Expert Commentary

Moving Words in Policies Can Alter Meaning

There is a long history of specialized insurance providers servicing industry groups. Many target market providers bring experience, technical expertise, and product enhancements to the table. However, this article is about specialty markets that may use deception instead to provide inferior coverage.


Inferior Insurance Product
August 2018

The approach for covering fixtures, machinery, and equipment within building and contents policies has been consistent in the insurance industry for decades. Insurance texts from as long as 60 years ago indicate that permanently affixed fixtures, machinery, and equipment are covered under building coverage. This language continues today in standard forms describing these elements, including outdoor fixtures, within building coverage.

Additionally, personal property coverage also includes machinery and equipment. Unlike the standard form building section, however, machinery and equipment covered as personal property is not required to be permanently affixed. Machinery and equipment may—or may not—be permanently affixed for coverage to apply under the personal property section of a building and contents policy.

But some insurance markets are deviating from this practice in a manner that can be detrimental to policyholders.

Same Words—Different Place—Different Meaning

In this instance, the words were little changed, but some of them were moved to different sections in the policy resulting in a material reduction in coverage as compared to standard building and contents property forms. The policies look virtually identical while the content is radically different.

So, what were the changes? In the building coverage section, the coverage for fixtures was limited to only permanently installed fixtures within the building by deleting the text that would have included outdoor fixtures. Permanently installed machinery and equipment were completely removed from the building coverage section. In the personal property section, machinery and equipment coverage was changed to include both permanently installed and nonaffixed machinery and equipment.

Who Is the Target?

This program was marketed to firms operating industrial facilities or owners of buildings leased to industrial operations. The industry groups were firms owning or occupying buildings with substantial built-in components such as refrigeration systems, industrial scales, overhead hoists, emergency generators, elevators, boilers, power distribution boxes used in the operation of the aforementioned, and other expensive items. The value of machinery and equipment on this type of account may exceed the cost of the structure where they were housed.

What Is the Result?

The insurance application for these programs used standard Association for Cooperative Operations Research and Development forms. Neither the agent nor the applicant had any indication that machinery and equipment values were being addressed in a different manner. The insured was asked for values for the building, personal property, business interruption, etc. as if the account was being submitted to a traditional insurance market. There was no indication of machinery and equipment being covered only as personal property. As a result, the values assigned to the building and contents sections of the policy were incorrect.

Let us consider the impact on separate limits of specific coverage being placed on an account using this approach. For the sake of this conversation, we will use $7 million building and $5 million personal property limits assuming standard form policy language.

Located within the building to be insured, the following items were permanently installed.
Fixed industrial shelving $1,000,000
Power distribution equipment $500,000
Elevators and hoists $600,000
HVAC equipment $400,000
Refrigeration/freezer equipment $1,000,000
Automated control systems $500,000
Total $4,000,000

Looking at the above list, what is a "permanently installed fixture"? Merriam-Webster Dictionary defines fixtures as "something that is fixed or attached (as to a building) as a permanent appendage or as a structural part."

Machinery is considered the components of a machine. Equipment is considered something necessary for a particular purpose.

As we look at the above, what is a permanently installed fixture? Is fixed industrial shelving a permanent appendage or a structural part? What are elevators and ceiling mounted hoists? Power distribution boxes, elevator equipment, ceiling mounted hoist framing, HVAC equipment, permanent refrigeration systems, boilers, and control systems are considered permanently installed machinery and equipment.

The policy change removing permanently installed machinery and equipment under building and shifting both affixed and nonaffixed machinery and equipment to personal property shifts perhaps $4 million in what is customarily building coverage to the personal property coverage section of the policy. As a result, the $5 million personal property limit, selected to insure a static amount of supplies, inventory, office furniture, and loose equipment will be grossly inadequate.

Separately, consider the impact this policy will have on a building owner leasing the premises to another party. More than 50 percent of the building value may be uninsured due to the deletion of machinery and equipment from the building coverage.

That's Not All

The change described above was but one of many changes in the policy delivered to the named insured. Throughout a large package, subtle changes were found repeatedly. Each change reduced protection.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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