Lifting Shingles Cause Damage

Lifting of Shingles Causes Damage

Homeowner 3 special form HO-3 01 13 section 1-perils insured against, 2, h. WE DO NOT INSURE, HOWEVER, FOR LOSS: Rain, snow, sand to the interior of building unless a covered peril first damages the building causing an opening…..

Our insured sustained damage to the interior of his home in several rooms when a rain storm caused water to intrude into the house through the roof and under the shingles.

Insurance Company denied the claim per the above exclusion.

The roof, at the time of the loss was in poor condition due to age. The wind speed at the time of the loss was in excess of 40 mph and we believe that the 40 mph+ wind speed damaged the roof by causing the shingles to lift which created enough of an opening for the rain to enter the house. At the time of inspection, the shingles were flat and there was no evidence of shingle damage to the naked eye. Should this loss be covered?

You have an issue of fact more so than policy interpretation; if the wind lifted the shingles then indeed there is coverage for the contents; if the roof just has leaks, then there would be no coverage due to faulty maintenance/wear and tear. An inspector should be able to determine whether or not the singles would lift in a windstorm.


I pulled this article off of National Underwriter-a service I subscribe to.  I believe it is consistent with the knowing that you can find coverage if a “covered” peril first causes damage and water damage seems to always come up when talking about this.

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Thank you!

I just wanted to take a minute to THANK all of my customers, prospects, employee’s (both past and present), vendors, friends and family for another wonderful year here at Agency 10 Insurance.  I wish all of you and your families and Happy New Year.  I hope you have a moment to reflect on the many blessings you have and to thank any individual who has made an impact in your life, don’t forget your God.  Thank you all again.

Best regards,

Marc Macke, CIC President Agency 10 Insurance

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Everything You Need to Know About Life Insurance

At the outset it must be understood that life insurance is not, and cannot be, a measure of human “worth.” The intrinsic worth of human life is immeasurable and impossible to replace at any cost. Instead, life insurance is based on the “economic value” of a human life measured in dollars. The basic purpose of life insurance is simply to minimize financial losses caused by death. However, it is not insurance against death happening, but against its untimeliness. Death is inevitable, but no one can predict when it will come. Life insurance removes some of the financial uncertainty associated with untimely death.

The basic purpose of life insurance is to provide some form of substitution for the earnings of the insured when he or she is no longer there. Through the use of policy options, however, life insurance can be expanded to meet many additional needs, from providing income for the insured to acting as a sinking fund for special purposes. However, the basic purpose of life insurance is family protection and the principal benefit of its ownership eventually inures to the family. There are several instances where life insurance coverage is used in a business setting either to protect the business against financial loss upon the death of a key individual (“key person” coverage) or to informally fund certain nonqualified employee benefit plans.

Even when used in a business arrangement, life insurance still generally protects the family. For example, life insurance is often used to protect a surviving spouse against the loss of a family business and the income it produces. Life insurance is also used to provide liquid funds upon a business owner’s death that are earmarked to pay estate taxes. The availability of such funds often prevents a forced sale of assets to pay the taxes, protecting the interests of the surviving spouse and children. Coverage of obligations such as education and mortgage payments guarantees schooling expenses and shelter for the family. When used as a form of compulsory savings or for funding other savings or investment plans, life insurance provides emergency funds for the family and assures completion of family investment objectives.

As mentioned, the common exception to the family protection concept of life insurance is corporate-owned “key person” life insurance, a coverage wherein a corporation protects itself against the financial risks associated with losing a key executive through untimely death. In this instance, no direct benefits are paid to the family of the insured.

Types of Policies

There is disagreement about the number of basic types of life policies. For purposes of this discussion, three distinct types are recognized: term life, whole life, and universal life. (Other sources may cite an additional one or two—endowment or limited payment are sometimes included as basic types.) These types are then further classified according to payment modes, expiration terms, and coverage levels.

Term life insurance is often characterized as “pure” protection in that no benefits are payable at any time except upon the death of the insured during the policy term. It may be illustrated by the following diagram.

If the insured does not die during the term of the policy, the policy expires and no further obligation on the part of the insurer exists. (This can be compared to other types of conventional insurance; for instance, a personal auto policy also has a predetermined premium and specific term. At the expiration of the policy period, the insurer’s obligation ceases.)

If the insured dies during the term of the policy, the beneficiary (the person to whom benefits are paid) will receive the full amount of the policy, without regard to the particular year in which death occurs. With a basic term policy, the annual premium remains constant and is paid for the entire term of the policy and the level of protection remains constant.

In addition to the above-mentioned level term life policy, a number of variations are available for special purposes. Normally, the term of the policy is in multiples of five years, such as five, ten, fifteen, twenty, twenty-five, or thirty year terms. However, there are also term policies that expire when the insured reaches a certain age, 60, 65, or 70 for example. Another variation—re-entry term—allows the insured to pay a lower premium if he or she provides evidence of continued good heath by passing another medical examination every few years. In other words, the insured “re-enters” the term plan at the same premium he or she would pay for a new policy purchased in that year. If the insured does not pass the examination or chooses not to take it, his or her premium will be higher than the “re-entry” premium.

Policy term variations are not the only options under term life insurance policies. Another variation is in the amount of coverage. Basically there are three coverage level options—level, decreasing, and increasing. In other words, as time passes, depending upon the plan selected, the amount of insurance rises, stays the same, or reduces. These plans are used to offset commitments that rise, stay the same, or reduce. Mortgage insurance is normally a decreasing term coverage that offsets the balance owed with the protection level, reducing as the mortgage balance declines. Increasing term life coverage (a money-back guarantee type of coverage in which the insured purchases additional insurance equal to the amount of the premiums; this coverage is most often associated with high premium permanent plans) is written, often as a rider to a permanent plan, to guarantee return of premiums or funds invested periodically over a number of years. The amount of insurance coverage increases as additional premium deposits are made.

