AAIS Installment Sales Coverage

AAIS INSTALLMENT SALES COVERAGE ANALYSIS

(February 2024)

 

Introduction

Eligibility

Policy Construction

IM 7308–Schedule of Coverages–Installment Sales Coverage

IM 7303–Installment Sales Coverage 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

Underwriting Considerations

INTRODUCTION

The American Association of Insurance Services (AAIS) Installment Sales Coverage is designed primarily for individuals or businesses selling merchandise to purchasers on an installment sales plan or offering merchandise to customers for trial periods. The common denominator in any installment type plan is that both parties retain a financial interest in the merchandise until the day it is paid for in full. Both parties will want coverage on the merchandise in case it is lost, damaged, or destroyed.

The IM 7303–Installment Sales Coverage is written on a single interest basis coverage and only the named insured seller's financial interest in the merchandise. The purchaser should protect its interest with the appropriate property coverage form.

This coverage form insures all property the named insured sells on an installment sales plan if its accounting records show its variable financial interest in the property, and if the property or merchandise involved is not otherwise excluded or limited. It covers all such transactions as of their inception dates, whether the transactions are already in force or new. Coverage continues until the final payment on the merchandise is made, or the policy expires.

ELIGIBILITY

Any individual, business, or commercial enterprise that sells merchandise on a conditional or installment sales plan and retains a financial interest in the merchandise until the final payment is made is eligible.

POLICY CONSTRUCTION

AAIS Installment Sales Coverage requires at least these four forms:

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

IM 7308–SCHEDULE OF COVERAGES–INSTALLMENT SALES COVERAGE
(01 12 changes)

This Schedule of Coverages is used with IM 7303–Installment Sales Coverage. IM 7308 contains the following information:

Policy Number (01 12 addition)

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

Covered Property

A description of the covered property is entered in the space provided.

Limits

This is the most paid in a single occurrence for loss to covered property.

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

Coverage Extensions

The limit for this coverage on the Schedule of Coverages 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

The Deductible Amount for all covered perils must be entered in the space provided.

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 7303–INSTALLMENT SALES COVERAGE 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 in return for the named insured agreeing 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 its definition is how all parties have a clearer understanding of the intended coverage. Eleven terms are defined:

1. You and your

These are the parties named on the declarations as the insured.

2. We, us, and our

This is the insurance company that provides the coverage.

3. Earth movement

This is earthquake, landslide, mudflow, mudslide, mine subsidence, sinking, rising, or shifting of the earth. It also includes vibration or the earth moving in any other way. It does not include sinkhole collapse.

4. Flood

Flood is more than just flood. It is also surface water, waves, tidal water, or overflow of bodies of water. Spray resulting from these is also considered flood even when wind drives the spray.

5. Limit

The amount of coverage that applies to the insured property.

6. 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.

7. Schedule of coverages

Any page labeled as such that contains coverage information, including declarations or supplemental declarations.

8. Sinkhole collapse

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

9. 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 does not include loss to personal property stored in the open. Damage to the interior of buildings or personal property stored in buildings by a falling object applies only if that falling object first breaches the building's exterior.

Water damage starts with the cracking or breaking of a part of the system or appliance holding the steam or water, and then the sudden or accidental discharge or leakage of water or steam occurs.

10. Terms

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

11. Volcanic action

Airborne volcanic blast or shock waves, ash, dust, and particulate matter but not the cost to remove dust, ash, or particulate matter when it did not directly damage covered property. Lava flow is also volcanic action.

Property Covered

Coverage applies to the property described below, subject to any exclusions or limitations.

1. Coverage

Coverage applies to direct physical loss from a covered peril to property that the named insured sold to a purchaser. Only such property that is an installment sales plan is covered. There are two different types of installment sales plan. One is a conditional sale or trust agreement, and the other is any type of a deferred payment plan.

Example: Adventure Appliances and Electronics sells small and large household appliances and home electronics.

Scenario 1: Bonjour Condominiums is interested in buying all its appliances from Adventure Appliances. Before the developer makes the purchase, she asks that Adventure provide all of the appliances for the model unit as an enticement for condominium purchasers. These appliances are covered under Adventure’s installment sales floater because they are part of a conditional sale.

Scenario 2: Mike and Sally purchase a refrigerator from Adventure and finance it through Adventure’s finance department. The refrigerator is covered under Adventure’s installment sales floater until Mike and Sally make their final payment.

2. Coverage Limitation

Coverage applies only to the type of property on the schedule of coverages sold under an installment sales plan. This property is covered only while in transit to the purchaser and at the purchaser's premises. The named insured's interest in the property is the only interest covered. Its interest is the amount the purchaser still owes on the loan as of the date of loss.

Example: Mike and Sally’s home sustained major fire damage, and the refrigerator was destroyed. Mike and Sally had made their final payment a few days before the fire, so the installment sales floater pays nothing because Adventure Appliances no longer had an interest in the refrigerator.

Property Not Covered

Six specific types of property are not covered:

1. Aircraft or Watercraft

Aircraft and watercraft coverage forms and policies should be used to cover these items.

