Although floor plan insurance is used quite frequently, many underwriters and agents do not completely understand how it works. This article will explain the basic concept of floor plan insurance and describe several situations in which it is commonly used.

To understand the various applications of floor plan insurance, agents must be familiar with its components. These are:

* A supplier sells goods to a purchaser.

* The goods are financed.

* As a condition of obtaining the goods and the financing, the purchaser must insure the goods with an insurer dictated by the supplier of the goods.

How a floor plan works

The supplier of the goods is typically a manufacturer. Construction machinery, automobiles, and appliances are some common classes of goods for which a floor plan arrangement is commonly used. An example will help clarify how floor plan insurance works. Assume that Air Manufacturing, LLC, a manufacturer, sells equipment to Wholesale Air Conditioning, Inc. Wholesale Air Conditioning does not have enough money or borrowing power to pay for its inventory. Through Air Manufacturing's finance company, Wholesale Air Conditioning is able to borrow the money needed to pay for the new merchandise it is buying. As a condition of financing the new inventory, Air Manufacturing requires Wholesale Air Conditioning to insure the financed inventory with an insurance company that Air Manufacturing owns or controls. Wholesale Air Conditioning therefore insures the new inventory with Air Insurance, Inc.

Here is a summary of the floor plan example just given:

* A manufacturer (seller) sells goods to a customer.

* The customer borrows money from the manufacturer's finance company to pay for the goods.

* The manufacturer's insurance company provides insurance on the financed goods.

In the case of an appliance dealer, floor plan insurance is probably adequate to cover the new inventory. In the preceding example, the insurance on the floor-planned inventory will probably be on a comprehensive basis. As a result, Wholesale Air Conditioning likely will not need any other insurance to cover the inventory adequately.

The dealer has other business personal property that must be insured, such as furniture, fixtures, storage racks, and non-financed inventory. Business personal property insurance will automatically cover these items. It also will cover the financed items that are already insured via the floor plan arrangement. A coinsurance penalty could result from not considering values covered by floor plan insurance. An insurer may or may not consider the values of the floor-planned items in determining the appropriate amount of insurance needed to avoid a coinsurance penalty.

Classes of property can be excluded from business personal property insurance. When floor plan insurance is part of a client's insurance program, I recommend that the business personal property coverage be endorsed to exclude all items protected under the floor plan insurance.

Rating technique

Every floor plan insurance contract I have seen was an inland marine-based policy. They were manuscript forms so that the policyholder and the insurer could write the coverage in exactly the way they both desired. Pricing of floor plan insurance is sometimes considered to be very difficult. My procedures for rating floor plan insurance are easy, and I have used them for nearly 40 years. I will describe my rating procedures for (1) floor-planned inventory that is always inside a designated building(s) and (2) automobiles that are floor planned.

For floor-planned items that are located inside a building, my starting point for rating the exposure is to charge the 100% coinsurance contents rate plus a load of $.05. My suggested starting rate is the rate the insurer would charge for comprehensive coverage for the auto dealer's inventory. Because inland marine insurance is an uncontrolled line, an underwriter obviously can charge whatever he/she wishes. One underwriter might charge 25% of my suggested rate, whereas another might charge 200% of the rate.

The Insurance Services Office has published a suggested rating methodology for comprehensive insurance on auto and truck dealerships. These rates have not changed in nearly 40 years, so I tend to believe they are realistic. Although the ISO rates may be used as a pricing guideline, floor plan insurance is still an inland marine contract and most likely unregulated, so underwriters can literally charge any premium they like.

Floor plan customers

Although an appliance store can purchase floor plan insurance, in my experience this is seldom done. Auto dealerships, in contrast, are a class of business where floor plan insurance is used extensively. To insure a dealership's inventory appropriately, you need to understand the four types of ownership arrangement and how they affect the dealer's insurance requirements. Each of the four ownership arrangements can be covered by any insurer's garage policy for auto dealer's vehicle inventory.

It is possible to double insure some inventory. This happens when floor plan-insured vehicles are also covered under the dealer's regular insurance program. Some examples will help you understand how floor plan insurance typically works with an auto dealer.

Consigned autos: A consigned auto is one that is in the possession of the auto dealer for the purpose of being sold. The dealer does not own the consigned vehicle; however, the dealer is responsible for damage to the vehicle. Simply putting an "X" in the appropriate place on a garage insurance policy's declarations page will provide coverage for consigned autos.

No floor plan arrangement is involved with consigned vehicles. The dealer must provide all the physical damage coverage for consigned vehicles.

Dealer with loan: Some dealers finance their used car inventory through a local financial institution. As an example, assume Ace Dealership, Inc. (ADI), borrows money from Local Bank, LCC, to finance ADI's used car inventory. Local Bank does not furnish any insurance. ADI will purchase physical damage insurance to protect the interests of both ADI and Local Bank. Putting an "X" in the correct box and adding a loss payable clause in favor of Local Bank places this coverage in force.

Dealers interest only: In another example, to finance its used car inventory, Mountain Dealership, Ltd. (MDL), borrows money from High Top Bank, Inc. (HTB). HTB, in addition to granting the loan, also provides insurance on MDL's used car inventory for the amount of the loan on a given car. High Top Bank will not grant a loan equal to the wholesale value of the inventory. HTB will lend money for only 75% of the value of each unit. This means that High Top Bank's floor plan insurance covers only 75% of the value of each vehicle. On a $20,000 vehicle, HTB is providing $15,000 of protection.

The dealer can insure the value that is not covered by High Top Bank's floor plan insurance. Again, placing an "X" in the appropriate box on the garage insurance declarations page will insure the dealer's exposure (the 25% of the value not insured by HTB's floor plan).

New autos: It is very common for franchise auto dealers to have their new car inventory covered by the manufacturer's floor plan. Usually the manufacturer owns both a finance company and an insurance company. This means that the manufacturer is making money on the entire transaction: selling, financing, and insuring a dealer's new car inventory.

In this example, Smiling Dealership, Ltd. (SDL), buys new cars from Zap Auto Manufacturing, Inc. (ZAM). ZAM furnishes the new cars. Financing is provided by ZAM Financing. The floor plan insurance is provided by ZAM Insurance.

All of the auto dealership floor plans I have seen provided only comprehensive coverage on the new car inventory. What about a prospective new car buyer who drives a test vehicle into a loaded cement truck, thereby wrecking the new car? This would be a collision loss. Under the floor plan used in this example, there is no coverage for the collision loss. The dealer can provide collision coverage for the floor-planned vehicles under its own insurance policy.

Limited collision: The floor plans of some manufacturers provide comprehensive coverage that applies anywhere in the covered territory. They also provide collision coverage for 20 miles of driving. As this is applied only to new cars that are usually delivered to the dealer with less than five miles on the odometer, it is easy to tell if the car has been driven more than the allotted 20 miles.

Summary

Floor plan insurance usually involves a supplier who furnishes both financing and insurance on the goods sold by the supplier.

Agents who insure auto dealerships typically need to address the following coverage issues while insuring "all around" the coverage provided by the floor plan:

* New vehicles are protected by comprehensive coverage under the manufacturer's floor plan. Does the manufacturer also provide collision insurance on the new, floor-planned vehicles, or does the dealer need to purchase this coverage?

*Does the entity that is financing a dealer's used car inventory provide floor plan coverage? What coverage is provided? You will need to "insure around" a floor plan on used cars and trucks. *