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Equipment Breakdown; Spoilage; Off Premises
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Your Instructor Today
Laurie Infantino, CIC, AFIS, CISC, ACSR, CISC, CRISPresident and Co-Founder of
The Insurance Community Center
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Course Objectives1. Review the exclusions and limitations in the
Commercial Property forms that create the need to purchase Equipment Breakdown Coverage
2. Review Spoilage on EB and Property3. Review EDP vs EB and the off premises
exposures both direct and indirect 4. Review the Equipment Breakdown form
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Let’s Begin with a Claim
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Blast at O.C. Eatery Kills 1, Injures 5 : Victims: Debris and darkness trap
the injured, who mourn the death of prized bartender.
Los Angeles TimesAugust 02, 1993
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El Torito Grill
A Blast that killed one man and injured five others caused by an exploding boiler. Pressure built up inside the boiler and the only way to relieve it was to explode. It shot the boiler through the roof like a missile.
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El Torito Grill• The explosion occurred at the El Torito located
in Newport Beach, California in Fashion Island Shopping Center. The El Torito was located across an access road from the shopping center. The explosion demolished the restaurant’s equipment room; knocked down a wall to an adjoining wall to the men’s locker room and killed Antonio De Santiago, a bartender who was changing his cloths at the time.
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El Torito Grill
• The building inspector said the building permit was issued 21 year ago. He suspected that the problem may have been twofold: a plugged pressure relief valve and a malfunction in the unit designed to shut off the gas supply when the boiler got too hot.
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El Torito
• What really happened?• The maintenance person removed the
safety valve from the unit causing pressure to build up with the resultant explosion.
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On the EB forms, what are the answers to these questions?• Is there coverage for the boiler?• Is there coverage for the damage to
the building that El Torito occupies?• Is there coverage for the damage
done to Fashion Island located across the street?
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On the EB forms, what are the answers to these questions?• Is there coverage for the damage to the
customer’s vehicle that El Torito’s valet parker parked in the El Torito lot?
• Is there coverage for the death of Antonio De Santiago?
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Course Objective #1
Review the exclusions and limitations in the Commercial
Property forms that create the need to purchase Equipment Breakdown
Coverage.
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Typical QuestionAir Conditioning Units on a Building
• Question: Why do we have to have an Equipment Breakdown Policy to cover air conditioning units on a building when they are covered on a Commercial Property Form?
• Answer: The units are covered under building coverage but ONLY for the perils of the policy
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The Purpose Of Equipment Breakdown Insurance• The purpose of this coverage is to
provide coverage for perils that are excluded or not covered in Commercial Property Policies.
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The Purpose Of Equipment Breakdown Insurance• Special Form has exclusions that
necessitate EB coverage• On a “named perils” policy EB,
coverages are not within the listing of covered perils
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Four Major Areas of Exclusions
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Electrical Exclusion
• The majority of Equipment Breakdown losses
• The majority of losses include the element of Business Income.
• Business Income losses can exceed the amounts of the direct damage
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Electrical Exclusion in PropertyWe will not pay for:Artificially generated electric current, including electric arcing, that disturbs electrical devices, appliances or wires. But if loss or damage by fire results, we will pay for that resulting loss or damage
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Mechanical Exclusion
We will not pay for:Mechanical Breakdown including rupture or bursting caused by centrifugal force. However, this does not apply to any resulting loss or damage caused by elevator collision
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Steam Boiler Exclusion• We will not pay for:• Explosion of steam boilers, steam pipes, steam
engines or steam turbines owned or leased by you, or operated under your control. But if loss or damage by fire or combustion explosion results, we will pay for that resulting loss or damage. We will also pay for loss or damage caused by or resulting from the explosion of gases or fuel within the furnace of any fired vessel or within the flues or passages through which the gases of combustion pass.
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Spoilage Exclusion
• There is no specific “spoilage” exclusion in the standard ISO forms. There is, however, language in the form that constitutes a “spoilage” exclusion along with “inherent vice”.
• Discussed in more detail in Learning Objective #2
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Other Exclusions or Limitations in the Commercial Property Forms
• Building Ordinance• Business Income• Off Premises discussed in Objective
#3
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Ordinance or LawExclusion:The enforcement of any ordinance or law:(1)Regulating the construction, use or repair of any property:
or(2)Requiring the tearing down of any property including the
cost of removing its debris.
• This exclusion is found in “almost” all property type forms including EB; EQ; Flood; DIC and more.
