Commercial Property Policy
PRO RATA DISTRIBUTION CLAUSE UNDER BLANKET POLICIES
Property insurance policies sometimes are written to cover blanket over
two or more locations. A Pro Rata Distribution clause may be attached to
such blanket policies. The clause operates to distribute the amount of the
policy by providing that insurance attaches in each building or location in
the proportion that the values at the location bear to those in all locations
covered. The Pro Rata Distribution clause thus limits the company's
liability at each separate location, with only a specific proportion of the
policy applying to each location.
* In most territories, the Pro Rata Distribution clause is not used if the
policy carries a 90% or higher coinsurance clause.
EXAMPLE:
Values at Location A - $5,000
Values at Location B - $10,000
Values at Location C - $15,000
A blanket policy of $24,000 with a Pro Rata Distribution clause covers all
three locations. The Pro Rata Distribution clause operates to distribute
the insurance as follows:
Amount of Insurance Applicable to Location A
Values at Location A = $5,000 or 1/6 of $24,000 = $4,000
Values at All Locations $30,000
Amount of Insurance Applicable to Location B
Values at Location B = $10,000 or 1/3 of $24,000 = $8,000
Values at All Locations $30,000
Amount of Insurance Applicable to Location C
Values at Location C = $15,000 or ½ of $24,000 = $12,000
Values at All Locations $30,000
Under the terms of the Pro Rata Distribution clause, if values fluctuate
between the different buildings, the insurance automatically will change.
Thus, in the above example, if all the values were to shift to Building A, all
insurance automatically would apply there. If insurance is carried to the
full value of the property, the loss payment will not be limited by the
clause. Conversely, if property is underinsured, then under this clause it
is equally underinsured at every location. If the owner carries 50%
insurance to value, he is 50% underinsured at each location that the
policy covers, regardless of how the total value is distributed among the
different locations.
Replacement Cost Coverage - In most territories, it is possible to insure
on a replacement cost basis buildings, improvements and betterments,
furniture, fixtures, machinery and equipment, and supplies in connection
with such property. The broader coverage does NOT apply to
merchandise or household contents, except for governmental,
educational, religious and nonprofit hospital risks. The contents of these
risks may be covered on a replacement cost basis; but such broadened
coverage is not available on manuscripts or articles of art, rarity or
historical interest.
Replacement cost coverage eliminates from settlement of a loss any
depreciation in the value of the property. The insured will be collecting
"new for old." (Compare this basis of recovery with actual cash value,
discussed here under FOR HOW MUCH.) No increase in rate develops,
but the insured is required to base his insurance on the replacement cost
of the structure, and compliance with the Coinsurance clause is based
on the higher figure. Policies written on a replacement cost basis usually
incorporate an 80% coinsurance clause, even where the basic (actual
cash value) policy is written without coinsurance requirements.
Replacement cost coverage policies stipulate that the insured must
replace the property within a reasonable time, if he is to recover a loss
on a replacement cost basis. Courts have held that one year is a
reasonable period within which to replace.
The replacement cost coverage in use by many companies also
incorporates a maximum of 400% of the actual cash value of the
property. As a result of this clause, it can be seen, the replacement cost
coverage does not necessarily guarantee that the insured will receive
sufficient indemnification for the full cost of replacing the damaged or
destroyed property.
EXAMPLE: In a fire at her premises, the insured loses a piece of furniture
which originally cost her $900. Its current replacement cost is $2,400. It
is agreed that the actual cash value of the item at the time of the loss is
$480 (present replacement cost, $2,400, minus 80% depreciation). The
policy is liable for up to 400% of the actual cash value, or $1,920. The
policy will, in this instance, pay $1,920 although it will cost $2,400 to
replace the lost property.
If the policy did not include the replacement cost feature, the insured's
recovery would have been limited to $480, the property's actual cash
value. It is also important to bear in mind that the company still may
exercise its option to pay only the cost to repair or replace the property,
if such amounts are less than the recovery arrived at, as above.
Agreed Amount Coverage - An agreed amount coverage is available
which modifies the basis on which losses are settled. In a policy with
this Agreed Amount option, the Coinsurance clause is waived, and an
agreed value for the property covered is shown in the Declarations.
Losses are settled on the basis of this amount. The company's liability is
limited to the proportion that the limit of insurance under the coverage part
bears to the agreed value shown in the Declarations.
Inflation Guard (Automatic Increase In Insurance) - Under this
endorsement, the amount of insurance is increased automatically by
1/365 per day of the annual percentage specified in the Declarations.
