Does the Standard Fire Policy (SFP)i belong in the dead letter office? The standard fire policy, also know as the 165-line policy because its last iteration contained 165 numbered lines, was a major breakthrough at the beginning of the 20th century. Insurance companies were required by law in almost every state to use the SFP or one that was very similar to it. Prior to that time, each insurance company used its own wording. Because most companies limited their exposure on any one risk, it was common for even small insureds to have two or three policies covering their property; larger firms could have a dozen or more. Adjusting losses involving multiple policies, each with different wording, was a nightmare. Furthermore, some of the policies contained language that was anything but friendly to the insured. The 1918 version was amended in 1943 and it is the 1943 version that’s referred to today as the SFP.

 

The SFP was replaced by the simplified language forms in the mid 80s and many regarded it as ancient history. For example, Barron’s Dictionary of Insurance Terms says “The New York Standard Fire Policy has become largely obsolete since 1980.” ii

 

When the simplified policies were introduced, no one shed any tears for the 165-line wording when it was replaced. It was not easy reading. For example, the first sentence in the requirements-in-case-lossoccurs provision runs over 200 words and the second over 90 words. In addition to simplifying the language, the new wording dropped some clauses that could negate an insured’s protection. The most important improvement, from an insured’s point of view, was the elimination of the increase in hazard provision. In the SFP it read:

 

“…Company shall not be liable for loss occurring while the hazard is increased by any means within the control or knowledge of the insured…” It’s surprising how many otherwise knowledgeable insurance people, whose careers started when the 165-line policy was king, have overlooked or forgotten that this clause does not appear in most current property policies.

 

The increase-in-hazard clause is still found in the ISO Standard Property Policy CP 00 99. That’s the form used by the New York Property Insurance Underwriting Association and most other state FAIR plans. An increase-in-hazard provision is also part of the mortgage holders provision that’s include in most property forms, although not in exactly those words. It provides that, if the insurer denies the insured’s claim because of the insured’s acts or failure to comply with policy conditions: …the mortgage holder will still have the right to receive loss payment if the mortgage holder.  (3) Has notified us of any change in ownership, occupancy or substantial change in risk (emphasis added) known to the mortgage holder.

 

In effect this is an increase-hazard provision applicable to the mortgagee, but it voids coverage only if the mortgagee knows of the change and fails to notify the insurer.

 

The new forms are not an unmitigated blessing. In some cases, losses that would have been covered under the old form are excluded under the new. The insurance departments in a number of states, including New York, saw this possibility. As a result, in 28 states, including NY, NJ, and CT, the insured is entitled to at least as much protection as the SFP would have provided. Table 1 lists the SFP states. The requirement that coverage under current form must at least equal the SFP coverage applies only to perils that the SFP policy covered: fire, lightning, and removal due those perils. All other perils had to be added to the SFP by endorsement and so are not included in the minimum requirements law. However, the coverage that SFP did provide can encompass some large exposures that would otherwise be excluded. Originally this was of interest only to textbook authors, but in recent years this provision has come to the aid of insureds that otherwise would have had no coverage. Some examples follow.

 

Terrorism

Probably the most important protection provided by SFP laws concerns terrorism losses. As we became aware after 9/11, the SFP did not contain a terrorism exclusion; therefore fire losses caused by terrorist action cannot be excluded in policies covering property located in many SFP states. Further, while the SFP specifically excluded explosion, it did cover ensuing fire damage.

 

Recognizing the state laws regarding the SFP, the ISO endorsement excluding terrorism (IL09530108 Exclusion of Certified Acts of Terrorism) contains a box to enter the names of states that require coverage at least equal to the SFP. For property located in a listed state, the following exception applies:

 

If a “certified act of terrorism” results in fire, we will pay for the loss or damage caused by that fire. Such coverage for fire applies only to direct loss or damage by fire to Covered Property. Therefore, for example, the coverage does not apply to insurance provided under Business Income and/or Extra Expense coverage forms or endorsements which apply to those forms, or to the Legal Liability Coverage Form or the Leasehold Interest Coverage Form. Some states that otherwise require coverage equal to the SFP policy, passed laws permitting fire resulting from terrorism to be excluded. Connecticut is one such state; New York and New Jersey do not permit fire resulting from terrorism to be excluded. Table 3 shows the states that permit the exclusion.

 

Innocent Co-Insured or What a Difference a Word Makes

A disgruntled spouse in the midst of an ugly divorce sets fire to the home owned and occupied by the couple. The home is a total loss. Does the couple’s homeowners policy provide coverage? The answer is often no. The concealment or fraud condition in the ISO HO policy reads:

 

We provide coverage to no “insureds” under this policy if, whether before or after a loss, an “insured” has:

 

1. Intentionally concealed or misrepresented any material fact or circumstance;

 

2. Engaged in fraudulent conduct; or

 

3. Made false statements; relating to this insurance.

 

Note that the provision says coverage for no insureds if an insured has engaged in the prohibited acts. In many states the courts have ruled that the innocent coinsured, even if he or she is totally a victim and had no prior knowledge of, or participation in the arson, cannot recover under the policy because both spouses are “insureds.”