While the principal behind each plan may be the same, there are variations in the rate of increase or decrease. Some plans change at a proportional step rate, others at varying curves as opposed to “straight line” with additional variations in frequency of change. Decreasing term life illustrations show the differences.

Finally, term life policies vary as to premium payment plans. Level premium, for the full length of the policy period, is most common, but many plans are also available in which the premium period is less than policy term. A common example of the shorter premium plan is found in mortgage term insurance where premiums on thirty year policies are paid for twenty years with nothing paid during the last five years. The third premium variation is single payment, in which case the entire policy premium is paid when the policy is issued. In addition to these variations there are also some “step rate” plans, but these are not common. These plans feature premium payments that theoretically increase as the insured’s ability to pay increases. In reality, the plans are a combination of several one-year term policies for rating purposes. Such plans are more common as whole life options, called modified premium plans in many cases.

Most life insurance consultants feel that protection should relate to the need—that short term needs should be fulfilled with term insurance, and permanent needs with whole life coverage. A fitting use, therefore, for term life insurance is any need that exists for a specific period of time but requires no element of savings. Ordinarily such protection is used where current income is considered vital rather than as a coverage of deferred funds. It is useful in covering current obligations such as debts, investment plans, and savings goals or short term obligations, such as income for child rearing years (family maintenance or family income are names given to this use) in case of a breadwinner’s death, or as an “option to buy” more insurance. Term insurance is often used to guarantee the availability of coverage for some future time through conversion privileges, and as a preliminary coverage for short periods of time.

Whole Life Insurance

Whole life insurance is a “permanent” coverage in that it does not expire without paying benefits, either to the surviving insured or to the beneficiaries. Whole life policies combine the protection of term insurance with a “savings” feature enabling the insured to use the policy to build economic security against the perils of untimely death and superannuation (living beyond earning years). In the whole life insurance illustration below, notice that the portion of the policy representing “pure” protection decreases as the “savings” portion increases.

One of the strong selling points of the whole life policy is the “forced savings” feature—when the insured purchases this policy, he automatically has a portion of his premiums set aside for future use. This “savings” may be borrowed against by pledging the policy as collateral, received as a refund by canceling the policy, or used to purchase additional coverage.

Whole life policies are designed so that this savings portion will equal the face amount of the policy when the insured attains a certain age, such as 95. In this case premiums would be payable to age ninety-five.

There is one major difference in the manner in which whole life and term life premiums are calculated. Term life only provides benefits for those insureds who die during the policy term. Whole life premiums include not only this charge but also an amount sufficient to pay benefits to those who survive to age ninety-five. Since the policy is for the person’s entire life and since premium calculations assume no one will live beyond age ninety-five, everyone who survives is paid as if he had died in the 95th year. While more complicated in practice, this additional amount of premium makes up the savings portion. In this respect, the policy is an endowment at age ninety-five terminating at that age by payment of the face amount of the policy to the insured. In the case of the policyholder’s death, the beneficiary has the option of receiving benefits either in a lump sum or in monthly installments. This determination is usually made at the time of policy issuance (see Settlement Options) but may be determined at a later time.

Just as there are many variations used with term life insurance, whole life is similarly adaptable to a number of uses. While the term of the policy is for the insured’s lifetime, full benefits may be made payable earlier than age ninety-five to a surviving insured by using a whole life policy that endows (pays the face amount). An example of such a policy is endowment at age sixty-five. With this contract, premiums are higher than whole life to age ninety-five due to the shortened length of time in which to accumulate the face amount in the savings portion. Premiums for endowment policies are paid from inception of the policy to the age of endowment or death, whichever occurs first.

In many cases an insured may want a whole life policy, but does not want to pay premiums for his or her entire lifetime. For these insureds a limited pay whole life is available. With this policy, premium paying years are reduced to a certain number, often twenty years, with the remaining policy provisions being the same as the basic whole life policy. Naturally, since the length of time to accumulate the necessary premium is shorter, higher annual payments are required.

Another variation in whole life insurance is the modified premium policy. This variation allows purchase of higher amounts of insurance with part of the premium deferred for a few years. Often the amount deferred is that which ordinarily would apply to the savings portion; or a one-year policy arrangement, similar to that previously mentioned in connection with the term life policies, can be used. In some cases the early premiums are level for a certain number of years, then jump to a premium level slightly higher than whole life at the issue age for the remainder of the policy term. In other policies, the early premiums are step-rated, either in flat amounts, such as $1 per $1,000 face amount, or in proportion to the number of years, often 10 percent of original premium each year for ten years. (In the latter example, the original premium is half the ultimate premium level.) Naturally, with this variation the savings portion does not grow as rapidly in early years as it does in the basic policy.

Another premium payment variation is single payment.

This type of policy is often used in estate planning for persons who receive a large inheritance at one time.

It must be noted that there is a difference in term premiums and whole life premiums. For a term policy, for example, of one year, the premium is a set amount. The next year, the cost of the same one-year term policy is higher to cover the increased likelihood of death occurring. Whole life policies usually are different. The premiums are level throughout the length of the contract. In the first year the premiums are higher in relation to the cost of pure insurance protection. In later years, the cost of pure protection is lower, although the benefits of the contract remain the same.

Following are illustrations of the whole life policy variations. The slope of the solid line separating pure protection from savings indicates relative premium costs. The steeper the slope, the higher the annual premium payment. Broken lines indicate growth of the savings portion due to interest accumulation after periodic premium payments cease. The illustrations are for explanatory purposes only; no attempt is made to represent actual policy performance.

A. An endowment at age sixty-five whole life policy pays death benefits as any other policy, but pays full face value to the insured if he survives to age sixty-five.

B. A limited pay, or as illustrated, a twenty pay whole life policy allows the insured to make payments during prime health years.

