each processor listed above.

Property at Unnamed Processors
Property in Transit
All Covered Property in Any One Occurrence

This is a catastrophic limit that caps all of the limits entered above. It is important to review and update this limit whenever changes are made within the above limits.

Delete the Processing or Work Upon the Property Exclusion

The Processing or Work upon the Property exclusion is deleted if the box in this section is checked.

Coinsurance

This section has a space to enter the coinsurance percentage that triggers the coinsurance additional condition if coinsurance applies.

Deductible

This section has a space to enter the deductible that applies.

Rates and Premiums

This section has spaces to enter the Rate per $100 and the Premium.

Special Provisions

Any special provisions are entered in the space provided.

IH 00 93–PROCESSORS 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 broader 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

a. The named insured’s owned property is covered property. Property that belongs to others is also covered property but only when the named insured is legally liable for that property. This property is limited to only the property described on the declarations.

b. Coverage is limited to when the covered property is in the care, custody or control of the processor or is in transit to or from that processor.

Example: Golf Days manufactures a variety of golf clubs that it sells through a network of national sporting goods stores. Golf Days does everything but the chrome plating. It sends the clubs to Peerless Plating to perform the electrostatic plating process. Golf Days insures the clubs while at Peerless’ premises for the plating work and in transit between the Peerless location and its own under the Processors Coverage Form.

2. Property Not Covered

The following described property is not covered:

a. Accounts, bills, currency, deeds, evidence of debt, money, notes, or securities

Note: This property is a mix of property that should be covered under commercial crime, accounts receivable, and valuable papers coverage forms.

ISO Accounts Receivable Coverage Form Analysis

ISO Valuable Papers Coverage Form Analysis

ISO Commercial Crime Coverage Forms and Policies Analysis

b. Property that is at or in transit to or from a processor that is owned, leased, or operated by the named insured

Example: Let's stay with Golf Days, but this time Golf Days owns Peerless Plating. The Processors Coverage Form does not apply because the named insured owns the plating operation. Golf Days should cover this property under its commercial property policy.

c. Property that is shipped by mail

d. Contraband. Any property that is illegal for the named insured to own or in illegal trade or transportation is not covered.

3. Covered Causes of Loss

Covered causes of loss are direct physical loss or damage to covered property with the exception of causes of loss listed in the exclusions section.

4. Additional Coverages

Some of the following additional coverages are also additional amounts 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:

The amount that is paid for direct physical loss or damage to covered property
The deductible that applies to such direct physical loss or damage

Payments under this Additional Coverage do not increase the limit of insurance that applies. However, the insurance company pays an additional $5,000 per occurrence when the direct physical loss or damage combined with the debris removal expense exceeds the limit of insurance or when the debris removal expense is more than the amount payable under the above described 25% limitation.

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. Preservation of Property

Covered property may need to be moved to keep it from being damaged by a covered cause of loss. When the named insured takes such action, the insurance company pays for any direct loss or damage that 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 potential loss or damage from which the property is being protected must be a covered cause of loss.

Covered property is covered for ANY cause of loss while it is being moved to and from (and while at) the "safe" location.

The property removed must be moved back within 30 days from the date of the move.

c. 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 process of extracting pollutants from either land or water.

This limit is an additional amount of insurance.

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 that 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. There is one exception. Loss or damage that is caused when the governmental entity orders property to be destroyed is covered if used as a method to prevent a fire from spreading is covered. However, this exception applies only if the fire being contained would have been a covered fire under this coverage form.

b. Nuclear Hazard

Nuclear reaction, radiation, or radioactive contamination is not covered. There is an exception. If a fire results from the nuclear reaction, radiation or radioactive contamination there is coverage for the direct loss or damage caused by that fire.

c. War and Military Action

This exclusion lists three specific warlike activities.

War. This can be a declared war, an undeclared war, or a civil war.
Military force of a warlike nature. These activities must utilize military personnel or agents of a government or other type of authority. Actions taken to prevent any of these activities are also considered war.
Insurrection, rebellion, revolution, and attempts to usurp power. Any action a government takes to respond to such actions is also considered 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 resulting from any of these events.

a. Improper packing, stowage, or rough handling

Damage or loss due to insufficient, improper, or defective packing, storage, and stowage is not covered. Any loss that is due to rough handling is also not covered.

Note: This could be considered a type of intentional acts exclusion. The named insured’s employees decide how to handle or stow property or help pack it in many cases. The named insured controls these situations. As a result, losses caused when any of these activities is done improperly would mean paying for a cost of doing business.