• Each type of policy must be endorsed to cover the Ordinance or Law coverage incurred as a result of the “perils” of that policy.
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Ordinance or Law• Look to response if it is only building or
equipment, as well• In Commercial Property the only coverage
available is for “Building Ordinance” none for equipment
• Some policies contain limited coverage automatically
• Verify Business Income Response under Equipment Breakdown Coverage
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Business Income
• Business Income is a coverage part in Commercial Property
• Business income is as important for an equipment breakdown loss. Nearly half of all equipment breakdown claims now include an element of loss of business income or incurred extra expenses.
• Losses are more difficult to measure
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Course Objective #2
Review the need for “Spoilage” Coverage offered in Property
Insurance and Equipment Breakdown
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Spoilage Exclusion
• There is no specific “spoilage” exclusion in the standard ISO forms. There is, however, language in the form that constitutes a “spoilage” exclusion along with “inherent vice”.
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“Spoilage” Exclusion
We will not pay for:Decay, deterioration, changes in
temperature, rust, corrosion, fungus,decay, deterioration, hidden or latent
defect or any quality in propertythat causes it to damage or destroy itself: (a) Dampness or dryness of
atmosphere; (b) Changes in or extremes of
temperature
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Spoilage• The Spoilage exclusions give rise to the need
for specific coverage referred to as Spoilage, Consequential, or Refrigeration Loss depending on the form.
• Spoilage coverage can be provided on both the Equipment Breakdown Form and the Commercial Property Forms.
• There is a significant difference in the coverages provided under each of the forms.
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Course Objective #3
Review EDP vs EB and the Off Premises exposures both direct and
indirect 32
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Off Premises (Utility Interruption) ExclusionWe will not pay for:The failure of power or other utility service supplied to the described premises, however caused, if the failure occurs away from the described premises. But if loss or damage by a Covered Cause of Loss results, we will pay for that resulting loss or damage.
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Why Does A Client Need “Off Premises” Coverages
• Most insurance policies require that damage occur at a premises described.
• Most insurance policies do not automatically cover “off premises” but they may have sub-limits included or optional coverages activated on the Declarations Page.
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Why Does A Client Need “Off Premises” Coverages
• The causes of loss to off premises utilities varies from such situations as fire, earthquake, flood, windstorm, vehicle damage, transformers malfunctions, etc.
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Commercial Property Off Premises
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Wind to Power Lines
Wind is a “Cause of Loss” on a Commercial Property Form. Covered on Utility Interruption Endorsement to a CPP
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Equipment Breakdown Off Premises
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Transformer Overloads causing damage
Covered on Utility Interruption on an Equipment Breakdown Form
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Off Premises Applies to ALL Property Policies• Commercial Property• Equipment Breakdown• EDP• Earthquake• Flood• Wind• Other+++++++++++++++++
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Course Objective #4Review the Equipment
Breakdown form
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Who Needs EB Coverage?
• Owner of a building• Tenant of a building
– Contractual requirement– For damage to their own equipment– For Business Income as a result of damage
to the building or damage to their property
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Reasons Coverage Is Often Not Purchased • In-house Maintenance Program• Reliance on Equipment Warranty or
Maintenance Contract (There is no loss of use coverage)
• Banks seldom requires it• Not offered by the Agent – this is a
potential errors and omissions exposure
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Electrical EquipmentUTILITY-OWNED TRANSFORMER
INSURED’R TRANSFORMER
MAIN ELECTRICAL PANEL
BACK-UP GENERATOR
Air Conditioning Or Refrigeration
Heating Systems
COMPRESSORS FANS, MOTORS
CHILLERS, PIPES
STEAM BOILER
PUMP, MOTORS
HOT WATER BOILER
PUMPS, MOTORS
HEAT PUMPS
COMPRESSOR, MOTORS,
FANSHOT
WATER HEATERS
Other Equipment
SMALL COMPRESSORS
DEEP WELL PUMPS
FANS, MOTORS
ELECTRIC HEAT TRANSFORMER
MISC. ELECTRICAL APPARATUS
AUXILIARY STEAM PIPING
*PRODUCTION MACHINERY
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Equipment Breakdown Coverage
Boiler & Machinery Insurance
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Why Equipment Breakdown Is Written• Mechanical, Electrical or Steam
Equipment on Premises• Inspection Service - the insured also has
the advantage of using an inspection service provided for certain types of equipment that can assist in preventing serious losses. Typically an insurance company will provide this service as part of the premium charged.