Market Value - Other Than Stock - As indicated earlier in this chapter
under Provision Modifying Actual Cash Value-Stock, stock which has
been sold but not yet delivered to the purchaser will be valued at its
selling price. The policy may be endorsed with a Market Value - Property
Other Than Stock clause. This clause modifies the loss payment
provisions of the policy so that losses are paid on a market value basis if
repair or replacement is not contracted for within 180 days of the loss, or
on a functional replacement basis (with similar property that performs the
same function) if repair or replacement is contracted for within 180 days
of the loss or damage.
Brand and Label Clause - By special endorsement, the policy provides
that if the company takes branded or labeled merchandise for "salvage"
after a loss, the insured may, at his or her own expense, stamp
"Salvage" or "Damaged Merchandise" or may remove the brand or label
from such property, if these actions will not damage the merchandise.
The endorsement is useful to manufacturers who would be adversely
affected by having their brand products sold in damaged or defaced
condition, or at prices below the usual established levels.
Manufacturer's Selling Price - This is optional and is offered to
manufacturing risks. Under its terms, all the insured's finished stock,
whether sold or unsold, is valued at the insured's selling price, less all
discounts or unincurred expenses.
Market Value Clause - It is possible to have all stock valued at its selling
price, whether actually sold or not, by attaching a Market Value clause.
Such clauses may be used only when the stock is of a kind that is
bought and sold at an established market exchange where the market
prices are posted and quoted.
Alcoholic Beverage Tax Exclusion - The law permits the Treasury
Department to refund taxes and duties paid on alcoholic beverages
which have been damaged by perils other than theft. An insured may
request inclusion of an endorsement which excludes the value of such
federal excise and custom duties paid on alcoholic beverages held for
sale.
Building Ordinance Coverage - Coverage may be obtained for the
"indirect" loss sustained by an insured who has suffered a loss which
destroyed only a portion of a building but who must raze the undamaged
portion of the structure because of an ordinance or law which prohibits
rebuilding with the type of material used in the original structure. The
policy, so endorsed, will pay for the loss of the undamaged portion of the
structure, the cost of its demolition and the increased expense of
repairing or replacing in accordance with the building ordinance or code.
PRO RATA DISTRIBUTION CLAUSE UNDER BLANKET POLICIES
Property insurance policies sometimes are written to cover blanket over
two or more locations. A Pro Rata Distribution clause may be attached to
such blanket policies. The clause operates to distribute the amount of the
policy by providing that insurance attaches in each building or location in
the proportion that the values at the location bear to those in all locations
covered. The Pro Rata Distribution clause thus limits the company's
liability at each separate location, with only a specific proportion of the
policy applying to each location.
* In most territories, the Pro Rata Distribution clause is not used if the
policy carries a 90% or higher coinsurance clause.
EXAMPLE:
Values at Location A - $5,000
Values at Location B - $10,000
Values at Location C - $15,000
A blanket policy of $24,000 with a Pro Rata Distribution clause covers all
three locations. The Pro Rata Distribution clause operates to distribute
the insurance as follows:
Amount of Insurance Applicable to Location A
Values at Location A = $5,000 or 1/6 of $24,000 = $4,000
Values at All Locations $30,000
Amount of Insurance Applicable to Location B
Values at Location B = $10,000 or 1/3 of $24,000 = $8,000
Values at All Locations $30,000
Amount of Insurance Applicable to Location C
Values at Location C = $15,000 or ½ of $24,000 = $12,000
Values at All Locations $30,000
Under the terms of the Pro Rata Distribution clause, if values fluctuate
between the different buildings, the insurance automatically will change.
Thus, in the above example, if all the values were to shift to Building A, all
insurance automatically would apply there. If insurance is carried to the
full value of the property, the loss payment will not be limited by the
clause. Conversely, if property is underinsured, then under this clause it
is equally underinsured at every location. If the owner carries 50%
insurance to value, he is 50% underinsured at each location that the
policy covers, regardless of how the total value is distributed among the
different locations.
Replacement Cost Coverage - In most territories, it is possible to insure
on a replacement cost basis buildings, improvements and betterments,
furniture, fixtures, machinery and equipment, and supplies in connection
with such property. The broader coverage does NOT apply to
merchandise or household contents, except for governmental,
educational, religious and nonprofit hospital risks. The contents of these
risks may be covered on a replacement cost basis; but such broadened
coverage is not available on manuscripts or articles of art, rarity or
historical interest.
Replacement cost coverage eliminates from settlement of a loss any
depreciation in the value of the property. The insured will be collecting
"new for old." (Compare this basis of recovery with actual cash value,
discussed here under FOR HOW MUCH.) No increase in rate develops,
but the insured is required to base his insurance on the replacement cost
of the structure, and compliance with the Coinsurance clause is based
on the higher figure. Policies written on a replacement cost basis usually
incorporate an 80% coinsurance clause, even where the basic (actual
cash value) policy is written without coinsurance requirements.
