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



Policy Wording of Covered Perils and Exclusions

Especially watch for definitions of terms, particularly “flood” and “earthquake” if they are defined in the policy, as DIC policies may define these terms differently, that is, in a more restrictive manner from what is typically covered in a flood policy. For example, some DIC policies exclude seepage or leakage or sewer backup as a part of a water damage exclusion. Mudslide or mudflow may be excluded in an earth movement exclusion as well as in a flood exclusion. 4 This could result in a no-coverage situation under the DIC for a loss that would normally be covered by the National Flood Insurance Program (NFIP) policy or earthquake endorsement to the commercial property policy. Should this restriction be caught in a policy review, the definition should be clarified or changed so that it provides the broader flood or earthquake coverage.

Also as discussed previously, the exclusions in a DIC policy should match the wording of the perils covered in the underlying or complementary standard property form. It is advisable to review the standard policies and the DIC policy in a side-by-side comparison to ensure that there is coordination of the policy language. By reviewing the wording of exclusions in the DIC policy, unanticipated exclusions may be recognized and negotiated out of the form so as to avoid a more serious conflict when a claim is made.

Limits of Insurance

Typically, a DIC policy contains separate limits for flood and earthquake coverages. The AAIS form has three separate limits: an aggregate limit; a catastrophe limit; and an occurrence limit, and these limits apply separately to earthquake coverage and flood coverage. In the AAIS form, there are also separate limits for all other perils (AOP) other than earthquake and flood.

Many DIC policies will only have an occurrence limit and an aggregate limit, and some only have an aggregate limit that applies to flood and earthquake exposures.

Although some DIC policies contain separate limits for business income loss, this is not always the case. When the limit applies to all covered losses, that is, both direct damage and consequential damage (business income loss), the income loss exposure must be considered when selecting limits.

Once again, it is imperative that these forms be carefully reviewed because there is no uniform or standard DIC policy. The ISO form Declarations page contains spaces to indicate the sub-limits of insurance in any one policy year for earthquake and flood.

Joint/Disputed Loss Agreement

It is possible that a loss may be covered in part by the commercial property policy as well as the DIC policy such as when an earthquake causes a fire. A joint/disputed loss agreement endorsement 5 is designed to facilitate the adjustment of a loss in the event of a disagreement between the property insurer and the DIC insurer over whether a loss is covered by both policies, or how the loss is to be apportioned. For this to be effective, the commercial...

“Especially watch for definitions of terms, particularly ‘flood’ and ‘earthquake’ if they are defined in the policy, as DIC policies may define these terms differently...”