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Limitations and Exclusions on Commercial Property Form
A. Explosion of Steam BoilerNo coverage for loss of or damage to steam boilers, steam pipes, steam engines or steam turbines
B. Mechanical BreakdownNo coverage for loss or damage caused by or resulting from mechanical breakdown, including rupture or bursting caused by centrifugal force.
C. Electric Arcing (Injury)No coverage for loss or damage caused by or resulting from artificially generated electric current, including electric arcing, that disturbs electrical devices, appliances or wires.
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Inspections
• The various state and municipalities are principally responsible for the inspections and maintenance of the log for boilers and unfired pressure vessels that are subject to inspection by the state jurisdiction.
• In most jurisdictions, insurance company inspections are acceptable in lieu of inspections made by a state inspector.
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Contract Maintenance or Damage MA EBMaintenance (MA)
1. Remedial Maintenance on site2. Clean, oil, adjust3. Repair defective parts due to
normal usage
YesYesYes
NoNoNo
Equipment Breakdown (EB)
1. Damage from an accident or other damage not due to wear and tear
2. Damage to electrical apparatus or any property external to the equipment
3. Power surge damage4. Indirect losses such as BI, EE,
Spoilage or Power Interruption
No
No
NoNo
Yes
Yes
YesYes
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New EB EndorsementEquipment Breakdown Cause of Loss EB 10461012• Similar approach to some insurance
company forms (Chubb first)• Eliminates major EB exclusions in the
property form
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There are “Other” Limitations that could affect coverage on CP• CAUTION:
– If EB endorsement “just” removing “EB” exclusions still have other exclusions that could affect coverage
• Flood• EQ• Animal• ETC
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Policy Overview
• The Equipment Breakdown Protection Coverage Form provides coverage on a comprehensive basis by incorporating optional coverages into the form.
• It is its own form and not an simply endorsing a property form
• These are activated by inserting a limit, number of days, or the word “INCLUDED” on the Declarations Page.
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Covered Cause of Loss
• Covered Cause of Loss is a "Breakdown" to "Covered Equipment".– Caution: Must Review Definitions– Used to say “Accident to an Object”– This is the TEST
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“Breakdown”
• Means the following direct physical loss, that causes damage to "Covered Equipment" and necessitates its repair or replacement:
• NOTE: Used to say “sudden and accidental”.
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“Breakdown”
(1)Failure of pressure or vacuum equipment;(2)Mechanical failure including rupture or bursting caused by centrifugal force; or(3)Electrical failure including arcing;unless such loss or damage is otherwise excluded within this Coverage Form
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“Breakdown” Exclusions Examples• Malfunction—Calibration, etc• Defects, erasures, errors, limitations or
viruses in computer equipment and programs
• Leakage at any valve, fitting, shaft seal, gland packing, joint or connection
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“Covered Equipment”
Equipment built to operate under internal pressure or vacuum other than weight of contents;(2)Electrical or mechanical equipment that is used in the generation, transmission or utilization of energy;(3) Communication equipment, and "Computer Equipment"; and
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“Covered Equipment”
(4) Equipment in Paragraphs (1), (2) and (3) that is owned by a public or private
utility and used solely to supply utility services to your premises. CAUTION: there is always a HOWEVER after these paragraphs that lists what they do NOT intend to cover.
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“Covered Property”
a. You own; orb. Is in your care, custody or control
and for which you are legally liable.
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Equipment Breakdown Coverage Triggers
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Coverages Available IF on Dec or says INCLUDEDa. Property Damageb. Expediting Expensesc. Business Income and Extra Expense OR
Extra Expense Onlyd. Spoilage Damagee. Utility Interruptionf. Newly Acquired Premises
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Coverages Available IF on Dec or says INCLUDEDg. Ordinance Or Law Coverageh. Errors And Omissionsi. Brands And Labelsj. Contingent Business Income And Extra
Expense Or Extra Expense Only Coverage
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Equipment Breakdown ProtectionBuilt in Coverages
Errors and Omissionsa. Protects the insured for an oversight on
premises that should have been insured in the policy
b. Does not extend to errors or unintentional omissions committed by insured in the reporting of values or requesting coverage
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Equipment Breakdown ProtectionBuilt in Coverages
Brand and Labelsa. Extends property damage coverage to
allow insured to stamp the word SALVAGE on or remove the label from damaged merchandise at the insurer’s expense
b. Not to exceed the limit of insurance on such property
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Exclusions
• Ordinance Or Law• Earth Movement• Water• Nuclear Hazard• War or Military Action
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Exclusions
• Fungus, wet Rot and Dry Rot• Any virus, bacterium or other
microorganism that induces or is capable of inducing physical distress, illness or disease– NOTE: Some states have forms for this
coverage– Some limited coverage is provided
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Exclusions
• Depletion, deterioration, corrosion, erosion, or wear and tear. However, if a "Breakdown" occurs, we will pay the resulting loss or damage
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Equipment Breakdown Sub-Limits ($25,000)
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“Hazardous Substance”
• "Hazardous Substance" means any substance other than ammonia that has been declared to be hazardous to health by a government agency.