2. Buildings and Land

An installment sales floater covers only personal property.

3. Contraband

Property that is illegal to possess or legal but in the course of illegal transportation is not covered.

 

Example: Mike and Sally bought multiple refrigerators in Wyoming and had them shipped to California to sell, at a profit, to friends who did not want to pay the higher prices for appliances that met California’s stricter rules. This trade is illegal, so any loss to the refrigerators would not be covered.

4. Money and Securities

Accounts, bills, currency, food stamps, evidence of debt, and lottery tickets not held for sale are not covered in addition to money, notes, or securities.

Note: This property is more correctly insured under commercial crime coverage forms.

Related Article: Commercial Crime Coverage Analysis

5. Vehicles

Automobiles or self-propelled vehicles that are built to be used on public highways are not covered.

Note: This property is more correctly insured under commercial automobile coverage forms. Single-interest or dual interest endorsements may be utilized to protect the interest of the financing entity.

Related Article: CA 00 01–Business Auto Coverage Form Analysis

6. Waterborne Property

There is no coverage except when the property is in transit while in a carrier for hire's care, custody, or control.

 

Example: Pat bought an ATV from Fun at the Farm and financed it for 12 months. Pat lived over the bay from Fun at the Farm. He owned a pontoon boat and could load the ATV on the boat for the trip home. Unfortunately, an unidentified boat crashed into Pat’s boat and fled the scene. The boat and the ATV were destroyed. Fun at the Farm is not covered for the loss of the ATV.

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. When a covered peril damages or destroys covered property, the cost to remove any created debris is covered under this extension.

b. Debris removal does not include any costs for removing, restoring, or replacing polluted land or water, or to extract 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, and its default limit can be increased by entering a higher limit on the schedule of coverages. Its limits are separate from the applicable limit for the covered property, not part of it.

The limit available for coverage described under a supplemental coverage is the only one available. It is not the total of the limit for a supplemental coverage and the limit for the covered property. The limits are not added to or combined with limits for any other supplemental coverage or coverage extension. They are also not subject to 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 only paid 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 at that location 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 a 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.

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 a civil authority destroying property as a means of controlling a fire causes the loss or damage. This exception only applies if the fire results from a covered peril.

b. Earth Movement or Volcanic Eruption

Earth movement is not covered except for the following four exceptions:

c. Flood

The insurance company does not pay for loss or damage caused by flood. There are two exceptions:

d. 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.

e. Sewer Backup and Water below the Surface

Coverage does not apply to loss or damage caused by water that backs up from a sewer or drain. It also does not apply when water below the surface of the ground exerts pressure on covered buildings or structures and causes damage.

There are two exceptions:

 f. 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. However, this exclusion is not limited to only these described causes.

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

A loss that is caused by electrical arcing or currents is excluded. There are exceptions:

d. Loss of Use

There is no coverage for loss resulting from delay, loss of use, or loss of market.

e. Mechanical Breakdown

Mechanical, structural, or electrical breakdown or malfunction caused loss is excluded. This applies even if the loss or damage is caused by a breakdown resulting from a structural, mechanical, or reconditioning process.

f. Missing Property

The unexplained or mysterious disappearance of covered property is excluded. This exclusion applies when there is no physical evidence that something happened to the property. It applies when the only proof that a loss occurred is a property shortage based on an audit or physical inventory. The one exception is for 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. Temperature/Humidity

Coverage does not apply to loss or damage that dryness, dampness, humidity, changes in, or extremes of temperature causes. However, if a covered peril occurs because of any of these, coverage applies to the loss or damage that covered peril causes.

i. Theft from an Unattended Vehicle

Coverage does not apply to theft of covered property from an unattended vehicle unless the vehicle was locked, its windows securely closed, and visible evidence of forced entry into the vehicle. This exclusion does not apply to covered property in the custody of carriers for hire.

j. Voluntary Parting

There is no coverage for loss or damage to covered property when voluntarily given to others, even if the surrender was due to a fraudulent scheme, trick, or false pretense.

k. Wear and Tear

Loss or damage caused by wear, tear, marring, or scratching is excluded. There is no exception.

Note: This is particularly relevant for this coverage because it is in the custody of a third party over whom the named insured has no control.

What Must Be Done In Case Of Loss

1. Notice

The named insured must promptly notify the insurance company or its agent of a loss. 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 be given in writing.

Note: The named insured does not control the covered property. The first notice the named insured will have is when the purchaser notified it of the loss or refuses to make any further payments because of the loss. Once the named insured becomes aware of the loss it is expected to provide prompt notice.

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 to do so, but 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: This could be difficult for the named insured to satisfy because it does not have control of the property at the time of the loss. The purchaser is not a party to this insurance, so is not obligated to satisfy this condition. The named insured also cannot be expected to honor this condition at the time of loss because its notification of a loss may not come until a finance payment is not paid. However, once the named insured is aware, it is expected to take appropriate action.

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 concerning 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.

Note: The named insured will generally have very limited information regarding the loss. Whatever factual information it does have must be provided. The insurance company may need to develop much of the loss information directly from the purchaser because the named insured will be unable to attest to cause of loss and circumstances around it.

