Coinsurance Clause |
Coinsurance Clause |
Video #1: Coinsurance Clause & How It WorksVideo #2: How to explain Coinsurance to a ClientVideo #3: Value of the covered property at the time of lossVideo # 4: The coinsurance percentage selectedVideo #5: The limit does not have to be value X percentageVideo #6: 5 steps on how to calculate the penaltyVideo #7: Example on calculating the coinsurance penaltVideo #8: Example 1 (Adequate Insurance)Video #9: Example 2 (Inadequate Insurance)Video #10: Example 3 (Over-Insurance)Video #11: Coinsurance Clause & Blanket InsuranceVideo #12: Example of Blanket Insurance CoinsuranceVideo #13: Coinsurance Clause & Valuation of PropertyVideo #14: Coinsurance Clause & Agreed Value |
Don’t Assume That Exposures Are Simple
It is understandable to think that premises liability may be routine, but there are often elements or circumstances that cause complications. Even exposures that are essentially residential can become entangled. One family owned a farmhouse and several properties as investments. They were all purchased and insured by a Commercial General Liability policy under the name of a limited liability corporation (LLC). The furnished farmhouse was used recreationally. After some family members and a couple of guests enjoyed a day of riding ATVs and dirt bikes, the family’s father left. He asked his son to lock up. The son and his friends were inside the farmhouse prior to locking things up. The son picked up a rifle that had been left out during a previous farmhouse visit. The firearm went off and its bullet struck one friend who, later, died. Matters worsened when the family’s request to cover the tragic loss was denied and they sued. The dispute was over whether the son qualified for protection as the policy’s named insured was an LLC. Click here to see how a court addressed their dispute over eligibility. Align The “Who” With the “How” The situation above demonstrates the importance of making sure that how coverage is written aligns with who needs the applicable protection. Policies routinely identify the parties qualifying for its protection. Defined terms, which can easily be overlooked, are critical. They must be considered according to the nature of the party appearing as the named insured. The family depicted above likely expected that writing coverage for their investment properties under the name of their LLC was logical. Their insurers were prepared to meet their coverage obligations, and most did. However, insurers also challenge requests for protection that, in their opinion, fall outside of contractual terms. This was the course taken by the property owners’ commercial insurer. Click here for an excerpt of wording regarding coverage and exclusions found under the AAIS Commercial Liability Coverage Form Analysis Section of PF&M found in Advantage Plus. Named Insured Description, Please The dispute above involved more than one aspect of the policy, in particular: • what party was described as the policy’s named insured? • whether the person who handled a firearm that resulted in a tragedy held status as an insured? • was the loss of the sort that was eligible for protection under the policy? While Commercial General Liability policies grant covered status to a variety of persons/entities, it depends upon, primarily, the description of the named insured. Insured status may exist as a relative under certain circumstances, but the relationship may be irrelevant under others. Handling any set of risks initially means having a basic understanding of risk elements. Such understanding leads to insights on what to expect regarding liability associated with, in this case, property ownership. It can be helpful to take a step back and review foundational information. Click here for a discussion on risk management and identification from Gordis on Insurance found in Advantage Plus. What Is Your Narrative? The more information that can be developed about a given situation, the greater the ability to identify exposures that must be addressed. Even before questions can be asked, familiarity should be built with the sort of exposures that are typically found with certain classifications. Tools that can provide such knowledge are risk narratives. They focus on hundreds of individual business classifications belonging to more than two dozen business categories. They discuss key coverage areas related to those individual, commercial operations. They can be an important guide in the effort to address a prospect’s risks. Click here to see a description of an operation from the risk narratives section of the Commercial Risk Survey found in Advantage Plus. Coinsurance – Are your clients informed?
