By David B. Goodwin, P. Benjamin Duke, and R. Gregory Rubio
This chapter provides an introduction to the basic contours of the law applicable to policies of commercial property insurance and the fundamental considerations that commercial businesses and their insurers encounter in securing and maintaining first-party property coverage. The chapter begins with a broad overview of the major types of commercial property insurance coverage and the varieties of policy forms available for insuring fixed-location business operations. Subsequent sections describe the fundamental components of the commercial property insurance program; the application process and related issues relevant to obtaining and defining the scope of coverage; the claims process; and other key duties and obligations of commercial property insurers and their insureds.
Section 41.01 sketches the historical origins of modern commercial property policies and the main types of coverage that businesses commonly incorporate into their first-party property insurance programs. Most substantial businesses purchase a variety of insurance covering risks to tangible property, which may include coverage for marine and other shipping-related risks and various categories of coverage traditionally referred to as "inland marine" insurance. As Section 41.01 explains, this chapter focuses on first-party commercial property insurance for physical premises and other fixed-location operations, including business interruption and other "time element" coverages against loss in connection with such operations. The huge market for this type of insurance has generated a variety of forms, ranging from relatively straightforward industry forms to specialized proprietary forms and manuscript policies insuring the largest and most complex global corporations.
Section 41.02 addresses the structure of commercial property insurance in relation to both the coverage provided by individual policies and the basic aspects of the property insurance programs adopted by businesses of varying sizes. Commercial property insurance presents the insured with a variety of challenges in designing a program of coverage that provides an optimal range and amount of coverage in the most cost-effective manner. Section 41.02 explains the role of covered "perils" in both all-risks and named-perils policies. While the effective scope of coverage in both types of policies fundamentally depends on which perils are covered, the all-risks coverage grant provides the insured with some arguable protection against wholly uncontemplated risks and shifts to the insurer the burden to prove that a particular cause of loss is excluded by the policy. Sections 41.02 and 41.02 address two other key components of program design that commercial insureds confront in structuring their first-party property coverage. Section 41.02 compares blanket property policies with location-specific coverage, and Section 41.02 describes the process of "layering" coverage using multiple excess policies and the main factors that influence an insured's decision as to how to structure its coverage program. Section 41.02 discusses the legal rules relating to overlapping or "concurrent" coverage and the need to minimize both gaps in and duplication of insurance comprising the overall property insurance portfolio.
Section 41.03 focuses on the application process involved in obtaining commercial property coverage. Especially for complex businesses with multiple physical locations, the application may require significant time and effort, including both collection of information relating to the properties to be insured and detailed review by the insurer. As explained in Section 41.03, the application may itself become the basis of a contract for temporary insurance during this process, prior to the actual issuance of a policy. Section 41.03 addresses the legal rules that have developed surrounding the formation of such temporary contracts. Section 41.03 discusses the related role of the binder as a mechanism for creating temporary contracts of insurance. The remainder of Section 41.03 (Sections 41.03-) addresses the importance of the delivery of the policy and the legal issues that arise when a loss occurs before the final policy is actually delivered to the insured.
A critical concern in completing the first-party property insurance application process is the integrity of the representations and warranties contained in the application for insurance and the policy ultimately issued by the insurer. Section 41.04 focuses on the key representations and warranties involved in the application process and the potential ability of third-party insurance brokers to make binding representations on the insured's or the insurer's behalf. Section 41.04 explores the standards applied by courts for finding a breach of representation or warranty in the context of commercial property insurance, and the consequences of such a finding in either voiding the policy or providing a defense to coverage of particular claims. Section 41.04 concludes this section by describing the application of waiver and estoppel doctrines in this context to prevent the parties from avoiding their contractual obligations notwithstanding the existence of a breach.
First-party property insurance coverage also raises significant questions as to whether parties with limited rights in a property may protect those rights through policies of property insurance. Section 41.05 discusses the fundamental "insurable interest" doctrine that limits who may obtain insurance on a particular property, by requiring that an insured must have a sufficient financial interest in the property for the insurance to represent a genuine transfer of risk. Section 41.05- then describe the mechanics of specifying who is insured under commercial property policies which frequently identify multiple named and additional insureds. Section 41.05 concludes by addressing a variety of issues that may arise in insuring different kinds of interested parties, such as mortgagors, bailees and custodians.
Sections 41.06 and 41.07 address what happens when a loss occurs and the insured lodges a claim under the policy. As explained in Section 41.06, policies of commercial property insurance almost invariably require the insured to provide not only timely notice of a loss but also a sworn attestation, known as a "proof of loss," within a specified number of days from the inception of the loss. The remainder of Section 41.06 addresses formal and substantive requirements of the notice and proof of loss and the issues that arise when an insurer alleges a failure by the insured to comply with those requirements. Section 41.07 explores the insurer's response to an insured's notice of claim and the insurer's duty to investigate and handle the claim in accordance with both fundamental common-law principles and statutory requirements under the model statute that has been adopted, with some variations, in almost all states.
Sections 41.08 addresses several other important considerations under commercial property policies, particularly with regard to the additional duties of the insured in maintaining coverage under such policies. Finally, Section 41.09 concludes this chapter by describing the main legal issues surrounding the termination, cancellation and renewal of first-party property insurance policies. Virtually every jurisdiction regulates the relationship between insurers and insureds in this area, resulting in significant statutory protections against loss of insurance without an adequate opportunity for the insured to obtain alternative coverage.
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David B. Goodwin, P. Benjamin Duke, and R. Gregory Rubio
David B. Goodwin is a partner in the San Francisco office of Covington & Burling LLP and is a member of that firm's Insurance Coverage and Appellate practice groups. With more than twenty-five years of experience representing corporate policyholders in insurance coverage disputes and litigation, his practice runs the gamut of insurance issues, including major property damage and business interruption losses, errors and omissions, fidelity, and director and officer claims, mortgage and financial guarantee insurance disputes, and products liability and environmental matters. Mr. Goodwin also is a highly experienced appellate advocate and has argued more than fifty appeals. A graduate of Oxford University and Stanford Law School, Mr. Goodwin was a law clerk for Judge Joseph T. Sneed of the United States Court of Appeals for the Ninth Circuit. Mr. Goodwin has also served as an adjunct professor at The University of California at Berkeley Law School, where he taught courses on insurance law.
P. Benjamin Duke is a partner in the New York office of Covington & Burling LLP and a member of the firm's Insurance Coverage practice group. Mr. Duke's litigation practice focuses on representation of corporate policyholders in all types of insurance-related disputes. He has extensive experience in all phases of complex litigation and arbitration involving not only insurance-coverage matters but also a range of securities, financial and other commercial claims. After graduating from Columbia Law School, where he was Executive Articles Editor of the Columbia Law Review, Mr. Duke served as a law clerk for Judge Carol B. Amon of the U.S. District Court for the Eastern District of New York and for Judge Amalya L. Kearse of the U.S. Court of Appeals for the Second Circuit.
R. Gregory Rubio is an Associate in the Washington D.C. office of Covington & Burling LLP. As a member of the firm's Insurance Practice Group, Mr. Rubio represents policyholders in a variety of coverage litigation and advisory matters, including major claims for coverage of complex environmental and other long-tail liabilities. Mr. Rubio graduated from the University of Illinois College of Law, where he served as Editor-in-Chief of the University of Illinois Law Review.
The authors gratefully acknowledge the invaluable assistance of Jillian Willis and Ranadeb Mukherjee of the Washington D.C. office of Covington & Burling LLP.
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