C. The modified premium policy has low initial premiums. Once normal premium level is reached, savings begin to grow. Normally savings will not be quite as high as with conventional installment payments to age sixty-five, a commonly used age for comparative purposes.

D. Single premium payment completes policy payment and allows the policy to grow to maturity in the manner represented here.

Each of the variations above has been presented separately. In actual operation they are often combined to give the various advantages of each to the insured. In life insurance, the name given to the policy will often reveal what variations are included. Thus, a “twenty pay endowment at eighty-five” combines the limited pay feature with the endowment feature at an age that meets the needs of the insured. This example is illustrated in (E):

There are additional variations of the above examples that do not require extensive discussion. For example, endowment policies can be written to mature in either a certain number of years or at a certain age. Many policies are purchased on the basis of settlement levels—certain amount of income per month after age sixty-five—or on the basis of an amount that can be purchased with an even dollar premium, such as $25 monthly. In addition, some policies pay dividends that add to the savings portion of the policy.

Dividends should not be confused with the term used in connection with investments in the stock market. In most cases, the amount considered to be a dividend is a calculated additional premium that is simply refunded to the insured after a period of use. The term “dividend” comes from the fact that the insured is theoretically receiving a share of earnings from investment of the additional premium by the insurer. These dividends are seldom guaranteed to the insured, but interest on dividend accumulations is often certain. The insured may, if he chooses, receive his dividends in cash, use the dividends to reduce premiums, use the dividends to purchase additional insurance, or allow them to accumulate at interest. Dividend and interest accumulations are paid to the insured or the beneficiary in addition to the face amount of the policy when the face of the policy is paid. Often they are also used as collateral for a loan.

As stated in the discussion of uses for term life insurance, the type of policy purchased depends upon the nature of the need being fulfilled. Whole life policies are best suited to filling needs that are permanent, for the lifetime of the insured, though he or she may be interested in a mode of payment other than lifetime installments. Whole life, at its most basic level, is also used to accumulate large sums of money. The level of protection can be raised by adding a term rider (comparable to the word “endorsement” used in property and casualty insurance) and the amount of savings accumulated and the rate of growth can be tailored by using available variations.

Examples of needs that are permanent—that exist regardless of when death occurs—are burial fund, clean-up fund (for debts not covered by credit life) and an adjustment fund for survivors. In addition, retirement needs for the insured and spouse and the advantages associated with having equity in a policy are available with whole life insurance if the insured survives to retirement.

Universal Life

Another type of life insurance policy, universal life, is basically a flexible premium, adjustable death benefit whole life program. In addition to flexible premium payments and adjustable death benefits, the maturity date, benefit options, and interest rates credited to the policy may change over the life of the policy. Among the features of universal life are:

1. Insureds determine their own premium schedule. Premium payments are entirely flexible, with no fixed payments required after the minimum initial premium. In addition, premium payments can “stop” or “go.” If an insured elects to stop making premium payments, the insurance company deducts the cost of insurance automatically from the policy’s cash value. When the entire cash value has been withdrawn, the insured person receives a premium notice for the minimum premium. The insured individual also may increase premium payments and such additional payments are invested by the insurance company, resulting in a growth of cash value. This cash value will continue to grow at an interest rate determined by the company; however, the minimum interest rate payable is guaranteed.

2. Flexibility in coverage. Coverage may be increased or decreased without the issuance of a new contract. However, to increase the amount of death benefit coverage, an insured individual generally has to show that he or she is still in good health.

3. Insured may select either a level or increasing death benefit. The owner of the policy may select a death benefit option. Under what is typically called Option A, the death benefit of the policy equals the policy’s face amount (i.e., a $100,000 policy will pay a death benefit of $100,000). Under what is typically called Option B, the policy’s death benefit equals the policy’s face amount plus an amount equal to its current cash value (e.g., a $100,000 policy will pay a death benefit of $115,000 ($100,000 face amount plus $15,000 current cash value)).

4. Cash value may be withdrawn or borrowed. Additionally, unlike a whole life policy, a universal policy allows the policy owner to access a portion of the policy’s cash value by making a partial surrender. This gives a portion of the cash value to the policy owner while the policy remains in force.

In addition to these features, universal life policies are subject to standard features and provisions of whole life programs. However, these features are enhanced by high current interest rates, and premium rates that are substantially lower than traditional whole life insurance.


A form of protection often associated with life insurance is an annuity, a policy against “living too long,” which is basically the opposite of term life. An annuity has no death benefit—most provide only for return of premium or the savings portion if death occurs before benefit payments begin.

The annuity has about the same variations available as the savings portion of the whole life contract—method of payment, timing of benefits, and determination of benefit amount—but also some features that life contracts have adopted as settlement options. In some cases, selection of a life policy settlement option is equivalent to purchasing a single payment annuity.

The variable annuity is a contract that relates benefits to economic cycles. Instead of purchasing a certain dollar benefit, the contract is bought by benefit units—comparable to shares in a mutual fund—that fluctuate in value as the value of the common stock in which the premiums are invested fluctuate. This allows the annuitant to receive increased benefits, based on stock market trends, as an offset against inflation. In a declining market the opposite may also be true—the benefits are reduced.

Annuities are often purchased by people who cannot buy regular life insurance contracts for reasons of health. Because there is no loading to allow for death, annuities have a low net cost. This is especially true if the annuity covers only one person and does not guarantee any certain amount of benefits. Additional information relating to annuities is under the heading Settlement Options.

Life Insurance Programming

One of the most difficult aspects of selling life insurance is determining, rationally, how much insurance should be purchased. When insuring buildings, producers can use appraisals; with liability protection, probability of loss and maximum settlement amounts can be estimated within “safe” limits. But, it is extremely difficult to determine how much a person is “worth.”

