Low limits can mean big trouble for insureds
It s fortunate for purchasers of commercial property insurance that policies generally provide some kind of coverage for valuable papers and records. And, while coverage usually is automatic, the limits and conditions under which coverage applies vary considerably by policy.
Today, because valuable papers and records to a great extent are stored and protected online, the hard copy exposure may not be as significant as it once was. It nonetheless is still important.
Complicating matters is the fact that coverage for physical loss or damage to electronic data is treated separately from coverage for hard copy valuable papers and records. This may confuse those who are confronted with both exposures and may not be aware that they need coverage for both.
Another problem is that not all policies that provide coverage for valuable papers and records contain definitions of precisely what is covered. This can wreak havoc when there is a loss and coverage is sought.
One form that defines valuable papers and records is the Businessowners Standard policy BP 0100.06 12 of the American Association of Insurance Services (AAIS). It is defined to mean: [w]ritten, printed, or otherwise inscribed documents and records. This includes books, maps, films, drawings, abstracts, deeds, mortgages, and manuscripts. However, valuable papers and records does not include data records, money, or securities.
The Building and Personal Property Coverage Form CP 00 12 06 07 of the Insurance Services Office does not define that term. This form, however, refers to that term by stating under the section of property not covered that valuable papers and records "include, but are not limited to proprietary information, books of account, deeds, manuscripts, abstracts, drawings and card index systems."
The words in the ISO form "include, but are not limited to" are intended to encompass other kinds of records without being more specific. Whether this approach will work is unknown. Much will depend on the facts of each case.
A question of limits
An ongoing concern with valuable papers and records coverage is insufficient limits. When a loss occurs to valuable papers or records, some insureds are surprised to learn that it is not the business personal property limit that applies, but rather the limit for valuable papers and records.
A case in point is Minnesota O&M Surgery, P.A., et al. v. Charter Oak Fire Insurance Company, 2011 WL 2304164 (Ct. App. MN), where the insureds challenged the court's application of their policies' $25,000 limit applicable to valuable papers and records.
Briefly, the facts are as follows: Two medical professional entities stored photographs, x-rays, and more than 88,000 slides in the home of their principal. The principal was said to have used the slides, which were images of patients and procedures, "all the time" as a "teaching tool" in connection with presentations and lectures.
Each entity was insured under a policy that contained coverage for business personal property and valuable papers and records, the limit for the latter being $25,000.
A fire at the principal's home damaged or destroyed some of the photographs, x-rays, and slides. The cost of cleaning the smoke-damaged slides alone was estimated to be more than $500,000.
After the loss, the insurer advanced a payment of $25,000 to each of the two entities, asserting that the items were "valuable papers and records" and that the coverage limit therefore was $25,000.
Considering the amount of the loss and the limit, the insurer should not have been surprised when the insureds filed an action seeking a declaratory judgment that the photographs, x-rays and slides were covered by their policies and were not subject to the $25,000 limit.
Each policy included coverage for business personal property located in or on the building described in the declarations or in the open (or in a vehicle) within 1,000 feet of the described premises.
Although the principal's home, where the loss occurred, was not one of the buildings described in the declarations, an endorsement was issued that stated: "With respect to medical, surgical and dental equipment and instruments (including tools, materials, supplies and scientific books) owned and used by you in the medical or dental profession . . . this insurance applies while such property is away from the described premises."
The insurer did not dispute that the photographs, x-rays, and slides were covered under the endorsement. Instead, it argued that each policy's $25,000 limit applied. The valuable papers and records coverage was described in the coverage form as meaning "inscribed, printed or written: (1) documents; (2) manuscripts; or (3) records, including abstracts, books, deeds, drawings, films, maps or mortgages . . . ."
Without addressing whether the photographs, x-rays and slides were "inscribed, printed or written," the district court concluded that they were valuable papers and records because they were film and because they fell within the type of material typically covered by a standard valuable papers and records exclusion. As a result, the material was subject to the $25,000 limit.
Another case that involved damage to film and a similar holding that the $25,000 limit for valuable papers and records applied is Quality Printing, Inc. v. Travelers Casualty Insurance Company of America, No. 12-2033- JWL (U.S. Dist. Ct. Dist. KS 2012).
This case involved a print shop whose policy had a limit of $500,000 applicable to its business personal property. Water damage destroyed much of the insured's work product, including customers' files. Each file contained a unique piece of film with the work product specific to that customer.
After the loss, the insured submitted a claim of $292,000 for the destroyed films. The insured asserted that the insurer misclassified the films as valuable papers instead of business personal property. The coverage under this policy was virtually identical to that in the preceding case, including the specific reference to "films" being included in valuable papers and records coverage.
A crucial distinction
As these cases make clear, valuable papers and records are likely to be treated as separate from business personal property and therefore subject to a lower limit. Many property policies treat valuable papers and records as a coverage extension. As a result, insureds are not likely to consider what the limits should be, in contrast to business personal property coverage where the insured is required to designate a limit in the declarations. This means that producers must ensure that the limits for valuable papers and records are adequate to cover the kinds of losses that these cases show can actually happen.
Another point is that the scope of coverage for valuable papers and records is likely to vary by policy. The BPP form of AAIS, for example, applies to special causes of loss, subject to certain itemized limitations.
Among these limitations where no coverage applies are: (1) property that cannot be replaced; (2) property held as samples; and (3) property in the course of illegal transportation. The AAIS form, like the ISO coverage extension, makes clear that valuable papers and records coverage does not apply to electronic data.
The BPP form of ISO, on the other hand, states that if causes of loss-special form applies to the BPP coverage form, coverage under this extension is limited to the "specified causes of loss" defined in that form, plus collapse coverage (which is not a cause of loss). Coverage, in other words, is limited to the equivalent of causes of loss-broad form. If causes of loss-broad form applies, coverage for valuable papers and records also includes coverage for collapse.
It may be difficult for producers to determine whether an insured has an extra-hazardous exposure dealing with valuable papers and records coverage, particularly today when so many businesses are relying on electronic data for the preservation of important documents.
If it can be determined that such an exposure does exist, it would be worthwhile to explain to insureds the importance of higher limits, given the high costs for replacing or restoring records.
Even though some insurers automatically provide higher limits than those available under the BPP coverage of ISO, they should be all be viewed as inadequate if the insured's loss exposure is more than simply incidental. *
Valuable papers and records are likely to be treated as separate from business personal property and therefore subject to a lower limit.
By Donald S. Malecki, CPCU
Donald S. Malecki, CPCU, has spent more than 50 years in the insurance and risk management consulting business. During his career he was a supervising casualty underwriter for a large Eastern insurer, as well as a broker. He currently is a principal of Malecki Deimling Nielander & Associates LLC, an insurance, risk, and management consulting business headquartered in Erlanger, Kentucky.