1. Forms
2. CP
3. CP-04-40

Form CP 04 40: Spoilage Coverage

1. What the form is

The CP 04 40 Spoilage Coverage endorsement is an addition to a Commercial Property policy that provides coverage for "perishable stock" against direct physical loss or damage caused by specific perils. "Perishable stock" is defined as personal property that is maintained under controlled conditions for its preservation and is susceptible to loss or damage if those controlled conditions change. This endorsement essentially functions as a self-contained policy in some respects, with its own specific definition of covered property, covered causes of loss, limit, and deductible. The primary causes of loss covered are:

• Breakdown or Contamination: This includes a change in temperature or humidity resulting from mechanical breakdown or failure of refrigerating, cooling, or humidity control equipment. It also covers contamination of perishable stock by the refrigerant used in the cooling systems. Importantly, physical damage to the equipment itself is not required for coverage to apply; a mere failure is sufficient.
• Power Outage: This covers spoilage due to a power interruption, whether it occurs on or off the described premises, if selected in the schedule. This is a key feature, as standard commercial property policies often exclude losses from power failure occurring off-premises.

2. Classes of business it applies to

While commonly associated with restaurants, the need for Spoilage Coverage extends to a wide array of businesses that handle perishable goods. Examples include:

• Restaurants, cafes, and caterers: For spoilage of food items in refrigerators and freezers.
• Grocery stores and supermarkets: For a wide variety of perishable goods like produce, dairy, meat, and frozen foods.
• Florists: For flowers and plants requiring controlled temperature and humidity.
• Pharmaceutical companies and pharmacies: For medications and vaccines that must be stored at specific temperatures.
• Medical facilities and laboratories: For blood products, tissue samples, and other biological materials.
• Bakeries: For ingredients and finished products requiring refrigeration.
• Dairy farms and creameries: For raw milk and dairy products.
• Chemical manufacturers: For certain chemicals that are temperature-sensitive.

3. Special considerations

There are several important points to consider when evaluating the need for or applying the CP 04 40 endorsement:

• Covered Property Definition: Coverage only applies to "perishable stock" as defined in the endorsement and located at the premises described in the declarations. Other types of property are not protected by this endorsement.
• Cause of Loss Selection: The insured must select which causes of loss (Breakdown or Contamination, Power Outage, or both) will apply. It's generally advisable to include both.
• Refrigeration Maintenance Agreement: The policy may require the insured to have a refrigeration maintenance agreement in place. This is often a condition for coverage or can impact pricing.
• Selling Price Option: The endorsement offers an option to insure perishable stock at its selling price rather than actual cash value. This can be particularly valuable for businesses like restaurants. Opting for selling price valuation typically results in a higher premium.
• Deductible: The CP 04 40 has its own deductible, which can be different from the main property policy deductible.
• Exclusions: While the CP 04 40 is somewhat self-contained, some exclusions from the underlying property policy still apply (e.g., earth movement, governmental action, nuclear hazard, war, and water). Additionally, there are specific exclusions within the CP 04 40 itself, such as loss caused by the disconnection of refrigeration systems from the power source by the insured or others. Contamination is limited to contamination by the refrigerant; other types of contamination (e.g., from a deceased person in a cooler) would likely not be covered under this endorsement.
• Interaction with Other Coverages:
  • Equipment Breakdown (EB) Coverage: While there might seem to be an overlap, an EB policy is generally not an effective substitute for the CP 04 40 for spoilage. EB policies often have a narrower definition of "breakdown" and may not cover spoilage unless a specific limit is chosen or values are included. The CP 04 40 provides broader protection for spoilage as it doesn't necessarily require physical damage to the equipment.
  • Utility Services Endorsements (e.g., CP 04 17 Direct Damage, CP 15 45 Time Element): These endorsements typically require the utility service interruption to be caused by a covered cause of loss to off-premises utility property. The CP 04 40, when Power Outage is selected, can provide broader coverage for spoilage due to power loss as it doesn't always require the power outage itself to be caused by a peril covered under the main policy. However, these endorsements cover different aspects of loss (direct damage vs. time element vs. spoilage of stock) and are not mutually exclusive.
• Coinsurance: The CP 04 40 is generally not subject to coinsurance.
• Cyber Incident Exclusion: Newer versions of the endorsement may incorporate cyber incident exclusions.

4. Key information for agents and underwriters

• Risk Assessment: Thoroughly evaluate the insured's operations to identify all perishable stock exposures. Consider the types of perishable goods, their value, the reliability of refrigeration/cooling equipment, and the potential financial impact of a spoilage event.
• Limit Adequacy: Ensure the limit of insurance selected is sufficient to cover the maximum potential spoilage loss, especially if the "selling price" option is chosen.
• Deductible Selection: Discuss appropriate deductible levels with the insured, considering their risk tolerance and the premium impact.
• Maintenance Practices: The existence and quality of a refrigeration maintenance agreement is a key underwriting consideration. Regular maintenance can significantly reduce the likelihood of mechanical breakdown.
• Power Reliability: For businesses in areas prone to power outages, the "Power Outage" coverage option is crucial. Underwriters should assess the local power grid's stability.
• Coverage Gaps: Be mindful of potential coverage gaps. For instance, the CP 04 40 covers direct loss to perishable stock but not necessarily the business income lost due to the spoilage or the cost to clean up contamination beyond refrigerant leakage. Other endorsements like Business Income from Dependent Properties or specific contamination cleanup endorsements might be needed.
• Pricing: The premium for this endorsement will depend on the limit of insurance, the causes of loss selected, the deductible, whether the selling price option is chosen, and the underwriter's assessment of the risk, including the maintenance of equipment. Expect a significant rate increase (e.g., 40%) if the selling price option is selected.
• Clarity on Declarations: Ensure the declarations page clearly indicates that Spoilage Coverage is provided, referencing form CP 04 40, and lists the specific limit, deductible, and covered causes of loss.
• Distinguish from Utility Services Coverage: It's important for agents to understand and explain to clients that while the CP 04 40 can cover power outage, it is specifically for the spoilage of perishable stock. Broader coverage for direct damage or time element losses due to utility service interruption often requires separate Utility Services endorsements (CP 04 17 or CP 15 45).