One popular life insurance programming method is based on a balance sheet-budget concept. This approach requires an inventory of resources available, commitments needing lump-sum and installment satisfaction, and incorporates income desires on both a living and dying basis. This information is put on a graph to show periods where income needs exist. (Care should be used in estimating social security resources unless an account statement is secured from the Social Security Administration.) Since the basis of most life insurance plans is permanent insurance, retirement income is calculated first. Once whole life coverage sufficient to provide desired income over social security benefits is determined, monthly interest on this amount is graphically represented to show what survivors will receive in the event of the death of the insured.

In addition to the above permanent needs—the insured is prepared for either living or dying—there must also be preparation for immediate death. Programming for immediate death assumes death at specific points in time and makes necessary arrangements to fit the situation.

The first immediate death situation assumes leaving a family with minor children. (Most insureds will have social security benefits payable from death until the youngest child reaches age eighteen; mother’s and father’s benefits cease when the youngest child reaches age sixteen, child’s benefits are generally payable until the child reaches age eighteen.) After the youngest child’s benefits are eliminated at eighteen (and to a certain extent when parent’s benefits cease when the child reaches sixteen), the surviving spouse enters a “blackout” period during which nothing is received from social security until he or she becomes eligible for widow(er)’s benefits at age sixty.

An insurance program to guard against financial hardship in such a scenario would have to take the following needs into consideration: family maintenance expenses beyond those provided for by social security prior to the children’s’ majority; maintenance expenses for the surviving spouse after cessation of parent’s benefits and prior to social security widow(er)’s benefits (the blackout period); additional income to provide for expenses beyond basic family maintenance, such as college education, etc.; and any additional income beyond that provided by social security during retirement years.

The second immediate death situation is where the death of an income-providing spouse occurs after the children have reached majority age (thereby eliminating social security parent’s benefits), but prior to the surviving spouse’s 60th year. In this situation, the surviving spouse is subject to the same maintenance expenses during the benefits “blackout” period; any additional income beyond social security retirement payments after age sixty; and perhaps educational and other expenses for children past majority age. Family maintenance, family income, or a combination of both will provide the necessary or desirable funds.

Other insurance programming methods use income anticipation as a base. One, called “maximum earning potential,” uses estimates of future earnings, discounted by an appropriate interest factor, to arrive at a desirable figure for insurance coverage. Another, “capitalized value of earning capacity,” is similar except that the final figure above is modified to reflect mortality prospects. These methods, and others like them, attempt to arrive at an amount that the insured should purchase to achieve personal financial security. The benefit of using one of the above programming methods lies not in the accuracy of the figures, but in arriving at an answer to the question of how much a person is worth to his or her family.

Settlement Options

When a life insurance policy is purchased, the insured is, in reality, buying money for the future. However, he is also buying something else, often overlooked, and that is the right to have this money managed safely and efficiently so maximum benefits from it are available to the recipient. The insured selects a settlement option that details the payout of benefits. These options apply with only minor differences to both life and annuity contracts.

A major consideration in the selection of a settlement option is the choice of recipients of the proceeds. There are a number of very important considerations in this regard requiring assistance from the insured’s professional financial advisers. Specific identification of the beneficiaries is essential, by qualification if not by name, with care not to eliminate legitimate beneficiaries while avoiding unnecessary taxation of proceeds. Life policies should be checked periodically for correctness in listing beneficiaries.

There are basically three choices of settlement available to the insured—payment in a lump sum, installments, or allowing proceeds to remain with the insurer at interest. With each of these options there are additional choices that can tailor the payout to meet the desires of the insured while keeping the plan flexible enough to prevent undue control by a “dead hand.”

Most financial advisers recommend starting a program by leaving the proceeds at interest with full right of withdrawal, if no other preference is made. This approach has many advantages—flexibility and immediate income to the beneficiary are the principal ones. Interest is usually paid monthly, but in special cases, such as when the beneficiary is a minor, insurers will let the interest accumulate.

Lump sum payment of the entire policy proceeds is the option presumed unless other arrangements are made. Normally when a lump sum settlement is desired, the entire sum is paid at once. However, some insurers will allow lump sum settlements to be paid in several installments, for example two or four payments within a few years (often used for education purposes).

Another variation is deferred lump sum, used when minors are beneficiaries, for payment several years after the date of death. Some insurers hesitate to use this option since it entails certain obligations concerning determination of qualifications to receive benefits, if tied to contingencies other than death of the insured.

The third settlement option is installment payment of proceeds and of interest, if any. A number of variations of this option are available. Installment payment may be a percentage or specified amount of the declining balance; payment for a specific number of years or until proceeds are exhausted; or a lifetime income to one person or several persons set up to begin immediately after death or deferred for a short period of time. The option selected depends upon the insured, the beneficiaries’ circumstances, and personal desires.

Life insurance contracts can be programmed to fill many needs of a family. The more attention paid to goals and methods of reaching the insured’s goals, the more effective will be the insurance program. A significant part of security is the confidence the insured has in the product and the chance that it will perform properly.

Buy Term; Invest Difference

Insurance authorities for years have discussed the merits of various insurance programs over others. However, no comparative discussion has caused more controversy than whole life versus decreasing term and investing the difference in stocks, bonds, money market funds, etc. On the surface, figures tend to favor the term alternative, especially if the insured has picked the right investment vehicle. Depending upon the market assumptions, the difference can be significant.

However, when faced with this alternative, the best suggestion appears to be to let the insured decide which alternative provides the financial security he or she is seeking. Most stock market analysts will demand, and mutual fund sales persons do likewise, that the individual have sufficient life insurance and other savings before investing. The most important question for the insured to answer is not whether the investment will perform, but whether he will. As many in mutual fund sales know, it is easy to want to put money aside, but if an individual is not accustomed to saving regularly, through good times and bad, he will interrupt the investing and not begin again. This personal trait is more important than the story the numbers tell in resolving the issue for an individual insured.

