Covered Perils and Exclusions Under Typical Commercial Property Insurance Causes of Loss Forms: Practice Questions and Solutions

This section of the study guide is intended to provide practice problems and solutions to accompany the pages of Commercial Insurance, cited below. Students are encouraged to read these pages before attempting the problems. This study guide is entirely an independent effort by Mr. Stolyarov and is not affiliated with any organization(s) to whose textbooks it refers, nor does it represent such organization(s).

Some of the questions here ask for short written answers based on the reading. This is meant to give the student practice in answering questions of the format that will appear on Exam 5. Students are encouraged to type their own answers first and then to compare these answers with the solutions given here. Please note that the solutions provided here are not necessarily the only possible ones.

Source:
Arthur L. Flitner, Jerome Trupin, and Martin J. Frappoli. Commercial Insurance. (Second Edition). 2007. Chapter 3, pp. 3.4-3.13.

Original Problems and Solutions from The Actuary's Free Study Guide

Problem S5-125-1.

(a) List eight of the perils that are covered in the "basic" causes of loss form used in commercial property insurance.

(b) List three perils that are covered in the "broad" causes of loss form, but not the "basic" causes of loss form used in commercial property insurance.

Solution S5-125-1. This problem is based on the discussion in Commercial Insurance, p. 3.4.

(a) The following perils are covered in the "basic" causes of loss form:

1. Fire
2. Lightning
3. Explosion
4. Windstorm or hail
5. Smoke
6. Aircraft or vehicles
7. Riot or civil commotion
8. Vandalism
9. Sprinkler leakage
10. Sinkhole collapse
11. Volcanic action
12. Limited coverage for fungus, wet rot, dry rot, and bacteria

Any eight of the above suffice as an answer. Other valid answers may also be possible.

(b) The following perils are covered in the "broad" causes of loss form, but not the "basic" causes of loss form:

1. Falling objects
2. Weight of snow, ice, or sleet
3. Water damage
4. Collapse due to certain perils (an additional coverage)

Any three of the above suffice as an answer. Other valid answers may also be possible.

Problem S5-125-2.

(a) What is the distinction between a "friendly fire" and a "hostile fire", as traditionally used in insurance?

(b) What two categories of events are explicitly excluded from the definition of "explosion" in a typical causes of loss form that covers explosion as a peril?

Solution S5-125-2. This problem is based on the discussion in Commercial Insurance, p. 3.5.

(a) Traditionally (though this distinction is becoming somewhat less clear due to recent court decisions), a "friendly fire" is a fire within its intended location (e.g., a stove or fireplace), whereas a "hostile fire" is a fire that escapes from its intended location.

(b) The following two categories of events are explicitly excluded from the definition of "explosion" in a typical causes of loss form (Commercial Insurance, p. 3.5):

1. Situations where pressure relief devices rupture or burst;
2. Situations where a building ruptures or bursts because its contents swell or expand as a result of water absorption.

Problem S5-125-3.

(a) List six exclusions, found in a typical "basic" causes of loss form, which are subject to anti-concurrent-causation wording.

(b) List four exclusions, found in a typical "basic" causes of loss form, which are not subject to anti-concurrent-causation wording. (These may be known as "other exclusions".)

(c) Two of the exclusions which are valid answers for part (b) are not incorporated into a "broad" causes of loss form. Which two exclusions are these?

Solution S5-125-3. This question is based on the discussion in Commercial Insurance, pp. 3.7-3.11.

(a) The following exclusions, found in a typical "basic" causes of loss form, are subject to anti-concurrent-causation wording:

1. Ordinance or Law
2. Earth Movement
3. Governmental Action
4. Nuclear Hazard
5. Utility Services
6. War and Military Action
7. Water
8. "Fungus," Wet Rot, Dry Rot, and Bacteria

Any six of the above suffice as an answer. Other valid answers may also be possible.

(b) The following exclusions, found in a typical "basic" causes of loss form, are not subject to anti-concurrent-causation wording (Commercial Insurance, p. 3.10):

1. Electric currents that are artificially generated;
2. "Rupture or bursting of water pipes" that is not caused by a covered peril;
3. "Leakage of water or steam" that is not caused by a covered peril and is not from an automatic sprinkler system;
4. Explosion of steam pipes, turbines, engines, and boilers "owned by, leased to, or operated by the insured";
5. Mechanical breakdown;
6. Insured's neglect to save and preserve the property at or after loss using all reasonable means.

Any four of the above suffice as an answer. Other valid answers may also be possible.

(c) The following two exclusions are found in a typical "basic" causes of loss form, but not in a typical "broad" causes of loss form (Commercial Insurance, p. 3.11):

1. "Rupture or bursting of water pipes" that is not caused by a covered peril;
2. "Leakage of water or steam" that is not caused by a covered peril and is not from an automatic sprinkler system.

Problem S5-125-4.

(a) What kinds of situations is the "water damage" coverage in a typical "broad" causes of loss form intended to cover?

(b) List three kinds of losses that would typically be excluded from the definition of "water damage" under a typical "broad" causes of loss form - and would therefore not be covered under that peril.

Solution S5-125-4. This problem is based on the discussion in Commercial Insurance, p. 3.12.

(a) The "water damage" coverage in a typical "broad" causes of loss form is intended to cover losses due to water or steam leakage as a result of situations where appliances or systems that contain water or steam - including plumbing, heating, and air conditioning systems - crack or break apart.

(b) The following losses would typically be excluded from the definition of "water damage" (Commercial Insurance, p. 3.12):

1. Cost of repairing any defect that resulted in the water damage;
2. Damage that occurs gradually - typically over a period of two weeks or longer;
3. Leakage or discharge from an automatic sprinkler system (covered under the sprinkler leakage peril);
4. "Discharge or leakage from a sump, including overflow because of sump pump failure";
5. "Discharge or leakage from roof drains, gutters, downspouts, or similar fixtures or equipment".

Any three of the above suffice as an answer. Other valid answers may also be possible.

Problem S5-125-5.

(a) List four circumstances under which coverage for collapse would be provided under a typical "broad" causes of loss form.

(b) How is "collapse" typically defined under a "broad" causes of loss form?

Solution S5-125-5. This problem is based on the discussion in Commercial Insurance, pp. 3.12-3.13.

(a) Coverage for collapse would be provided under a typical "broad" causes of loss form under any of the following circumstances:

1. The collapse results from a cause of loss that is itself covered under the "broad" form;
2. The collapse results from hidden decay that is not known to the insured prior to the collapse;
3. The collapse results from hidden damage by insects or vermin that is not known to the insured prior to the collapse;
4. The collapse results from the weight of personal property or people;
5. The collapse results from the weight of rain that has collected on a roof;
6. The collapse occurs during the course of construction and is the result of poor construction methods or defective materials.

Any four of the above suffice as an answer. Other valid answers may also be possible.

(b) "Collapse" is typically defined under a "broad" causes of loss form as a falling down or caving in of a building or part of the building which (1) is abrupt and (2) results in the building or building part no longer being usable for its intended purpose (Commercial Insurance, p. 3.13).

See other sections of The Actuary's Free Study Guide for Exam 5.