Doug Rogers, controller for Westside Industries, a profitable account that you’ve covered for a number of years, calls to say that Westside has just leased new computer equipment worth $500,000, and that the lease requires them to insure the equipment. He’d like you to take care of it. That raises a number of questions. First, does their policy cover the equipment and do they need additional coverage?
Westside is insured under an ISO Commercial Package Policy that includes the Building and Personal Property Coverage Form (CP 00 10) with these limits: Building . . . . . . . . . . . . . . . . $10,500,000 Your Business Personal Property (YBPP) . . . . . . . . . . $4,300,000 Personal Property of Others . . . . . . . . . . NOT INCLUDED Turning to the Covered Property section of the form, you see that one of the items listed under YBPP reads as follows: (7) Leased personal property for which you have a contractual responsibility to insure, unless otherwise provided for under Personal Property of Others. Because the policy does not cover Personal Property of Others, the new computer equipment would be covered under YBPP. You can tell Doug that the leased computer equipment is covered property, but that the limit of insurance should be reviewed to see if the limits are adequate to cover the added value. If it’s new or additional equipment, the amount of insurance should be increased. If it replaces existing equipment that was considered when the present amount of insurance was set, no change may be necessary unless the new equipment is worth more or less than the replaced equipment. You might also explore with Doug the advantages of insuring the building and YBPP for a single blanket limit, but that’s a topic for another column.
Suppose that instead of requiring that Westside insure the property, the lease said that any risk of loss or damage to the equipment would be borne by Westside and that they must return it at the expiration of the lease period in “as-received” condition, excepting only normal wear and tear. Does Westside have coverage for any damage under paragraph (7) quoted above? The answer is no. The lease doesn’t require insurance, so the computer system doesn’t meet the definition for YBPP. The Personal Effects and Property of Others coverage extension in the Building and Personal Property Coverage Form will provide a little protection for such a situation, as follows:
You may extend the insurance that applies to Your Business Personal Property to apply to: (2) Personal property of others in your care, custody or control. Unfortunately, the coverage extension limit is $2,500 per loss at each described premises—not adequate coverage for $500,000 worth of equipment. One solution would be to add a $500,000 limit for Personal Property of Others to Westside’s policy. If you do add Personal Property of Others to a policy, you should always cover it as part of a single blanket limit with the YBPP coverage. Blanket coverage is almost always preferable to specific; that’s especially true in this situation because ISO manual rules permit use of a blanket limit for YBPP and Personal Property of Others without the need to increase the coinsurance to 90% as is usually required when insuring different classes of property for a blanket limit.
To save Westside some premium, you might consider insuring the computer system under the Legal Liability Coverage Form (ISO form CP 00 40), which can be used for insuring buildings or personal property of others in the insured’s care, custody, or control. Because this form only covers losses for which the insured is legally liable, the rate for covering personal property under this form is ordinarily 50% of the usual personal property coverage rate (or, for buildings, 25% of the usual building rate). If Westside is only concerned about covering its potential liability for loss to the equipment, the Legal Liability Coverage Form might, at first glance, seem to be the ideal solution that also saves Westside some money.
However, a more careful reading of the forms reveals that the Legal Liability Coverage Form is subject to an exclusion of liability assumed under contract. (This exclusion is not in the Legal Liability Coverage Form, but in the applicable Causes of Loss Form.) The insurer can be expected to apply this exclusion if the lease agreement obligates the insured to pay for damage to the computer system. So, the Legal Liability Coverage Form does not provide the coverage that Westside needs. Regardless of whether the insured is contractually required to insure the leased computer system, another alternative you should consider is covering the computer equipment with an inland marine computer systems policy, also referred to as an electronic data processing (EDP) equipment policy. (You should examine this option in the case of owned computer equipment also.) Because the computer equipment is, or can be, covered by Westside’s existing package policy, Doug might ask, “Why should I purchase another policy, other than to generate additional commission for my broker?”
There are good reasons for some insureds to purchase EDP policies. Note the emphasis on “some.” It’s your job as an insurance professional to help Doug determine if his firm would benefit from a separate computer systems policy. There are a number of advantages to such policies: • Broader coverages. Many computer systems policies cover causes of loss that are not covered in most commercial property policies. Examples of such causes of loss are flood, earthquake, and mechanical or electrical breakdown. However, all property is subject to flood and earthquake damage, not just computers, so perhaps you should get Doug quotes for flood and earthquake coverage for all Westside’s property, if he hasn’t already considered it. Mechanical or electrical breakdown can be covered by equipment breakdown forms and you’ll want to check how Westside’s equipment breakdown policy will respond to such losses.
• Data and media coverage. The Building and Personal Property Coverage Form severely limits coverage for electronic data. The only coverage is a coverage extension that provides an annual aggregate limit of just $2,500. Some computer systems coverage forms include damage to data resulting from virus, harmful code, or similar instruction. Firms that do regular backups of their data and store them off-site in a secure location may not feel they need this coverage; you might point out that sometimes when corrupted files are discovered the backup tapes contain the same errors.
• Upgraded value coverage. When computer equipment is damaged or destroyed, firms will almost always replace the equipment with the newer and more powerful equipment that’s available in the marketplace. Some insurers can provide a coverage extension that will pay for the difference in cost between replacing the equipment as it was and the cost of upgraded equipment. The wording in one policy is as follows: In the event of a covered total loss to one or more items, we will allow up to 20% over the current replacement cost as described…as an Optional Upgrade Allowance for the purchase of new property with upgraded processing or performance characteristics. Other insurers offer the option to purchase a specified limit for upgrade coverage instead of a percentage of the value of the prior equipment. You should take the opportunity of Doug’s call to ask about Westside’s data backup procedures and whether Westside has considered an off-site backup facility if their computer system is inoperable for any reason. The most common causes for interruption of computer operations are hardware and software errors, power outage, fire, flood, earthquake, and hurricane.1 When a four-alarm fire at a Con Ed station in lower Manhattan shut down electrical service to much of the financial district for up to two weeks a number of years ago, many financial firms claimed that they sustained enormous business interruption losses. However, one insurance company was up and running seamlessly the next day at its off-site backup facility with no loss of business income. Deciding how to cope with the interruption of computer systems is a key part of any disaster recovery plan. Discussing both insurance and non-insurance options with Doug will demonstrate that you take a risk management approach to serving your clients.