Special Policies

Most of this discussion has assumed insurance on the primary wage earner for family purposes. In addition to this there are a number of policies that have a more restricted appeal. The most common, the family plan policy, has grown to the point of being almost a standard coverage.

The basis of the family plan is to provide insurance on all members of the family at one low cost. This is accomplished by writing permanent coverage on the principal wage earner, a level term coverage on the other spouse, and a convertible “blanket” term coverage on all children, regardless of health, including those yet to be born. Premiums for this coverage are quite within reason for nearly any young family, though too often the policy is sold as being “enough.”

Another specialized coverage insures more than one person. While typically the coverage expires upon death of one of those insured, there are variations that allow conversion to other insurance and those that continue as an individual policy after death of the first insured. A policy insuring two lives that pays a death benefit at the first death is called a joint life policy. In contrast, a policy insuring two lives which does not pay a death benefit until the death of the surviving insured is called a survivorship life policy or second-to-die policy. Such policies are often used in estate planning. Further, these policies have had special appeal in partnership arrangements for “buy and sell agreements” and for husbands and wives. Some insurers will write this coverage on others with insurable interests in each other.

The “jumping juvenile” or special juvenile plan is a specialized coverage that was popular before universal life insurance was introduced. Instead of having only a modified premium, the juvenile plans commonly also have modified protection, a lower face amount during early years. The path of increase from the initial amount of coverage to the ultimate level, often reached at age 21, differs from plan to plan. Some remain at initial level until the insured’s 21st birthday; others make periodic increases, often doubling the amount of coverage prior to that point eventually reaching a protection level comparable to other juvenile plans. Initial premiums for these special plans vary from low annual installments to high single payments without regard to age. In most cases the ultimate premium is approximately the same as other whole life plans at that age though no savings are accumulated until after premiums reach the higher level. The main advantage to the insured is protection during juvenile years with guaranteed permanent coverage at age 21. Since universal life insurance with its flexible premium payments and death benefit amounts has been available, older policies such as the jumping juvenile type of coverage have decreased in popularity.

There are, of course, hundreds of additional special policies, but most are variations of the policy types discussed in these pages. Typical differences lie in the rate of accumulation of the savings portion or level of protection in relation to premium costs. The producer who finds the variations confusing will do well to remember one thing: you only get what you pay for. This is especially true in life insurance, though it requires an additional phrase: you have to make full use of the options to get it.

Taxation of Life Insurance

First, the death benefit of a life insurance policy is usually received free of income tax by the policy’s beneficiary. Two exceptions to this general rule are when the policy has been transferred or sold for value and when the policy does not meet the federal tax law definition of life insurance. In these instances, all or a portion of the death proceeds may be taxed to the beneficiary.

Second, premiums paid to purchase personal life insurance policies are not deductible for income tax purposes.

Third, dividends received on life insurance policies are generally not taxable until the policy holder has received more in dividends than he or she has paid in premiums.

Finally, if the policy allows the policy holder to borrow against the policy, the amount of the loan is not taxable to the policy holder when received (unless the policy has failed a test in the tax law and become classified as a “modified endowment contract”). Further, the interest paid on the policy loan is not deductible to the policy holder, at least in most instances.

Copyright © 2012, The National Underwriter Company

Interested in learning more about what life insurance route is right for you? Contact Agency 10 Insurance today at 763.553.0451

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Commercial General Liability (CGL) policy does not cover such business risks as…


It is a well-known fact that with some limited exceptions, the Commercial General Liability (CGL) policy does not cover such business risks as damage to the named insured’s work, or products, or to impaired property. The limited exceptions, which are not discussed here, deal with Exclusion J—Damage to Property; Exclusion L—Damage to Your Work; and Exclusion M—Damage to Impaired Property or Property Not Physically Injured.

It is not unheard of, however, for some insurers to provide some limited coverage to contractors for their liability having to do with damage to their work, to products they may install, or to impaired property. Since there is no shortage of claims dealing with liability emanating from construction work, the insurers willing to provide this limited coverage are likely to limit their target marketing to trade contractors—such as electricians, plumbers, and heating and air conditioning contractors—where the exposures are not catastrophic. Some insurers may even venture out to include other kinds of construction contractors, such as interior carpentry, subject to a limitation. It is not unusual to find a variety of undesirable coverages, including asbestos liability, written subject to a sublimit.

At the outset, it is important to note that contractors’ E&O coverage should not be confused with contractors’ professional liability insurance. This latter coverage is intended for contractors involved in construction management and design-build work.

Who first coined the policy known as contractors’ E&O insurance is not important, although it is interesting that all the insurers providing it carry that same name. What is important, however, is the scope of coverage that these policies will provide.

Before delving into the characteristics of contractors’ E&O coverage, it is first necessary to provide a limited review of the CGL policy because it should give those interested in analyzing contractors E&O coverage a better insight into what to look for in fulfilling the needs of their insureds who are contractors interested in purchasing this specialized coverage.

CGL Policy versus Contractors’ E&O Policy

The characteristics of both the CGL and contractors’ E&O policies will be discussed in this section and compared on the basis of the insuring agreement, trigger, the nature of injury covered and not covered, the nature of coverage, when coverage applies, whose work is covered, the nature of contractual liability coverage, and restrictions to occupations.

Characteristics of the CGL Policy

The majority of discussions of the CGL policy deal primarily with the standard provisions of the Insurance Services Office (ISO) form. Keep in mind, however, that many insurers rely on their own independently filed policies that often contain some provisions identical to the ISO standard, but may also include other nonstandard forms. Those insurers within the excess and surplus lines markets likewise issue standard ISO forms but may also mix and match other forms. The CGL policy can be a standard or nonstandard issue. Wherever reference is made to standard, it means the provisions of ISO.

