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The Difference in Conditions Policy: An Extra Friend in a Flood or Earthquake

April 18, 2013

It’s the curse of the insurance professional that the arrival of something poetic like “April showers” gets you thinking about floods and mudslides along with earthquakes and other natural catastrophes. That’s why, this week, we will be discussing the Difference in Conditions (DIC) policy, a useful tool for filling coverage gaps.

As gloomy as these events are, the mention of floods and earthquakes is unavoidable when discussing insurance limits and exclusions because these are the kinds of events that insurance companies dread.  Carriers set rates such that the amount of premium paid in on policies will cover any money expected to be paid out in claims. The company spreads the risk of loss over many consumers in hopes that only a small number will suffer damage. Large scale calamities like floods and earthquakes often harm many policy holders at once, subjecting the insurance company to a “run” on expensive claims. This is why flood and earthquake insurance is commonly provided by the government and why such policies can be so limited in scope of coverage and expensive when sold on the private market.

It’s in dealing with these limits and exclusions to standard commercial property policies that the Difference in Conditions policy can help. A DIC policy is an attractive, supplementary option for business owners facing a significant flood or earthquake exposure when their carrier doesn’t offer flood or earthquake coverage, cannot provide full limits to cover potential flood/earthquake losses, or can only offer this coverage at prohibitive rates.

The DIC policy was originally designed to be a “gap” policy that provided special form coverage against “open perils.” Property policies often only covered losses caused by specifically named perils with the DIC policy covering what was excluded. Now, while more and more property policies are written on an “open perils” basis (meaning more inclusive), DIC policies are primarily bought to cover flood and earthquake exclusions – exclusions that may still not be covered on by open perils property policy.

Besides providing coverage for flood and earthquake losses, a DIC policy may also be used to provide excess limits over flood and earthquake coverages made available by endorsements to a commercial property policy or through the National Flood Insurance Program (NFIP). Furthermore, because a DIC is often written as a type of inland marine insurance, it also may be used to address other risks that may not be covered in commercial property policies such as property in transit, property overseas, or business interruption claims arising from a transit loss.

So, the DIC policy is obviously a powerful tool for covering gaps that come with some commercial property policies. However, we should offer a warning to anyone who plans on shopping for commercial DIC policies: seek professional help. DIC policies are a “non-filed” or “unregulated” policy, which means that every carrier has their own set of policy and contract terms. Often, the terms and conditions in a DIC policy can vary in important ways from one carrier to another. Choosing a DIC whose terms and definitions conflict in important ways with your underlying commercial property policy can cause coverage problems as well as fixes.

Here are a few things to look out for:

     •  Closely compare the coverages and exclusions.
     •  Pay close attention to definitions of terms, particularly “flood” and “earthquake”.
     •  Know the difference between Replacement Cost versus Actual Cash Value.

A good insurance agent can help you navigate these differences and find the coverage options that are right for you. If you want to learn more about the history, uses and eccentricities of the DIC policy, a good resource is the online issue of Adjusting Today found here (via Adjuster’s International).

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