Example: Golf Days had a change in its warehouse manager, who was on a bit of an expense reduction kick. She decided that one area to cut back was in the packaging of goods sent to the processors. The processors called her to let her know that, due to poor packaging, the golf clubs had been damaged. Did she want them to proceed with plating or return them for salvage? When the loss was reported, the claim was denied because of this exclusion.

b. Theft from an unattended vehicle

When the loss is due to theft from an unattended vehicle, there is no coverage. There are two exceptions.

If the vehicle's doors, windows, and compartments were closed and locked at the time of the theft AND there are visible signs of forced entry, coverage does apply.
If covered property is in a carrier for hire’s care, custody, or control.

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. Unexplained disappearance

When covered property is gone and there is no obvious cause or explanation of what happened to it.

e. Shortage found upon taking inventory

Any loss discovered as a result of an inventory shortage and there is no explanation as to what happened to the property, similar to unexplained disappearance. This is sometimes referred to as "inventory shrinkage."

f. Dishonest or criminal acts (12 13 changes)

These are any dishonest or criminal acts that 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.

This exclusion does not apply to acts of destruction by the named insured’s employees, temporary employees, leased workers, or authorized representatives. However, there is no coverage for theft by the named insured’s employees, temporary employees, leased workers, or authorized representatives.

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.

g. Processing or work upon the property

Loss or damage that is caused when covered property is being processed or worked upon is not covered. This applies regardless of who is doing the processing. There is one exception. If a fire or explosion results from such work or processing of covered property, any damage to covered property caused by that fire and explosion, is covered but only if the fire or explosion is otherwise covered under this form.

Note: This exclusion can be eliminated by selecting the box on the Declarations to do so.

h. Pollution

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

A specified cause of loss causes the event
When a pollutant event results in a specified peril, the resulting loss from that specified cause of loss to covered property is covered.

Note: Refer to the definition of Specified Causes of Loss in F. Definitions for a list of the covered causes of loss that apply to the exception for this exclusion.

i. 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:

Networks, devices, systems, wires, or appliances of an electrical or electronic nature
Cellular or satellite devices, appliances, systems, or networks

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

If the energy described in this exclusion results in a fire or explosion, coverage applies to the direct loss or damage that fire or explosion causes, but only if the fire or exploration are considered covered causes of loss under this coverage form.
The exclusion applies only to the particular item in which the disturbance occurs

j. Voluntary parting

The named insured or anyone else entrusted with the property being tricked or deceived into giving that property away.

Example: Mason arrived at Plating Processors and requested the golf clubs Golf Days had sent over earlier in the month. He explained that the new warehouse manager had mixed up the invoices and really needed those clubs immediately, which is why he came over rather than waiting for standard transport. The clubs were ready so they were loaded into Mason’s truck. Unfortunately, Mason did not work for Golf Days and was never seen again. This loss is not covered because Plating Processors had been entrusted with the goods and voluntarily turned them over to Mason.

k. Unauthorized instructions

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

l. Neglect

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

m. Theft (12 13 addition)

Theft by any person the named insured entrusts covered property to for any reason, whether they act alone or in collusion with any other party. This exclusion applies 24 hours a day/7 days a week. There is one exception. Covered property in a carrier for hire’s care, custody, or control is not subject to this exclusion.

3. Other Exclusions

This group of exclusions applies to loss or damage caused by or that result 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. Wear and tear, depreciation

This is loss or damage due to wear, tear, and depreciation.

Notes:

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

Depreciation is a loss of value due to wear.

b. Any quality in the property

These are any qualities in the property that cause it to destroy or damage itself.

Note: An example is loss or damage caused by hidden or latent defects in the property.

c. Breakdown of covered property

This is loss or damage caused when the property being processed breaks down.

Note: There are no exceptions. This means that the breakdown could be because the property could not withstand the processing or because the property was old and was too brittle.

d. Malfunction or failure of covered property to operate

This means that covered property does not perform or function as intended.

Note: There are many reasons this could happen. There is no coverage for any of them unless they result directly from a covered cause of loss.

e. Insects, vermin, or rodents

This is loss or damage to covered property caused by or that results from insects, vermin, or rodents.

Note: Some examples are damage from mice, rats, cockroaches, squirrels, beavers, spiders, ants, centipedes, and ticks. Each is characterized by destructive habits that cause damage, such as gnawing and nibbling.

f. Corrosion, rust, dampness, or extremes of temperature

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

Notes:

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

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

C. Limits of Insurance

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

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 applicable limit of insurance.