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“Consequential Damage”
• The reduction in value of undamaged stock parts of a product that becomes unmarketable
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Data and Media
• Your cost to research, replace or restore damaged "Data" or "Media" including the cost to reprogram instructions used in any "Computer Equipment".
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Hazardous Substance
• Any additional expenses incurred by you for the cleanup, repair or replacement or disposal of "Covered Property" that is damaged, contaminated or polluted by a "Hazardous Substance".
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Water Damage
• The damage to "Covered Property" by water including any salvage expenses.
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Valuationa. Replacement Cost in most casesb. Up to an additional 25% of the property
damage loss to “Covered Property” for repairing equipment in a manner that does not harm the environment, increases its efficiency or enhances its safety
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Valuation
c. Provides for the loss in value of an extended warranty
d.“Covered Property” may be valued at its selling price
e.“Data” and “Media” have limitation on replacement and valuation
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Valuation
• Underwriters often restrict coverage on older boilers and machines. Some firms agree to exclude certain kinds of equipment or insure at ACV and/or have high deductibles on categories.
• Actual Cash Value Endorsement
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Coverage Territory
1.United States of America (including territories and possessions); Puerto Rico; and Canada
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Deductibles
• Dollar Deductible• Time Deductible
– If a time deductible is shown in the Declarations, we will not be liable for any loss under that coverage that occurs during that specified time period immediately following a "Breakdown".
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Deductibles
• Multiple of Daily Value Deductible– Determine the total amount of Business
Income that would have been earned during the Period of Restoration
– Divide the result by the number of days the business would have been open during the period of restoration. Result is daily value.
– Multiply the daily value by number of days on the declaration
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Deductibles
• Percentage of Loss Deductible– If a deductible is expressed as a percentage
of loss in the Declarations, we will not be liable for the indicated percentage of gross amount of loss or damage (prior to the applicable deductible or coinsurance) insured under the applicable coverage.
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Suspension Clause
a. Permits insurer to suspend coverage if found in dangerous condition
b.Suspension is immediate(1)Written notice to insured(2)Could be handwritten at address
where “ Covered Equipment” is locatedc. Reinstated only by endorsementd.Pro rata refund will be processed but
suspension in force even if refund not made or offered
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Joint or Disputed Loss Agreement
1. An important provision when coverage is written separately from the Commercial Property.
2. Pays 100% of loss portion that is covered under this form.
3. Pays 50% of loss portion that is disputed between the Commercial Property coverage and this coverage.
4. Add the Loss Adjustment endorsement to the Commercial Property coverage for this provision to work properly
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Some “interesting endorsements”
• Optional Valuation Clause EB99649• Product Withdrawal Coverage EB 99659• Off Premises Equipment Coverage EB
99639
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8/14 Property Valuation – Credit for CA Only
8/16 Personal Auto – 2 CE Hours Many States
8/22 Farm Property
7/26 Understanding Logging Industry and Forest Products
Presented and Sponsored By: Mattei Insurance Services
Join the Community TODAY at:www.insurancecommunitycenter.com
Upcoming Classes
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Disclaimer
Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state
jurisdiction. This instructional materials provided by Insight is intended as a general guideline and any interpretations provided by Insight do not
modify or revise insurance policy language. The authors of these materials, Insight Insurance Consultants is a division of Insight Consulting
and Management Inc. In providing these materials, Insight assumes neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of
the instructional materials provided. Copyright 2010 – 2011 All Rights Reserved
www.insurancecommunitycenter.comLaurie: 714.803.5830 [email protected]
Marjorie: 714.206.9583 [email protected]
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