By PHILIP K. GLICK, CPCU, RPLU, senior vice president of ECBM Insurance Brokers & Consultants in West Conshohocken, Pa., and president of Glick Risk Management Advisors, an affiliated insurance consulting firm
The commercial insurance marketplace has continued to be extremely competitive over the last several years, with premium rates declining and broad coverage generally available for most insurance buyers. Although we are beginning to see some signs of likely near-term tightening, rates remain level and in some cases are still declining moderately.
Yet at the same time over the last several years, we have seen a number of hidden cost increases being imposed by the insurance industry. It is critical that every risk manager be aware of these "stealth increases" and take aggressive steps to push back on these increases.
SLOWING THE CLAIMS PROCESS
A noticeable slowdown in property insurance
claims payments has occurred over the last several years, coupled with tougher adjusting standards by many major property insurance companies. In addition to frequent delays in the adjusting of physical property claims, problems in adjusting business income and extra-expense losses have become more frequent. In almost every case, insurance companies are referring the business-interruption claims for their insureds to forensic accountants.
It's also typical to see three, four, even five additional sets of information requests as claims are submitted and documentation provided.
As a result of these changes, where major property losses used to be routinely adjusted from date of loss to final payment in four to six months, claims are now extending out 12 to 18 months--and often even longer.
From a liability
insurance claims standpoint, insurance companies are also delaying when accepting the tender of liability claims from additional insureds on the policies of the named insureds. This includes delays in tendering claims from general contractors to subcontractors and from property owners/developers to general contractors.
Extensive delays can also occur when getting acknowledgement and acceptance of coverage for landlords as additional insureds for claims filed by customers injured at their tenant's premises.
Similarly, retailers with products liability claims resulting from customers lawsuits are often not promptly defended as additional insureds by the insurers that cover their manufacturers or distributors.
As recently as five years ago, insurance companies routinely accepted the tender of coverage for an additional insured with an appropriate certificate of insurance and signed contract--often within 60 to 90 days. Such tenders were accepted for the majority of claims at first request.
Today, the results are the exact opposite. Tenders for coverage are routinely not acknowledged at all until the third or fourth written request, often taking as much as six to nine months for an acknowledgement. Tenders are then typically denied in the majority of claims until repeated legal efforts are made to force the named insured's insurer to accept coverage for the additional insured.
CONTINUING COVERAGE PULL-BACKS/RESTRICTIONS
During the last several years, many insurance companies have imposed coverage restrictions, including direct restrictions on clients' own insurance policies. For instance, they are no longer agreeing to provide contractual liability coverage under their commercial general liability policies for broad-form, hold-harmless agreements they enter into with their clients or customers.
What's more, most additional insured endorsements now being issued will no longer pick up the requirement for the named insured to extend coverage to an additional insured for the sole negligence of the additional insured.
Take the standard additional insured endorsement now issued on behalf of a general contractor for work done for an owner or by a manufacturer for its retail buyer or distributor. It now only covers claims "arising in whole or in part" out of the contractor's or manufacturer's work.
Accordingly, the insurers will no longer cover claims due to the sole negligence of the owner or other party.
Insurers are beginning to impose broad professional liability exclusions on commercial general liability policy renewals. Professional liability exclusions are becoming routine on policy renewals for contractors even if the professional services are limited to just their own preparation of surveys, maps or shop drawings, or selection of outside professionals such as project architects or engineers.
Some insurers are imposing professional liability exclusions on the general liability policies for products manufacturers, even for bodily injury or property damage liability claims related to product design or advice to their customers--if a related loss does not arise directly from the sale and manufacture of their product.
Liability carriers are also often resisting issuance of waiver of subrogation endorsements with respect to coverage extended to additional insureds. In the past these waivers were routinely agreed to and would prevent an insurance company from first extending coverage to an additional insured and then bringing legal action to recover their payments upon conclusion of litigation to the extent a loss was determined to actually be caused by the additional insured's own negligence.
MORE RESTRICTIONS ON ADDITIONAL INSUREDS
Another equally disturbing form of coverage restriction relates to the scope of coverage provided to clients as additional insureds on the liability policies of their vendors and subcontractors doing work for them.