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.

Note: Only the named insured is required to submit to examination. This means that information provided by the purchaser is voluntary. The purchaser refusing to provide a statement will not violate this condition.

5. Records

The named insured is required to produce all records that relate 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.

Note: This could be a problem again because the named insured is not in control of the property at the time of loss. If the named insured has control of the property, it must comply with this condition, but it cannot be penalized when it has no control.

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 is not permitted to demand that the named insured take ownership of the damaged property. The transfer of ownership will take place only when the insurance company consents in writing.

9. Cooperation

The named insured is required to cooperate with the insurance company but only as stated in the covered form. However, this requirement does not extend to the purchaser.

Valuation

1. Installment Sales

o    If the realized value of the item is equal to or greater than the amount that remains due from the purchaser, there is no loss in value, and there is no payment.

o    If the realized value of repossessed property is less than the amount that remains due from the purchaser, the valuation of the loss is the difference between the realized value and the value on the named insured's accounting records.

Example: Hal’s Office Supply sold Vern some filing cabinets and desk/chair sets for his new accounting business valued at $10,000. Vern made a $1,000 down payment and signed a three-year sales contract. Eighteen months later, a hurricane devastated the area, and Vern took that event as a signal to discontinue operations and move inland. Hal repossessed the furniture when Vern stopped paying for it. The value of the furniture was $2,000 because of storm damage and depreciation. Hal's accounting records revealed that he was still owed $4,500. The insurance company paid $2,500 ($4,500-$2,000), and Hal retained the furniture.

2. Pair or Set

The value of a loss that involves damage 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 the 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 to 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. 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.

5. 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 7. 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 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 receiving 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. Either the amount of loss is determined 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 that involve property of others either to the named insured acting on the property owner’s behalf 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 appointed. Both are insureds, but only with respect to the property insured under this coverage form.

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 related 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: It is important to note that this condition applies to the named insured, not the purchaser. The purchaser is not an insurer, so his or her falsehoods related to the cause of loss or any other aspect should not impact coverage for the named insured.

6. Policy Period

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

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.

Note: Many finance agreements will provide mutual waivers of subrogation. If so, these waivers do not hinder the named insured ability to collect.

10. Suit against Us

The insurance company cannot be sued by anyone for any coverage until all the terms of the coverage form have been met. Suits must be brought within two years after the insured first had knowledge of 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 for coverage to apply.

ENDORSEMENTS

No endorsements have been developed specifically for this coverage. However, insurance companies that write this coverage may add their own endorsements that limit or broaden coverage or change terms and conditions.

A common and frequently requested endorsement is the dual interest extension of this coverage. The dual interest form covers the interests of both the named insured seller and the purchaser of the merchandise. Additional premium for this coverage is required because the full value of the merchandise is covered at all times until the final payment is made and the sale is complete. This is usually accomplished by an additional monthly charge from the seller to the purchaser, and the named insured then pays the higher premium.

Another approach that may be taken is to add reporting conditions when there is a large fluctuation in the value of installment sales, as is usual with seasonal merchandise or merchandise with unusual valuation requirements.

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

UNDERWRITING CONSIDERATIONS

This coverage is difficult to underwrite because the named insured has no control over the covered property. Because of this, underwriting must focus on the seller’s ownership and experience, loss experience for this line of business, the general nature of the customers who purchase the merchandise, and the characteristics of the property being sold.

The named insured seller should have successfully engaged in this type of business for at least five years. This ensures that it has likely survived some business cycles and has learned how to manage this unique and potentially difficult operation. It also usually means that the named insured is financially solvent and able to continue to survive as business conditions change over time. Knowing how to manage installment loans in good economic times can be considerably different than when the economy is down and unemployment is high.

Previous loss experience in this line is an excellent source of information to evaluate and use to determine future loss activity. This measure presumes that the ownership and management have been reasonably stable over time, changes in operations minor, and the same general type of merchandise handled throughout the period.

The named insured must have criteria in evaluating its customers’ eligibility to purchase merchandise on an installment payment basis. Established procedures should be in place and used to make this determination. Uniform background evaluations and credit checks should be used. The deposit or down payment amount should be reasonable yet large enough to separate good customers from those who may default. The repossession rate should be reviewed carefully. It is a good predictor of future loss activity because property loses its value during repossession, and losses are more likely to occur when the payments are in arrears or the customer defaults.

The nature of the merchandise sold also affects the underwriting process. Major household appliances and furniture are commonly sold this way, and their loss record as a whole is generally good. However, the record for computers, other electronic devices, and home entertainment systems is less stable. The default and repossession rates for this type of property are higher, the property depreciates or loses value more quickly, and it is more damageable and susceptible to electrical disturbances and other less frequent sources of loss. This type of property is also attractive from a theft standpoint and can be easily transported and disposed of on the black market.

In general, installment sales on certain types of merchandise are essential in today's economy and are a normal way of doing business. Installment sales coverage can be successfully underwritten if the conditions that affect it are recognized and evaluated and needed adjustments or responses to conditions implemented.