CHAPTER XV USE AND OCCUPANCY, PROFITS, AND RENT INSURANCE The Fire Policy Incomplete in its Coverage Against Loss by Fire.-The standard fire policy only protects property against "direct loss or damage by fire" and expressly provides that it limits recovery to the cost of replacement or reproduction. Yet in the overwhelming number of cases, the amount of loss occasioned by fire is not limited to the value of the property actually destroyed. The manufacturer, whose factory is partially or totally suspended in its operation through a fire, loses valuable profits during the period of suspension, as well as such maintenance expenses and fixed charges as cannot be discontinued despite the interruption of the business. The same may also be said of merchants and numerous other types of business men. Owners or commission men holding merchandise for sale, or, if already sold, holding the same for shipment or delivery, stand in position to lose all their profits or commissions should the goods be destroyed. Likewise, owners of buildings, destroyed or damaged by fire, will lose the rental income during the time that it takes to restore the property to 1 For a detailed discussion of the forms of insurance discussed in this Chapter the reader is referred to Robert P. Barbour: "Agent's Key to Fire Insurance," Chapters XII and XIII; "Rent, Rental Value and Leasehold Insurance,' a pamphlet published by the Insurance Company of North America, 1920; and "Use and Occupancy Insurance, a pamphlet published by the Insurance Company of North America, 1919. an inhabitable condition. In fact, numerous instances may be cited, especially when the property damage is only partial, where the loss resulting from the interruption to business greatly exceeds in seriousness the value of the property actually destroyed. Until recently such losses of profit, maintenance expenses, and rent were regarded as unavoidable and were accepted as a matter of course. Yet they should be the subject of insurance quite as much as the property itself. They are insured to-day by all leading fire insurance companies under three main types of coverage, viz., “use and occupancy insurance," "profits and commissions insurance," and "rent insurance." The last type, in turn, may be classified into "rent," "rental value," and "leasehold" insurance. While all these kinds of insurance are similar in their general purpose, the special forms under which they are written (and which are attached to the standard policy) differ greatly in their provisions. Moreover, various companies also issue separate policies under which use and occupancy, profits, and rentals are protected if the property is damaged or destroyed by windstorm, explosion, riot, sprinkler leakage, etc. Use and Occupancy Insurance.-Meaning and application. This type of insurance is designed to reimburse manufacturers, merchants, warehousemen and others for (1) the loss of profits and (2) the loss of continuing and unprofitable maintenance expenses and fixed charges, occasioned by the suspension or interruption of their business through fire. The great need for such insurance must be apparent. When manufacturers, merchants or warehousemen are prevented by fire from continuing the production, sale or storage of goods, the indirect loss often exceeds the value of the property actually destroyed. Yet the standard fire policy provides that the company shall not be liable for "compensation for loss resulting from interruption of business or manufacture." Hence, the desirability of attaching a special form to the policy which enlarges the insurance coverage to include the above-mentioned items. Only in this way can the insured be protected against the loss of net carnings, the payment of unavoidable, but under the circumstances, unproductive expenses, the disintegration of his organization and the possible inability, owing to the effects of financial drain, ever again to restore his property to a state of profitable operation. Use and occupancy insurance is effected by the occupant of the premises, whether owner or tenant. The insurance usually applies to the building, equipment, and necessary raw materials used in the business under consideration, but does not cover finished stock or merchandise for sale. As will be explained later, the last two items are usually covered under a profits policy. Attempts at the use of a standard use and occupancy form have been made, but with comparatively little success. Conditions surrounding different types of business vary so greatly with respect to the problems arising in the application of this form of insurance, and the same may also be said of profits and commissions insurance, that the use of some one standard form of wording has been found impracticable. Accordingly, many different forms 2 The following serves to illustrate the form used in connection with use and occupancy insurance for manufacturing plants: COPY OF USE AND OCCUPANCY FORM ...... On the use and occupancy of and occupied for ... situated If the said building and machinery equip ment be destroyed or so damaged by fire as to necessitate a total or partial suspension of manufacturing, this company shall be liable under this policy for loss of net profit on goods the production of which is thereby prevented, and for such fixed charges and expenses have been devised to cover the situation with reference to manufacturing plants or various other types of business, such as street railway properties, coal mining operations, mercantile establishments, warehouses, chemical laboratories, hotels, theaters, schools, etc. Valued poli as must necessarily continue during a total or partial suspension of manufacturing, for not exceeding such length of time as would be required under ordinary circumstances to rebuild, repair or replace such part of said building and machinery equip ment as may be destroyed or damaged (not limited by the date of expiration of this policy), under the following terms and conditions, to-wit: During the time of a total suspension of manufacturing under this policy shall not exceed one-three hundredth (1/300th) part of the amount of this policy for each working day. During the time of a partial suspension of manufacturing, liability under this policy shall not exceed that proportion of the per diem liability for a total suspension of manufacturing which the daily average decrease in the production of goods bears to the daily average production for a period of three hundred (300) days' time immediately prior to such suspension. It is a condition of this insurance that liability is based on not less than three hundred (300) working days to the business year. The word "day" or "working day" as used in this contract shall be held to cover a period of twenty-four (24) hours. Liability hereunder shall not exceed the amount of insurance by this policy nor a greater proportion of any loss than the insurance thereunder shall bear to all insurance, whether valid or not, covering in any manner the loss insured against by this policy. The production of goods for or by the assured elsewhere than in the above described building because of and during such suspension, shall be considered the same as goods manufactured therein, except that liability hereunder shall extend to the necessary decrease in profits thereon. This policy applied only to the buildings and machinery that contribute to the completion of the work of this plant, and all storehouses and contents are excluded unless specifically provided for herein. Surplus machinery or duplicate parts thereof, equipment or supplies, which may be owned, controlled or used by the assured shall, in the event of loss, be used in placing the property in condition for operation. In case the assured and this company are unable to agree as to any question affecting the amount of loss under this policy, the same shall be determined by appraisers in the manner provided by the policy hereto attached, the provisions of which policy shall govern in all matters pertaining to this insurance, except as herein otherwise provided. cies are, as a rule, avoided, and an effort is usually made to use the preceding year, or some other past period, as the basis for estimating the value of use and occupancy or profits for the particular premises to be insured. Items usually constituting the value of use and occupancy. The use and occupancy form usually provides, using the manufacturing form as a basis, that "if the said. building.. .... and machinery and equipment be destroyed or so damaged by fire as to necessitate a total or partial suspension of manufacturing, this company shall be liable under this policy for loss of net profit on goods the production of which is thereby prevented." Further provision is also made to the effect that the company shall be liable for "such fixed charges and expenses as must necessarily continue during a total or partial suspension of manufacturing but not exceeding such length of time as would be required under ordinary circumstances to rebuild, repair or replace such part of said building and machinery and equipment as may be destroyed or damaged (not limited by the date of expiration of this policy) etc." Such fixed charges and expenses are sometimes enumerated in the form as comprising "rent, interest, taxes, royalties for machinery (or processes) which have to be paid regardless of the operation of the plant, salaries (under contract), payroll relating to employees who must be retained in order to resume promptly after damage is repaired, cost of lighting, heating, attendance and general maintenance consistent with suspension of business during the time necessary for repairs." Policy definition of buildings, machinery and equipment. The premises contemplated under the use and occupancy insurance should be described specifically (by city, block boundaries, number of lot and number of building) and not in general terms. Buildings and contents which are regarded by the insured as not contributing to the use and |