These restrictions include the same direct limitations cited above plus several additional limitations such as:
-- Excluding coverage for punitive damages.
-- Covering only general liability claims for losses arising from specific products or operations that are declared at policy inception. This includes very recent limitations on coverage for contractors to only specified classes of construction or types of subcontracted work declared at policy inception. Examples of excluded work could include jobs involving incidental demolition, renovation work or residential construction.
-- Limiting coverage for additional insureds to premises/operations coverage only or no longer agreeing to extend additional insured status for products or completed operations liability. Accordingly, claims filed against a building owner by a buyer of a condo injured bydefective work by a contractor that comes to light afterpurchase would no longer be insured.
-- Capping or including legal defense costs in a contractor's or product manufacturer's per occurrence policy limits in some cases, rather than paying legal defense costs in addition to policy limits. This trend is beginning to take place for contractors in more hazardous trades, such as demolition, and for manufacturers of more hazardous products, such as flammable materials.
INCREASED PROPERTY DEMANDS
Property insurers are beginning to increase windstorm deductibles on coastal properties including those in Florida, the Gulf Coast, New Orleans and even coastal New Jersey. These wind deductibles were often as low as 1 percent to 2 percent of total insured values. We are now routinely seeing wind deductibles of 5 percent of insured values per location.
Property insurers are also pushing back at renewal on insured property values, typically demanding that insured values (and the premiums paid for those insured values) be taken to true 100 percent replacement costs.
Although premium rates per $100 of insured values remain low, the underwriters' pushing for true replacement costs will only increase effective renewal premiums. If insureds are not willing to increase the insured values, underwriters now often respond by adding an 80 percent or 90 percent coinsurance penalty to the renewal property policy and by no longer providing blanket agreed-amount coverage.
We are also seeing less obvious cost increases involving underwriters' engineering and loss-control requirements at renewal, such as more stringent fire-protection requirements, the adequacy of sprinkler systems and other protective safeguards.
Insurers are also putting greater attention on liability and workers' compensation loss-control programs. Although premium rates may remain competitive, underwriters are demanding stricter loss control compliance as part of most coverage renewals.
Often renewal policies are quoted at premiums that are subject to satisfactory loss-control inspections by the insurer within 30 to 60 days after the renewal. If insurers impose stringent loss-control requirements that are determined after the insurance renewal, this could result in substantial additional costson the insurance buyer to comply.
If the insured cannot or is unwilling to meet these requirements, they may then suffer cancellation penalties if they must replace renewal policies mid-term. This could include short-rate cancellation penalties and other higher premium costs to replace renewal coverage on short notice
HOW TO OVERCOME STEALTH COST INCREASES
Given these trends, forewarned is forearmed. Specific steps should be taken by all risk managers to identify these potential cost drivers and take aggressive steps to push back on any of these cost increases.
Any insurance buyer should carefully evaluate and confirm the detailed renewal coverage terms and conditions for every insurance policy renewal. Greater scrutiny should also be made to be sure that the renewal coverages provided by contractors, vendors and other service providers remain as broad as in the past.
Pressure should be exerted on yourvendors, contractors and suppliers to push back on their brokers and their insurance company claims adjusters to promptly accept appropriate tenders of coveragefor you as an additional insured on their liability insurance policies.Appropriate business incentives, including contractual holdbacks, should be considered to put additional economic pressure on contractors or vendors to honor their obligations to accept additional insured status for defense costs and any indemnity awards that may occur.
Specific claims-adjusting strategies should be developed on all property claims. These should include clear timelines and thorough agreement on the documentation that will be needed by the property insurance company's claims adjuster (for property, business-interruption and extra expense losses) at the inception of a claim.
Loss-control requirements--including property engineering, workers' compensation and general liability safety requirements, and products liability quality assurance standards--should clearly be documented in writing as part of insurance company quotes prior to binding renewals.
The potential additional costs of complying with any new loss-control requirements should be quantified and agreement reached on any changes that will be mandatory before renewal coverage decisions are made.
(Editor's note: Also be sure to read the author's similar analysis of the workers' comp insurance market, featured on our WORKERSCOMP ForumTM.)
January 1, 2010
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