The CGL policy is generally written on an occurrence basis, although a standard claims-made form has been available since 1986. Typically, the CGL policy consists of three primary coverages: (1) bodily injury and property damage, (2) personal and advertising injury, and (3) premises medical payments. The form does not cover exposures relating to (1) risks insurable under other policies; (2) risks subject to CGL coverage by endorsement, usually for an additional charge; and (3) risks not otherwise insurable.

The CGL policy, both standard and nonstandard, typically excludes property damage to the named insured’s work, the insured’s product, and impaired property.

Characteristics of Contractors’ E&O Coverage

Based on the contractors’ E&O policies reviewed, all are nonstandard, meaning each insurer has its own format and provisions and all are written on a claims-made basis.

Since the contractors’ E&O policy is meant not to duplicate what the CGL policy covers, the policy specifically excludes liability for bodily injury, property damage, and personal and advertising injury. It also does not cover any property damage liability not excluded by the CGL policy.

What is covered, depending on the individual contractors’ E&O policy, is property damage to the named insured’s work, the insured’s product, and impaired property. The following is an example provided by an insurer offering this specialized coverage presumably as a sales pitch. A contractor completes a $35,000 electrical job. A few months after the building’s occupancy, the named insured’s product (faulty junction box) causes a fire that extensively damages the building. The electrician’s CGL policy would cover damage to the building, but the $35,000 electrical work would be excluded. Had the electrician been able to purchase a contractors E&O policy, the remaining damages would have been covered, provided sufficiency of limits.

The Insuring Agreement

Under the standard CGL policy, the insurer agrees to pay those sums the insured becomes legally obligated to pay as damages. Reference to the words “legally obligated to pay” is broad in scope because it encompasses civil liability that can arise from either unintentional (negligent) or intentional tort under common law, statute, or contract.

The insuring agreements of the contractors’ E&O policy are somewhat more limited. These policies may duplicate what the standard ISO policy says but refine the agreement more narrowly. An example is the insuring agreement that makes reference to “legally obligated to pay damages” but goes on to say that the damages must result from an insured’s negligent act, error, or omission. Compared to the CGL policy, this insuring agreement is narrower because the act, error, or omission must be negligent. The contractors’ E&O policy, in other words, does not encompass coverage for liability for intentional acts or intentional torts under contract.

This is not to say that all contractors’ E&O policies contain this wording, but it is to say that the insuring agreements of these policies do appear to hinge coverage on errors, omissions, or negligent acts. Thus, if a contractor knowingly decides to cut a corner for purposes of cutting costs and a problem arises, the insurer could deny coverage because of the conscious, intentional act of making that decision, even though there was no expectation of a future problem. Insurers are not likely to be so precise and deny coverage on this point if the coverage is for low limits.

The Trigger

The trigger of a standard CGL policy written on an occurrence basis is at the time of injury or damage, during the policy period. When the standard claims-made policy is issued, the trigger is when notice of the claim for damages because of bodily injury or property damage is received and recorded by the insured or insurer, whichever is first.

As a general rule, contractors’ E&O coverage is written on a claims-made basis, subject to all of its unique characteristics, such as prior acts, retroactive date, and extended reporting period. A claim must usually be made after the retroactive date, if any, and during the policy period or extending reporting period. These policies are like the standard claims-made form that states notice has been received when it is received in writing by the insured or insurer.

A definite advantage of these policies is the notice of circumstance provision. Briefly, sometimes insureds will learn of a circumstance that has not developed into a claim but based on the insured’s perspective, a claim is likely to develop. If the insured reports this notice of circumstance, it will be considered notice to the insurer if and when that circumstance leads to a claim. Not all policies provide this notice of circumstance. Despite the advantage of this provision, insureds need to be very careful on what is described in the report to the insurer. If the circumstance is described too broadly, the insurer could laser out of the renewal a greater part of any future coverage than what actually would be covered. Another point is that the insured must make such report or the insurer could deny any future claim, based on failure to provide prompt notice.

Nature of Injury or Damage Covered

The standard CGL policy provides coverage for damages because of bodily injury, property damage, and personal and advertising injury. Property damage coverage consists of two parts: (1) physical injury to tangible property, including all resulting loss of use; or (2) loss of use of tangible property that is not physically injured. Also covered, to the extent no exclusion applies, is damage to tangible property, other than the named insured’s work, product, or impaired property. However, property damage does not include electronic data.

Not covered and the reason for the need of contactors’ E&O coverage is damage to the named insured’s work, products, or impaired property, with some exceptions.

The contractors’ E&O policy applies solely to property damage, usually defined to the same extent as the standard CGL policy. One such randomly selected contractors’ E&O policy covers damages because of claims for faulty workmanship, material, design, or products, or consequential loss resulting (1) from the insured’s actual or alleged error, omission, or negligent act; or (2) from a defect in material or in a product sold, either of which is installed by the insured. The form of another insurer covers damages while acting in the named insured’s capacity, as described in the declarations, or from a defect in material or a product sold or installed by the insured, while acting in this capacity.

Given the fact that these policies are nonstandard, they must be viewed very carefully to make sure they apply to the kind of exposure that confronts the contractor. If a contractor does electrical work, the insurer will likely want to limit its coverage to that specialty and not be surprised to learn that the contractor also does metal roofing or installation of fiber optics.

It is good when a contractors E&O policy covers damage to impaired property because it is a widely misunderstood term, even though defined. It may even be misunderstood in relation to a contractors’ E&O policy because this policy is limited to damage to the named insured’s product or work. Damage to other property is not covered because it should be covered by a CGL policy. When impaired property is covered, it encompasses tangible property, other than the named insured’s product or work that cannot be used or is less useful because it incorporates the named insured’s product or work that is known or thought to be defective, deficient, inadequate, or dangerous, subject to one additional proviso: the property can be restored to use by repair, replacement, adjustment, or removal of the named insured’s product or work.

