Insurance Issues
Items to Consider When Switching Insurance Carriers
Before making any changes to your insurance carrier or agent, make sure the agents and carriers have substantial industry knowledge, experience, carrier relationships and service capabilities.
Nathan Brainard
Insurance agents are often asked: what are the pros and cons of switching an insurance carrier? It is important to note that not all insurance carriers, and polices for that matter, are “equal” in what they offer their policyholders.
Just like the variety of options you have when selecting what type of power unit you are purchasing or the tires for your fleet, you have options in insurance providers. Some of the most important items to keep in mind when considering a switch from one carrier to another is their experience with your industry and the amount of premium they currently handle. A company who is just getting into the industry might incur a substantial loss and be forced to exit just as quickly as they entered, or they might not provide all of the necessary forms you need to be protected. Beyond their existing experience, one of the most important factors is the financial strength or rating of the potential carrier.
Verifying the Financial Stability of a Carrier
There are third-party companies such as A.M. Best who provide information on insurance carriers, most notably financial rankings (see Table 1). Consider doing business with insurance companies who carry a rating of “A-VII” or better. This is not only for your protection, but for your agent as well. While there is technically nothing wrong with a carrier who possesses a rating less than “A- VII”, they simply don’t offer the peace of mind other companies with a rating of “A- VII” or higher offer. Furthermore, insurance agents purchase Errors & Omissions (E&O) insurance should a mistake be made and a lawsuit be filed. Many E&O carriers will not offer coverage to an agent/agency for insolvency if the carrier has less than a specified rating. If you are dealing with a smaller agency that is carrying minimal E&O coverage and a claim is not covered, they could go out of business and leave you holding the bag for the uncovered claim.
Anyone can gain access to the A.M. Best database by visiting www.ambest.com, registering and entering in the name of the insurance carrier in question. They will not inundate you with spam, and it can prove to be a valuable resource.
The financial ranking of an insurance carrier is based on the current review of their financial position, as well as their long-term financial outlook, etc. This is especially important since a majority of contracts with both municipalities and private companies contain a stipulation regarding not only the limits of insurance provided, but also that coverage is in place with a carrier who possesses a specific financial rating.
Insurance carriers/ companies who carry a rating less than “A” (in any fashion) might get more competitive with their premiums, but in the event of a catastrophic event, such as Hurricane Katrina in which a lesser rated carrier sustains a massive loss, the possibility of their going out of
business and leaving their policy holders without coverage are greater than those with an “A” rating. In some states there is a possibility of the carrier being backed by the state in such an event, however, this will depend on several factors including, but not limited to: the carrier’s financial rating, whether they are Admitted vs. Non-Admitted, if your state has such a policy of stepping in and picking up coverage, the conditions of which the carrier went out of business and the amount of the claim in question. Some states also differentiate between coverage lines such as Worker’s Comp, Auto or GL.
An Admitted Carrier
An “admitted carrier” tends to be one with a “household name”; you’ll see commercials for them on television. An “Admitted” carrier is one whom the state has approved for business and is willing to back you up in the event of such a loss. These losses tend to be capped at a specific amount per claim, and the guarantee is for policyholders from the time the carrier goes out of business to the expiration date of the policy. Again, it is important to find out the laws in your specific state to determine how this is handled and to what amount of a claim.
A Non-Admitted Carrier
A “Non-Admitted” carrier is one who is not backed by the state and might not have a recognizable name. They are typically known as Excess & Surplus, or E&S carriers. There are some industries, such as Waste Hauling and Recycling where a majority of the carriers who are willing to entertain the policy terms are Non-Admitted. There is nothing wrong with a financially strong, Non-Admitted carrier as long as you understand you are placing a bit more skin in the game. In some cases, you may not have a choice. For this industry you will typically have to consider E&S carriers unless your premiums are quite large, usually in excess of $1,000,000 annually. There are exceptions, but as a general rule this will typically hold true.
Endorsements and Exclusions
This brings us to the next item to consider, Endorsements and Exclusions. Every carrier out there will offer different terms, so simply reviewing the bottom line premium is ill advised. If you plan on purchasing your insurance based on the lowest premium you could potentially be playing Russian roulette with your company. Let’s use the following example:
You own a residential and commercial hauling company where loads are taken straight to athird-party transfer station or landfill, and over the past five years have had a loss ratio (premium paid in versus the premium paid out in claims) of less than 20 percent. Your goal is to secure Auto, General Liability (GL) and Umbrella or excess coverage. You assigned your agent to bring you three proposals for review and consideration.