 

New York has taken an interesting approach. In a case involving arson by the disturbed resident-son of the insured, the New York Court of Appeals, our highest court, after reviewing cases holding both for and against innocent co-insureds, wrote:

 

The plaintiff (the innocent mother) points out that all fire insurance policies are required by law to provide a certain level of coverage (Insurance Law § 3404 [f] [A]), and that the statutory policy excludes coverage only for acts by “the insured” (Standard Fire Policy, page 2, lines 31 & 32)...While the phrase “an insured” is unambiguous, it is clear…that the language “an insured” offers an innocent party significantly less coverage than the language “the insured”. Since the latter phrase is that adopted by the legislature in the Insurance Law, use of the former violates that statute’s requirement that all fire policies offer the level of coverage provided in the standard policyiii Thus, because the mandated coverage equal to the SFP would exclude only acts of the insured, not those of any insured, the case was decided in the insured’s favor.

 

Inland Marine Coverages

A builders risk policy covering the construction of dormitories at Arizona State University included a warranty endorsement that required the insured to conduct a fire watch “during all welding operations or other hot processes.” The warranty endorsement provided that “failure to comply with this warranty will render this coverage null and void.” The project was destroyed by fire caused by careless welding procedures, there had been no fire watch, and the insurance company denied the claim.

 

Clearly such a denial would not stand up if the policy were required to provide fire coverage equal to the SFP. The twist here is that the policy was written on an inland marine form. A majority of the states that require fire policies to provide at least as much coverage as the SFP, specifically exempt inland marine forms from that requirement. New York, New Jersey, and Connecticut are among the states that exempt Inland Marine. The most prominent state that applies the requirement to Inland Marine is California. Unluckily for the insured in the dormitory fire case, Arizona also exempts Inland Marine. The insured’s attorneys argued that the policy should be classified as fire insurance rather than inland marine, which would give the insured the benefit of the SFP coverage requirement, but the court held that it was properly classified as inland marine and sustained the insurer’s declination.iv Table 3 shows states that apply SFP requirement to IM as well as property insurance.

 

Summary

Although the SFP is thought of as a relic of bygone days, it lives on in states that require coverage at least equal to that provided by the SFP. It can come to your insured’s rescue in surprising ways. New York, New Jersey, and Connecticut are among the states that require coverage at least equal to the SFP, although in Connecticut the requirement does not apply to fire resulting from certified acts of terrorism.

 

UPDATES

Employee Theft Strikes Home Again!

In “Employee Theft Strikes Home” (Insurance Advocate 12/14/09) I wrote about theft by employees at two insurance firms. As if to prove that those were not isolated cases, there have been two more articles in the news since then. An employee at a Georgia insurance agency who stole more than $1,000,000 over a six-year period by, in large part, using company checks to pay for a credit card spending spree.v And a claims manager for Nationwide Insurance in Westchester County embezzled more than $300,000 by issuing loss drafts to fictitious individuals and depositing the checks in his personal account.vi

 

What Will It Cost to Rebuild?

Four times a year, Rough Notes Magazine publishes a “What It Will Cost to Rebuild” chart. The latest one shows a decrease in every one of the three classes of buildings and five construction types that Rough Notes monitorsvii. The reductions percentages range from 2.1% for brick residences to 9.3% for brick and concrete factories and commercial buildings. Many insurers automatically increase the amount of insurance on renewal. This might be a year to question that procedure.

 

 

 

 

 

i The Standard Fire Policy is often referred to as the New York Standard Fire Policy. The first state to adopt laws requiring a standard fire policy was Massachusetts. but the law was declared unconstitutional within a year by that state’s courts. New York stepped into the breach and was the first state to successfully adopt a standard fire policy, doing so in 1886. In 1918 a revised New York policy was enacted into law in New York and it was the one that was specified by law in most other states. For a fascinating history of the creation of the policies see; David Rumsey “The New Standard Fire Insurance Policy of the State of New York http://books.google.com/books?id=s_AdAAAAM AAJ&pg=PA41&lpg=PA41&dq=new+york+standa rd+fire+insurance+policy+history&source=bl&ot s=K9jhlOmTZm&sig=YkKlSImVTJi0p_HimGUIK1g RJDE&hl=en&ei=C7qzS9TNKoO8lQen- 7C5BA&sa=X&oi=book_result&ct=result&resnu m=2&ved=0CA0Q6AEwAQ#v=onepage&q=new %20york%20standard%20fire%20insurance%20p olicy%20history&f=false

ii Dictionary of Insurance Terms Barron’s Educational Series, Inc., Hauppauge, NY http://www.allbusiness.com/glossaries/newyork- standard-fire-policy/4957601-1.html

iii Joretta K. Lane, Appellant, v. Security Mutual Insurance Company, Respondent. 96 N.Y2d 1,747 N.E.2d 1270, 724 N.YS.2d 670 (New York Court of Appeals—February 13, 2001) iv Liberty Ins. Underwriters, Inc. v. The Weitz Company, LLC 215 Ariz. 80, 158 P.3d 209 (Ariz. Ct. App. 2007) v Joy Lukachick “Missing $1 million linked to employee” Chattanooga Times Free Press 1/22/10 http://www.timesfreepress.com/news/2010/jan/ 22/missing-1-million-linked-to-employee/

vi Rebecca Baker “Ex-manager for insurance company indicted on embezzlement charges” March 2, 2010 Journal-News http://www.lohud.com/apps/pbcs.dll/article?AI D=/201003020230/NEWS02/3020327 vii “What It Will Cost To Rebuild This Spring” Rough Notes March 2010 page 94