Assume, for example, that after a plumbing contractor installs pipes over which concrete is poured for the flooring, a defect in the work is suspected (faulty hookup) because of low water pressure. The concrete flooring, which is property that cannot be used because it incorporates the named insured’s work (plumbing) should be covered, along with replacement of the faulty piping.

In light of the unique coverage that the contractors’ E&O policy provides, the kinds of exclusions, other than for bodily injury, personal and advertising injury, and property damage other than to the named insured’s product or work, may appear to be somewhat unusual. For example, these specialty policies do not apply to liability assumed by the insured under any written or oral contract, other than liability for damages the insured would have in the absence of such contract or agreement; delay or the failure to complete a project on time; any error or omission in the preparation of estimates; infringement of copyright, trademark, or patent, unfair competition, piracy, or theft; intentional injury; manufacturer’s warranties; pollution; professional liability; and subcontracted work. Some of these exclusions may appear to be unnecessary, such as intentional injury, if coverage is limited to negligent acts. Infringement of copyright, trademark, or patent also would appear to be unnecessary when a policy limits its coverage to tangible property. These kinds of exclusions may be inserted simply to clarify to the named insured the nature of coverage.

When Coverage Applies

Unless a CGL policy is modified with CG 21 04, Exclusion—Products-Completed Operations Hazard, coverage applies for liability stemming from an occurrence while work is in progress, as well as after work is completed or a product has been relinquished.

Contractors’ E&O liability coverage, on the other hand, applies only after work has been completed or a product has been relinquished. No coverage applies while work is in progress.

Scope of Contractual Liability Covered

The standard CGL policy automatically covers five types of agreements: (1) lease of premises; (2) easement agreements; (3) agreements required by municipalities, other than work done for those entities; (4) sidetrack agreements dealing with railroads; and (5) elevator maintenance agreements. Unless one of two limitation endorsements are issued, contractual liability coverage also applies to tort liability assumed under contract (subparagraph f. of the “insured contract” definition). The two endorsements are CG 21 39, Contractual Liability Limitation endorsement, which limits coverage to the five preceding agreements, and CG 24 26, Amendment of Insured Contract Definition, which limits coverage to partial fault.

The extent of tort liability assumed coverage, however, will also depend on any applicability of an anti-indemnity statute. Some statutes permit the assumption of sole fault, others limit liability assumed to partial fault, and still others will not permit the transfer of the consequences of sole or partial fault to others.

The point here is that the CGL policy provides some contractual liability coverage. The contractors E&O policy, on the other hand, does not provide contractual liability coverage. However, it does typically cover liability that would apply in the absence of any contract or agreement.

Whose Work Is Covered—Occupation Restriction

The CGL policy typically applies to work performed by or on behalf of the named insured by a subcontractor, for example. However, by endorsement, the CGL policy coverage can be limited solely to work of the named insured. The contractors’ E&O policy, on the other hand, limits liability coverage solely to work or products of the named insured. Professional liability, however, is commonly excluded. Professional liability is not commonly excluded under a CGL policy, but an endorsement is available for that purpose.

Coverage is not restricted under the CGL policy to the occupation of the named insured or to the classifications shown in the policy declarations. It is possible, however, to limit coverage in a variety of ways. Examples are by issuing CG 21 44, Limitation of Coverage to Designated Premises or Projects, and CG 21 53, Exclusion—Designated Ongoing Operations. Insurers in the excess and surplus lines market are known to issue endorsements limiting coverage solely to the kind of work entailed in the classification(s) listed.

Typically, the contractors’ E&O policy limits coverage to the contractor’s capacity as described in the policy. A contractor who describes his work as a heating and air conditioning contractor will not have coverage for roofing or carpentry work. The reason for this restriction is that the coverage is not for all contractors but solely with certain trade contractors where the exposure to liability is not as great as it is with other work of contractors.

Problems—Court Issues

Not surprisingly, given the selective underwriting and relatively low limits applied to contractors’ E&O coverage, there have not been many disputes that have culminated in court decisions.

One dispute, however, was Yeager v. Polyurethane Foam Insulation, LLC, 808 N.W.2d 741 (Wis. App). It is unclear whether the plaintiff was a project owner or general contractor but will be referred to here as the general contractor. In constructing a new home, the general contractor hired the services of insulation contractor (PFI). After the work was completed, however, the general contractor was under the belief that the insulation work was incorrectly performed and, therefore, sued PFI for breach of contract and warranty. The insurer, Society, that issued a CGL policy to PFI denied coverage in light of the fact that the faulty workmanship of PFI was not an occurrence and was specifically excluded.

Contractors’ E&O coverage was issued to the CGL policy by endorsement. The endorsement provided that the insurer would pay “those sums that [PFI] becomes legally obligated to pay as damages covered by this insurance because of contractors’ errors and omissions to which this insurance applies.” This endorsement, which was for a limit of $10,000, also stated that the insurer’s right and duty to defend ended when the insurer had used up that amount in the payment of judgments or settlements for contractors errors and omissions.

The insurer conceded that the contractors E&O endorsement provided coverage for the claims made against its named insured, PFI, but also claimed there was no other coverage available under the CGL policy.

The insurer offered to pay the $10,000 limit to the court, in fulfillment of its obligation under that endorsement, but also maintained that once that amount was paid it had no further duty to defend PFI.

The court ruled that the CGL policy did not apply and that the posting of the $10,000 limit extinguished all other obligations under the policy. The general contractor maintained that the court erred in making that decision. The court held that the general contractor had no standing to challenge the court’s ruling on the insurer’s duty to defend since the general contractor was not a party to the contract.

Another case involving a contractors’ E&O coverage issue, where the insurer successfully denied coverage under that policy, including the contractor’s CGL policy is General Cas. Co. of Wisconsin v. Rainbow Insulators, Inc., 798 N.W.2d 320 (Wis. App). This was a duty-to-defend case involving defects in the construction of a condominium building that caused acoustical problems for residents. KBS was the general contractor for the project and hired subcontractors that included E&A Enterprises, Inc. (E&A).