It is almost a guarantee that you will have three options which are vastly different from one another, not only in the terms of coverage, but in the premiums. If you are planning on“buying the cheapest option”, you could be making a fatal mistake. While premiums should play a factor in your decision, it should not be the driving factor.
Option #1 has a total premium of $110,000 for all three lines of coverage. It is an “A-IX” rated carrier and offers a pollution endorsement in the event you lose a load as well as all of the typically requested forms: Blanket Additional Insured, Waiver of Subrogation, Primary Non-contributory wording, and the Defense costs are outside the limit of coverage. Additionally, the umbrella will kick in over the pollution coverage should the need arise.
Option #2 has a premium of $100,000 for all three lines of coverage and is also an “A-IX” rated carrier. They are able to offer all of the terms of option one, but they are not able to offer Additional Insured status on a blanket basis. There will be an additional charge of $250 each time “blanket” wording is needed. They are also not able to include the pollution coverage in their Umbrella form.
Option #3 has a total premium of $60,000 for all three lines of coverage. There is an absolute pollution exclusion as well as an accidental upset and overturn exclusion. They do not offer any forms on a blanket basis and they carry a “B” rating. The Defense costs are inside the limit of coverage and their Umbrella does not have the ability to sit over the pollution coverage.
You now have to make a decision on which carrier to move forward with. Right off the bat Option #3 should be eliminated. Their financial rating is less than desirable and they do not offer any true coverage from a pollution standpoint, or in terms of required endorsement wording. If you did spend the money on this policy you, in essence, have just begun your game of Russian roulette. Should a claim be submitted there is a strong possibility it is not covered by this carrier and you, as the business owner, will now have to pay for and potentially defend this claim out of your own pocket.
Options #1 and #2 are more viable and warrant some discussion with the agent. The real factor here is how much risk are you willing to take on? If you are more aggressive and don’t mind paying each time you need a certificate with Additional insured wording, and the fact that a pollution related claim does not have the added protection of the Umbrella policy, this might be the option for you. It is important to note pollution claims are seldom a few thousand dollars. They tend to start in the tens of thousands and go up from there.
If you are more cautious and willing to pay a bit more for that extra sense of security, the first option is for you. You will also not be saddled with an extra expense every time a certificate with Additional Insured wording is requested. Keep in mind, it is your company and it is up to you to make the best decision on how to protect what you have built. You should use your agent as a sounding board and ask their advice. After all, you rely on them for their expertise in this matter the same way you rely on your CPA for your taxes.
Know What to Look For
As a company engaged in waste (residential, commercial, medical, etc) or in recycling, following are a few key coverage endorsements to be on the lookout for when contemplating a move from one carrier to another. First, ask if this carrier specializes in your industry. You don’t want to make a switch to a carrier who has just gotten into the market due to a poor economy, and at the first sign of economic improvement is going to exit and leave you in a position of having to locate a new carrier next year.
CA 99 48 – Broadened Transportation Pollution Liability
This provides coverage in the event you have a truck overturn or lose a load and you are responsible for the remediation or cleanup costs. The MCS 90 is a less valuable form and while it will meet most county and state requirements, it will also require you, as the company, to reimburse the carrier for any expenses incurred to the cleanup. The CA 99 48 has a deductible, which once paid requires no further action. This endorsement does not cover Bodily Injury or Property Damage. The broadest form, which includes Bodily Injury and Property Damage, is known as TPL or Transportation Pollution Liability.
Absolute Pollution Exclusion
Almost all GL and Auto policies have this listed in the declarations page. This means they will not provide any coverage for a pollution related item, thus making the above endorsement even more valuable.
Accidental Upset and Overturn
This provides coverage should you have a truck involved in an accident and lubricants such as hydraulic fluid, fuel, oil, etc. leak out. This is all it will cover, and it is not pollution coverage.
Blanket Additional Insured
There are several versions of this endorsement. Some limit coverage to Landlords and Lien Holders while others extend out to contract holders. If your contracts do not require you to provide this endorsement, you have more options than those companies who do need a specific type of coverage.
