What is a Difference in Conditions (DIC) Policy?
Difference in Conditions (DIC) policies most commonly are used to provide additional limits of coverage for certain property perils or to fill in coverage for perils that are excluded in standard property policies. They also may be used to supplement international policies that are written by admitted carriers in the applicable foreign countries. The DIC policy form excludes causes of loss that are better insured on other forms, such as standard property policies, boiler and machinery policies, or employee dishonesty bonds. Carriers who write DIC policies use their own proprietary coverage forms, so policy language should be reviewed carefully before a DIC policy is selected.
General Information
There is no standard DIC coverage form. Carriers who are willing to provide the coverage draft their own forms, and some underwriters even may use language that is manuscripted to fit a particular exposure situation. Therefore, policy wording should be carefully reviewed before it is put into place. This lack of an industry standard and various carriers’ willingness to manuscript policy language can present both a blessing and a curse to those using DIC forms. The language can be artfully tailored to fit an individual exposure. However, when policy language is manuscripted, those reviewing the policy must be very careful not to overlook new coverage holes that may be created by the very language that was designed to more fully insure the exposure. The form used also must be carefully reviewed in connection with the standard policy forms it complements to be sure that they dovetail properly.
DIC policies usually provide catastrophic coverage for perils that present severe property exposures, such as flood and earthquake. DIC policies also can be used to supplement coverage in operations with unusual transit, burglary and international exposures. The form is not meant to respond to frequency losses, so high deductibles usually are employed.
Purpose
The DIC policy is not designed merely to increase property limits; that can be accomplished by excess property forms. Rather, the DIC policy is designed to broaden coverage by:
- Providing additional limits of coverage for specific perils when standard markets won’t provide adequate limits of coverage, and
- Providing coverage for perils that are excluded on standard coverage forms.
In some situations, an insurer may decline to offer the catastrophic limits of coverage that are needed. In other situations, even though a broad special causes of loss form is offered, certain perils such as flood and earthquake may be excluded.
One of the most common illustrations of the second situation is flood coverage for a facility that is in a flood zone. Flood coverage is normally excluded on standard property policies and may be specifically excluded on HPR property forms when the insured is in a flood zone. A DIC policy can be used to provide flood coverage for this insured, as well as business income coverage otherwise not covered by the underlying policy because flood is an excluded cause of loss. Note, as well, that the flood policies written by the NFIP (National Flood Insurance Program) do not cover loss of business income.
DIC Policies
DIC policies commonly are constructed on one of three platforms:
- An “all-risk” primary coverage form that excludes perils that are being provided by a standard policy,
- A specified peril primary coverage form with only the perils that are to be covered on the DIC form listed, or
- An excess property form with underlying policies scheduled and standard property causes of loss excluded.
In the first type of policy structure, the perils excluded on the DIC policy will be those normally covered on standard policies, such as fire, lightning, windstorm, hail, etc. One policy that was reviewed included an “all-risk” perils exclusion that listed certain perils that were excluded and then stated that “any other causes of loss as provided under special causes of loss set forth in the standard broad (ISO) insurance form CP 10 30 or its equivalent” were excluded.
This type of structure, which is commonly employed in DIC forms, backs into the needed coverage by first giving blanket “all risks” coverage and then excluding those perils that are not excluded on the standard coverage form that the DIC policy is supplementing. The coverage that is left with this type of policy structure responds to perils that are excluded and perils that are not mentioned on the standard property form. The fact that perils that are not mentioned on the standard form are covered with this structure could provide unanticipated coverage for damages arising from causes of loss that are not contemplated when coverage is being arranged.
This policy may include additional exclusions that pertain specifically to the DIC policy, such as fraud, intentional damage or pollution. It operates much like the ISO special causes of loss form. Coverage is inferred unless an exclusion or limitation is found that voids coverage.
When using this approach–that of the all-risk form–it is important to be sure that the perils that are excluded on the DIC form are worded exactly like the perils covered on the standard policy that the DIC form is complementing. The exclusions on the DIC policy must dovetail with the perils covered on the standard property policy or serious coverage gaps might be inadvertently created.
In the second type of structure, only perils that are listed on the DIC policy are insured. An example of this is a DIC policy that is drafted solely to cover flood or earthquake. With this type of structure, the policy is limited to only the listed perils. Loss arising from any other peril is excluded. This is similar to the coverage method provided by ISO basic or broad causes of loss forms. Coverage is not implied; the cause of the loss must be specifically listed on the policy as applying to the property in question.
The third approach provides additional limits of insurance only for causes of loss that are limited on the standard policy. This approach combines an excess property form with a DIC form in order to fulfill needed limits of coverage for specific perils. An example of this would be a DIC policy structured to provide additional limits for open stock burglary. In this situation, an excess burglary policy could be purchased. However, an excess DIC form would provide broader coverage than a simple excess burglary form because losses arising from perils that were not specifically excluded on the DIC coverage form would be covered–in addition to open stock burglary.
Coinsurance Requirements
DIC policies normally do not include coinsurance requirements. This permits the purchase of insurance for only partial values of property. If coinsurance were included in a DIC form designed to cover flood, the insured would have to purchase flood coverage limits equal to the total value of the property insured. Without a coinsurance requirement, a limit sufficient to insure only the property on lower floors, which normally would be the property subject to flooding, can be purchased without fear of an underinsurance penalty.