KBS filed a third party complaint against E&A and its insurer, Acuity, alleging that E&A breached its contract through faulty installation of metal resilient channels that act as sound barriers, and by refusing to correct the faulty installation. KBS claimed that the errors of E&A resulted in two categories of damage: (1) the loss of use and enjoyment of the condominium units by residents, and (2) the physical destruction of ceilings required to fix the noise problem. The insurer, which issued both a CGL and contractors’ E&O coverage, asserted that its policies did not cover the allegations of KBS, the general contractor, against E&A. The circuit court granted summary judgment to the insurer and E&A appealed the court’s order unsuccessfully.

While the court found that both allegations for loss of use of tangible property and physical destruction of the ceilings were determined to be “property damage,” as defined by the policy, both were also found not to be covered by the CGL policy because of the exclusion for damage to the named insured’s work. Without coverage under the CGL policy, the argument turned to the contractors’ E&O policy that this same insurer issued (and that the court referred to as a professional liability policy).

The E&O policy provided coverage for “damages because of property damage to your product, property damage to your work, property damage to impaired property or recall expense that arises out of your product, your work, or any part thereof.” The contractors’ E&O policy used the same definitions as the CGL policy for “property damage” and “your work.” Since KBS alleged “property damage” that fit within the “your work” exclusion, the court concluded that the E&O policy provided initial coverage.

The insurer, Acuity, argued that its contractors’ E&O policy did not provide initial coverage because KBS failed to allege damages due to property damage. The court disagreed. The insurer’s next point of attack was to deny coverage based on one of the exclusions titled “delay,” which excluded coverage for damages arising out of any delay, as well as failure by the named insured or anyone acting on its behalf to perform the contract or agreement in accordance with its terms. The court held that by its terms, the delay exclusion applied because KBS’s allegations were based on E&A’s failure to perform according to the terms of the construction contract between KBS, the general contractor, and E&A, the subcontractor.

E&A argued that the E&O form provided coverage for KBS’s allegations, despite the contract exclusion, because the alleged property damage arose out of E&A’s negligent acts, errors, or omissions. In other words, E&A asserted that, because KBS alleged that negligent conduct caused E&A to breach the contract, the policy provided coverage. E&A cited 1325 North Van Buren, LLC v. T-3 Group, Ltd., 716 N.W.2d 822 in support of its argument. However, reliance on this case failed because the policy there did not contain a contract exclusion.

E&A also argued that the interpretation of the contract exclusion was absurd because it would render the E&O coverage meaningless, that every time an insured enters into a contract, it would lose coverage for any negligent acts, errors, or omissions in work performed under that contract. The court disagreed that its interpretation of the contract exclusion was incorrect because it would render the policy useless. The court explained that although KBS’s specific allegations in this case fit the contract exclusion, it would not defeat coverage in every scenario. The exclusion, said the court, applied only if the insured or anyone acting on behalf of the insured “[d]elay[s] or fail[s] . . . to perform the contract in accordance to its terms.” It did not exclude all claims of any sort, the court added, that might arise during the course of work performed under a contract as E&A suggested.

The court offered the following example of where the contract exclusion would be inapplicable: because contractors owe common law duties of care to those with whom they contract, as to all other persons, the contract exclusion would not operate to preclude E&O coverage arising from a tort claim that involved conduct that was not a delay or failure to perform under a contract term. The court added that “in Wisconsin, one always owes a duty of care to the world at large.”

The court of appeals therefore concluded that the complaint did not allege facts that, if proven, would have resulted in coverage under either of the two insurance coverages for KBS’s allegations, the your work exclusion in the CGL policy, and the contract exclusion in the E&O form. Accordingly, the insurer also did not have a duty to provide defense.


After reading this article on the contractors’ E&O policy or endorsement, what may beg a question is what should be considered when in the market for this coverage? The following considerations might be recommended in pondering the purchase of contractors’ E&O coverage:

•Because these policies or endorsements cover business risks, which commonly are assumed by insureds and can amount to large claims, consider the insurer offering the coverage. A standard line insurer might be more advantageous than an excess and surplus lines insurer. Longevity of the insurer is also important.

• Be sure not to confuse contractors’ E&O coverage with contractors’ professional liability, which is intended for such exposures as construction management and design-build work.

• Knowledge of CGL policy provisions is important because it may be easier to determine whether the E&O coverage is appropriate for the contractor.

• Even though the same insurer of contractors’ E&O coverage issues the CGL policy, do not assume all gaps between the two policies are eliminated. Also, do not assume that if the CGL policy does not apply, the E&O coverage will. Remember the foregoing discussion of General Casualty Company of Wisconsin v. Rainbow Insulators, Inc.

• Since property damage under the contractors’ E&O policy or endorsement must occur after the work (impaired or otherwise) is completed, it may sometimes be difficult to determine when damage first occurred and, as a result, generate a coverage problem.

• The contractors’ E&O coverage limits coverage to negligent acts, errors, or omissions. The CGL policy covers any act (intentional or unintentional), error, or omission unless an exclusion applies.

• Contractors’ E&O coverage varies by insurer. While it is not a large market, some coverage is broad and other forms are narrow. The forces, therefore, must be reviewed carefully with the perspective contractor in mind.

• Do not rely on the title of exclusions. An E&O policy with a delay exclusion should exclude only liability arising from a delay or failure to complete a contract on time. If the policy or endorsement also excludes liability arising from the failure to complete a contract, it should be avoided, to the extent possible. A problem is that contractors’ E&O coverage exists in a limited market, for certain kinds of contracts, and usually for low sublimits.

Copyright © 2012, The National Underwriter Company

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