1. Forms
2. CP
3. CP-15-06

Form CP 15 06: Extra Expense From Dependent Properties - Limited International Coverage

1. What the form is

The CP 15 06, "Extra Expense From Dependent Properties - Limited International Coverage," is a commercial property insurance endorsement that extends Extra Expense coverage to losses stemming from physical damage to dependent properties located outside the standard coverage territory (United States, its territories and possessions, Puerto Rico, and Canada). Its primary function is to cover necessary additional expenses an insured incurs, above their normal operating costs, to continue their operations when a key international supplier, buyer, or provider (a "dependent property") suffers a loss covered by the insured's policy. This endorsement is specifically for extra expenses and is used in conjunction with the Extra Expense Coverage Form (CP 00 50) or the Business Income (and Extra Expense) Coverage Form (CP 00 30). It does not cover the loss of business income itself, only the extra costs to keep the business running.

2. Classes of business it applies to

This endorsement is crucial for businesses with international supply chains or significant reliance on international entities. Examples include:

• Manufacturers: A U.S. company that relies on a specialized component manufactured only by a single supplier in Germany. If that German supplier's factory has a fire, the CP 15 06 could cover the extra costs for the U.S. company to expedite shipping from an alternative, more distant supplier or to reconfigure its own processes to use a different component temporarily.
• Retailers: A U.S. retailer that sources a significant portion of its unique merchandise from artisans in a specific region of Italy. If an earthquake damages the workshops of these artisans, this endorsement could help cover the costs of finding and air-freighting alternative unique goods to avoid a major interruption in sales.
• Technology Companies: A software development firm that outsources a critical part of its coding or data processing to a company in India. If the Indian facility is damaged by a flood, the CP 15 06 could cover the extra expenses of temporarily transferring that work to a higher-cost domestic provider or setting up a temporary alternative international operation.
• Wholesalers/Distributors: A U.S. food distributor that imports specialty food products from a specific agricultural cooperative in South America. If a covered peril destroys the cooperative's processing facility, this endorsement could cover the extra costs associated with sourcing and transporting similar products from a different international region at a premium price to fulfill existing contracts.

3. Special considerations

Several important factors must be considered when using the CP 15 06:

• Limited Scope: This endorsement specifically provides Extra Expense coverage, not Business Income coverage. If the insured also needs to cover lost profits due to the shutdown of an international dependent property, a separate endorsement like CP 15 01 (Business Income From Dependent Properties - Limited International Coverage) would be necessary.
• Scheduled Locations: The international dependent properties must be specifically listed (scheduled) on the endorsement, along with a corresponding limit of insurance for each.
• Covered Cause of Loss: The damage to the international dependent property must be caused by a peril that would be covered under the insured's own policy (e.g., if the insured has Special Form coverage, the loss at the dependent property must also be from a Special Form peril).
• Direct Physical Loss: The trigger for coverage is direct physical loss or damage to the dependent property. Economic losses alone are not sufficient.
• Exclusion of Electronic Data: Coverage generally does not apply if the only loss to the dependent property is loss or damage to electronic data. If there is damage to other property as well, coverage for electronic data-related extra expenses may cease once the other property is repaired.
• Relation to CP 00 50: This endorsement modifies the Extra Expense Coverage Form (CP 00 50) or the extra expense portion of the Business Income (and Extra Expense) Coverage Form (CP 00 30). The underlying extra expense coverage must be in place.
• Coverage Territory Modification: The standard Commercial Property Conditions regarding Coverage Territory are modified by this endorsement to include the scheduled international locations for the specific purpose of this dependent property coverage.

Real-world example: A U.S. electronics manufacturer relies on a specific microchip from a supplier in Taiwan. If a typhoon (a covered peril under the manufacturer's policy) damages the Taiwanese supplier's plant, the CP 15 06 could cover the extra cost of air-freighting chips from an alternative, more expensive supplier in South Korea to prevent a shutdown of the U.S. assembly line. However, it wouldn't cover the lost profits if the U.S. manufacturer couldn't get chips at all for a period.

4. Key information for agents and underwriters

Agents and underwriters need to focus on the following when dealing with CP 15 06:

• Accurate Identification and Scheduling: Ensure all critical international dependent properties are accurately identified, their locations correctly listed, and appropriate limits of insurance are established for each. Underwriters will need to assess the risk associated with each specific international location.
• Understanding the Dependency: The nature and criticality of the dependency are key. Is it a sole supplier? Are there viable alternatives, and what would be the extra cost to utilize them? This information is vital for setting adequate limits and for risk assessment.
• Limit Adequacy: The limits selected should reflect the potential extra expenses the insured would realistically incur to maintain operations. This could include costs like expedited freight, temporary sourcing from higher-cost suppliers, or retooling. Underinsuring this exposure can leave the insured with significant uncovered expenses.
• Cause of Loss Consistency: Verify that the causes of loss applicable to the insured's domestic operations are appropriate for the international exposures being considered. Political instability, different construction standards, or unique natural catastrophe exposures in the dependent property's country should be evaluated.
• Underwriting International Risks: Underwriters must be comfortable with assessing risks in foreign countries, which may involve different legal environments, varying building codes, and diverse natural hazard exposures. Information on the dependent property's own risk management and insurance program can be beneficial.
• Potential for Accumulation of Risk: If an underwriter has multiple insureds dependent on the same international supplier or region, there's a potential for accumulation of risk from a single event in that foreign location.
• Pricing: Pricing for this endorsement will depend on the limits requested, the location and nature of the dependent properties, and the perceived risk associated with those international locations (e.g., susceptibility to natural disasters, political stability).
• Distinguish from CP 15 08/CP 15 09: Unlike domestic dependent property endorsements (like CP 15 08 or CP 15 09), which can cover both business income and extra expense, the CP 15 06 is solely for extra expense related to international dependent properties. Agents should ensure the client understands this distinction.

Real-world example for underwriters: An underwriter receives a submission for CP 15 06 from a U.S. company that depends on a supplier in a region known for frequent earthquakes. The underwriter would need to assess the earthquake preparedness of the supplier's facility, the potential disruption time, and the availability and cost of alternative suppliers to determine an appropriate premium and ensure the requested limit is reasonable given the exposure.