The best way for an agency to protect itself from claims where coinsurance penalties come into play is by explaining to the client what can happen if a risk is not insured to value. Not every client understands the concept of coinsurance. Coinsurance penalties in property policies are placed in those policies for a reason. A property owner cannot ask for full coverage on a building (or contents or business interruption) at lower limits and expect to collect the same amount of reimbursement should a loss occur as if higher limits were on the policy. Carriers protect themselves with coinsurance clauses to help ensure they are getting the proper premium for a risk. In essence, coinsurance operates to help ensure an insured has some "skin in the game." Yet not all policies are written with coinsurance. An agent, however, should be aware which clients have a coinsurance clause in their policies and must take certain steps to protect themselves should a client suffer a loss and has a coinsurance penalty assessed. Due to the application of coinsurance, not every client will be able to collect the full amount of damages if there is a loss. If a client has been informed of the consequences of coinsurance penalties when a policy is procured, the client should have no reason to make a claim against an agent. Generally speaking, an agent has no duty to tell a client how much coverage the client should carry. Unfortunately, not all clients are properly informed of either the existence of - or the consequences of - coinsurance. When a loss occurs, agents can be dragged into the litigation process when a client is penalized for not carrying enough insurance, even if it was the client who ultimately provided the figures. THE AGENT FAILED TO NOTICE Some agents might not have a market for a particular risk and, as a result, be forced to place coverage through a broker or an MGA that has a market. While an agency might be familiar with its standard markets in terms of when a carrier might place coinsurance on a risk, the same may not be true when dealing with markets it cannot directly approach. When dealing with coverage procured through another broker, an agency must recognize when coinsurance is placed on a policy and must inform the client. Take, for example, a case where an agent went through an MGA for business personal property coverage for a large client. The agent and client agreed on blanket coverage with no coinsurance and asked the MGA to quote on blanket coverage with no coinsurance. The quote from the MGA did not mention coinsurance. When the proposal was accepted by the agent on the MGA's system, the agent failed to notice that 90% coinsurance would apply if a statement of values was not received within 30 days. Needless to say, no statement of values was submitted, and the policy was issued with 90% coinsurance. The agent also missed that the dec page indicated there was 90% coinsurance on the policy when it was issued. A tornado loss destroyed the client’s warehouse, and the carrier determined the business personal property was greatly underinsured. A $2 million coinsurance penalty was assessed. The client sued the carrier and the agent, and the agent sued the broker. The case settled with the agent, carrier, and MGA each paying. The agent's share was $550,000. THE CLIENT WAS ASSESSED A COINSURANCE PENALTY The issue of coinsurance can also present a problem for an agency if the agency assists the client in determining limits. As stated above, an agent normally has no duty to inform a client what limits the client should carry. However, there will be instances where the agent assists the client in determining limits for a particular type of coverage. For example, a claim was made against an agency based on a coinsurance penalty arising from a business interruption loss. The client wanted his agent's help in calculating the business interruption limits he should carry. The agent informed the client to give him monthly and annual figures based only on profits. The limit was set at the projected profit figures. What the agent failed to realize is that a business interruption projection must also include a figure representing continuing expenses. A loss occurred, with the client assessed a coinsurance penalty of $160,000. The agent admitted he was unaware of continuing expenses needed to be part of the calculation. The claim was settled for $135,000. MAKE SURE THE CLIENT UNDERSTANDS The best way for an agency to protect itself from claims where coinsurance penalties come into play is by explaining to the client what can happen if a risk· is not insured to value. Document the discussion and make sure the client understands the ramifications of coinsurance. If an agency assists a client in determining limits, the agency must feel very comfortable with the advice given. Otherwise, it might be best for the client to seek the advice of a property appraiser, accountant, or some other expert to determine limits. If you must let someone down, be sure it isn’t the friend who helped you up when you were down.
We all have short memories. We become preoccupied with our own interests and daily cares, and it’s easy to lose track of friends. There will always be times when you must choose between what you wish to do and what you must do. When you are faced with such decisions, make sure you always remember those true and loyal friends who were there when you needed them, and never, under any circumstances, abandon them. When you let down a friend who helped you when you needed it most, you will not only adversely affect the friendship; you will seriously damage your own self-respect. When you fail a friend, regardless of how heavy your own burdens may be, you also fail yourself. If you absolutely cannot do what good friends would like, find another way to make it up to them. Most failures could have been converted into successes if someone had held on another minute or made more effort.
When you have the potential for success within you, adversity and temporary defeat only help you prepare to reach great heights of success. Without adversity, you would never develop the qualities of reliability, loyalty, humility, and perseverance that are so essential to enduring success. Many people have escaped the jaws of defeat and achieved great victories because they would not allow themselves to fail. When your escape routes are all closed, you will be surprised how quickly you will find the path to success. |
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