Replacement cost coverage policies stipulate that the insured must
replace the property within a reasonable time, if he is to recover a loss
on a replacement cost basis. Courts have held that one year is a
reasonable period within which to replace.
The replacement cost coverage in use by many companies also
incorporates a maximum of 400% of the actual cash value of the
property. As a result of this clause, it can be seen, the replacement cost
coverage does not necessarily guarantee that the insured will receive
sufficient indemnification for the full cost of replacing the damaged or
destroyed property.
EXAMPLE: In a fire at her premises, the insured loses a piece of furniture
which originally cost her $900. Its current replacement cost is $2,400. It
is agreed that the actual cash value of the item at the time of the loss is
$480 (present replacement cost, $2,400, minus 80% depreciation). The
policy is liable for up to 400% of the actual cash value, or $1,920. The
policy will, in this instance, pay $1,920 although it will cost $2,400 to
replace the lost property.
If the policy did not include the replacement cost feature, the insured's
recovery would have been limited to $480, the property's actual cash
value. It is also important to bear in mind that the company still may
exercise its option to pay only the cost to repair or replace the property,
if such amounts are less than the recovery arrived at, as above.
Agreed Amount Coverage - An agreed amount coverage is available
which modifies the basis on which losses are settled. In a policy with
this Agreed Amount option, the Coinsurance clause is waived, and an
agreed value for the property covered is shown in the Declarations.
Losses are settled on the basis of this amount. The company's liability is
limited to the proportion that the limit of insurance under the coverage part
bears to the agreed value shown in the Declarations.
Inflation Guard (Automatic Increase In Insurance) - Under this
endorsement, the amount of insurance is increased automatically by
1/365 per day of the annual percentage specified in the Declarations.
Market Value - Other Than Stock - As indicated earlier in this chapter
under Provision Modifying Actual Cash Value-Stock, stock which has
been sold but not yet delivered to the purchaser will be valued at its
selling price. The policy may be endorsed with a Market Value - Property
Other Than Stock clause. This clause modifies the loss payment
provisions of the policy so that losses are paid on a market value basis if
repair or replacement is not contracted for within 180 days of the loss, or
on a functional replacement basis (with similar property that performs the
same function) if repair or replacement is contracted for within 180 days
of the loss or damage.
Brand and Label Clause - By special endorsement, the policy provides
that if the company takes branded or labeled merchandise for "salvage"
after a loss, the insured may, at his or her own expense, stamp
"Salvage" or "Damaged Merchandise" or may remove the brand or label
from such property, if these actions will not damage the merchandise.
The endorsement is useful to manufacturers who would be adversely
affected by having their brand products sold in damaged or defaced
condition, or at prices below the usual established levels.
Manufacturer's Selling Price - This is optional and is offered to
manufacturing risks. Under its terms, all the insured's finished stock,
whether sold or unsold, is valued at the insured's selling price, less all
discounts or unincurred expenses.
Market Value Clause - It is possible to have all stock valued at its selling
price, whether actually sold or not, by attaching a Market Value clause.
Such clauses may be used only when the stock is of a kind that is
bought and sold at an established market exchange where the market
prices are posted and quoted.
Alcoholic Beverage Tax Exclusion - The law permits the Treasury
Department to refund taxes and duties paid on alcoholic beverages
which have been damaged by perils other than theft. An insured may
request inclusion of an endorsement which excludes the value of such
federal excise and custom duties paid on alcoholic beverages held for
sale.
Building Ordinance Coverage - Coverage may be obtained for the
"indirect" loss sustained by an insured who has suffered a loss which
destroyed only a portion of a building but who must raze the undamaged
portion of the structure because of an ordinance or law which prohibits
rebuilding with the type of material used in the original structure. The
policy, so endorsed, will pay for the loss of the undamaged portion of the
structure, the cost of its demolition and the increased expense of
repairing or replacing in accordance with the building ordinance or code.
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MY Insurance Agency
The materials on this page is meant to be
informative in nature. Due to the ever
changing and varying state laws, and the fact
some insurers offer coverage in slightly
different forms from the Insurance Services
Office (ISO) standard forms, we cannot
guarantee the accuracy of the materials on
this page.
informative in nature. Due to the ever
changing and varying state laws, and the fact
some insurers offer coverage in slightly
different forms from the Insurance Services
Office (ISO) standard forms, we cannot
guarantee the accuracy of the materials on
this page.