Difference in Conditions Coverage: What Is It and Who Needs It?

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...provide full limits for these perils, or offers this coverage at premiums that are prohibitive from the insured’s standpoint.

No Standard Form

It is important to note that there is no standard DIC coverage form, although Insurance Services Office (ISO) and the American Association of Insurance Services (AAIS) offer DIC policy forms in their non-filed inland marine guides. Companies may use and amend the AAIS and ISO forms as needed. Insurers that write DIC coverage may draft their own forms as well. Although this offers considerable flexibility in drafting coverage, it also can result in a variety of forms being in use with little or no uniformity, thus creating potential coverage gaps between the commercial property insurance and the DIC. Consequently, it is imperative that these forms be carefully reviewed when DIC insurance is written and when a claim under the policy is made.

Policy Approach

Though the primary use of a DIC is to cover flood and earthquake losses, a DIC policy can cover loss from other perils as well. It, therefore, is important to compare the exclusions of the DIC with the exclusions in the underlying property policy to determine what additional coverage is provided by the DIC. Losses that are excluded under the commercial property policy, but not excluded under the DIC, ordinarily will be covered by the DIC. The following is the insuring agreement in the AAIS DIC policy:

AGREEMENT

In return for “your” payment of the required premium, “we” provide the coverage described herein subject to all the “terms” of the Difference in Conditions Form. This coverage is also subject to the “schedule of coverages” and additional policy conditions relating to assignment or transfer of rights or duties, cancellation, changes or modifications, inspections, and examination of books and records. Endorsements and schedules may also apply. They are identified on the “schedule of coverages.”

The reference to the “schedule of coverages” is important. The “schedule of coverages” typically contains check boxes to indicate the nature and extent of the coverage. For example, the schedule will provide the following information:

The ISO Declarations section has spaces to indicate the location number, address and limits of insurance for buildings and business personal property, property at unnamed locations and all covered property in any one occurrence. It also has boxes to check as to whether replacement cost coverage applies. The DIC policy covers direct physical loss or damage to covered property caused by any covered cause of loss. The building and personal property coverage in the ISO form is similar to that provided by the AAIS policy.

The following Property Covered section is an excerpt from the AAIS DIC form:


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