Blanket Waiver of Subrogation
This provides the certificate holder amnesty from having their insurance reimburse your carrier for a claim involving both parties. If the form is not on a blanket basis, ask how much it is going to cost you every time you need a certificate with this endorsement. You might find it is more advantageous to spend an extra $750 (or whatever the charge is) at the beginning of the policy term as opposed to paying $250 every time you need it. After the third certificate you are wasting money that could have been easily saved if you had taken the time to ask this question.
Defense Costs
This is extremely important. Are these inside or outside of the limit of coverage? The optimal answer here is outside the limit. If you have a claim and your policy has $1,000,000 per occurrence on GL or combined single Limit (CSL) on auto, and your defense costs are within the limit, your total amount of coverage is reduced by the cost of your legal defense. Unfortunately, good attorneys are not typically inexpensive and if the defense costs are inside the limit of coverage you have available, it could be quickly eroded.
As for the Umbrella or Excess coverage, most carriers will exclude pollution coverage here as well. There are some carriers who do offer coverage in their Umbrella for pollution, but it needs to be requested. In some instances it could be necessary to select a different Umbrella carrier from the Auto and GL provider.
Shopping Your Agent
Another item that seems to revolve around switching carriers is shopping your insurance agent. If you shop not only your insurance carrier, but also your agent every year be wary. Insurance carriers track their submissions and are able to go back to their database and see how many times your particular account has been submitted. If they have seen it every year for the past five years, but have never written your coverage they are going to be less likely to be aggressive, or in some cases even offer a proposal. They would rather have their underwriters focus and work on accounts they stand a better chance of doing business with. Additionally, when they review your loss runs, which are required with the submission information, and they see you have been with a different carrier each of the last five years, they could take a similar approach of not offering terms or not being aggressive.
While they are providing a service, and you as the consumer have every right to shop around, they want to find companies they can establish a relationship with. It might sound absurd to you, but would you want to hire a driver who had worked at five different hauling companies in five years? The driver is going to require training, benefits and other expenses above and beyond payroll. Why would you waste money on someone who is just going to leave as soon as they think they can make 25 cents more an hour, when you could invest in a driver who is committed to being with you for a long period of time?
Independent insurance agents should be viewed the same way you see your CPA or Corporate Council. While they do sell something, good agents are experts in their field. If you are dead set on shopping your agent, consider broker selection. This is essentially a process where you interview several different agents and determine which agent and agency bring the most benefit to you and your company. Keep in mind, the selling and issuance of the policy is the easy part. Industry knowledge, access to viable carriers/markets and service/claims handling are going to really separate the various candidates. Important questions to ask the prospective agents are:
How many accounts in this industry do you currently represent? Asking for referrals is not uncommon.
How many carriers do you currently represent who are interested in this class of business?
What volume of premium do you and your agency handle in my industry? This is important as agents who have more premiums in a specific class of business tend to have better relationships with their underwriters and can get more “favors” when needed.
What services does your agency provide once a policy is written?
Do you offer in-house risk management and claims handing via your employees, or do you rely on the carrier to provide these services? If they offer the services via their own employees, ask for copies of the biographies or resumes of these individuals. You don’t want someone with no real world experience to be your only resource should they be needed.
Do you provide claims tracking software or a Web site I can access from my office should the need arise? If so, is there a charge for this service?
These are just a few examples of questions you might consider asking. Keep in mind, these are the people who are going to represent you and your company. Their experience in your field could be crucial to your success or the reason for your demise. Sure, company owners, officers and directors would rather floss their teeth with a chainsaw than deal with the insurance renewal, but it is a crucial part of your business and how you are protecting your assets.
There is no harm in exploring the marketplace, especially in the current economic climate. The manner and frequency in which you do this however is going to be crucial to your company, not only this year, but as you move forward and grow. This is a complex industry that requires agents and carriers with substantial industry knowledge, experience, carrier relationships and service capabilities. These are all items which should be seriously considered prior to and before making any changes to your insurance carrier or agent.
Nathan Brainard is Vice President of the Environmental Division at Insurance Office of America (IOA) (Longwood, FL). Nathan has been with IOA for six years and specializes in Environmental Insurance with an emphasis on insurance for the Waste, Recycling, Remediation and Demolition industries. He can be reached at (407) 998-5287 or via e-mail at [email protected].