E. Additional Conditions

1. Valuation

This condition is added to the Valuation General Condition in the Commercial Inland Marine Conditions.

When a loss occurs before the property has been finished, the value of property includes the value of the labor, materials, or services the processor furnished. There are two exceptions.

It applies only if the named insured had already paid the processor for that labor, materials, or services.
The value of the property is never more than the cost to replace it.

Example: A fire sweeps through Peerless Plating while a batch of clubs goes through the plating process. The fire did not damage them, but they became brittle and useless because they were in the bath too long. Peerless had insisted on 50% payment upfront for the value of its labor, materials, or services. The clubs are now worthless. Golf Days is paid the value of the raw materials and labor it had invested in the clubs up to this point of the process, plus the 50% upfront payment Golf Days had made to Peerless Plating. However, the total value cannot be more than the actual replacement cost of the clubs.

2. Other Conditions

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

a. Coverage Territory

The coverage territory is the United States of America, its territories and possessions, Puerto Rico and Canada. This includes property that is shipped by air within and between these points.

b. Coinsurance

This condition applies if there is a coinsurance percentage on the declarations.

The insurance company does not pay the full amount of any loss or damage if the value of the covered property at the time of loss or damage multiplied by the coinsurance percentage is more than the limit of insurance for all covered property at that location. In such cases, the amount the company pays is determined as follows:

Step 1. Multiply the value of the covered property at the time and location of the loss or damage by the coinsurance percentage on the declarations.

Step 2. Divide the limit of insurance for the covered property at the location where the loss or damage occurred by Step 1.

Step 3. Multiply the total amount of loss or damage at the loss location by Step 2. before applying the deductible (if any).

Step 4. Subtract the amount of deductible from Step 3.

The insurance company pays the lesser of Step 4. or the limit of insurance. Any amount that remains must be paid by other insurance, or the named insured must pay it from its own funds.

F. Definitions

There are three definitions.

1. 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.

2. Specified causes of loss

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

Sinkhole collapse is the earth’s surface suddenly settling or collapsing into an underground opening created by water acting on limestone or some other rock formation. It does not include either the cost to fill sinkholes or the land that collapses or sinks into the voids.
Falling objects does not include loss to personal property that is stored in the open. It also covers damage to the interior of buildings or personal property that is stored in buildings by a falling object only if a falling object first breaches the building's exterior.

3. Water damage

Water damage occurs when part of a system of appliance holding water or steam cracks or breaks resulting in an accidental discharge or leakage of water or steam.

ENDORSEMENTS

ISO has not developed any specific endorsements for exclusive use with the Processors Coverage Form. None of the other ISO non-filed inland marine endorsements is used with this coverage form.

UNDERWRITING CONSIDERATIONS

Underwriting processors coverage involves evaluating the physical features and characteristics of the locations where the property is located and the measures taken to care for and protect it.

Manufacturing processes that involve heat and water subject the covered property to loss or damage by fire, heat, or water. Property not being processed or worked on should be kept in specific storage areas away from operations to reduce the chance of loss or damage to it. The property should be in a well-ventilated area, away from combustible fumes and vapors, and kept clean. Property susceptible to temperature extremes may need temperature-controlled storage. Property to be processed or worked on that is susceptible to water damage should be stored on shelves or above floor level and away from water sources and areas of leakage.

Burglary and theft are important considerations with some types of property to be processed or worked on. As a result, the protection provided should be based on their desirability with respect to these causes of loss.

Some of the important underwriting questions involve the actual property being processed or worked on. The type of property must be clearly identified, and its insurance value established. The amount of time needed to replace it must also be determined. This property may be made of almost any material, and the susceptibility of these materials to damage must be determined. Property being processed or worked on is used in many different applications and requires different degrees of precision. If property or a certain part requires extremely fine machining or tolerances, it may not be repairable to the extent needed to meet those requirements. In that case, it becomes a functional total loss. In addition, if a foreign manufacturer or a now-defunct business made the property being processed or worked on, the time needed and the cost to repair or replace it could increase dramatically, and this time factor must also be considered.

The contract between the manufacturer or the owner of the property being processed or worked on and the subcontractor or job shop doing the work should clearly establish each party’s responsibilities for it. It should also specify the party responsible for insuring it and the degree or amount of damage it must sustain before it must be repaired or replaced.

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 have this coverage need reviewed and establish an appropriate insurance solution.