Excess, Umbrella, and multi-Insurer Coverages. Deductibles and Self-insured Retention policies; Control over Safety; Insurance Pricing in 2017.
You’ll buy insurance this year for your transportation business, and perhaps a large percentage of it will be from multiple insurers. Pricing may be an issue (see below), or your clients may require certain policy features.
Insurance policies themselves are always bilateral, not multi-lateral agreements. So, when you buy into a multi-insurer program, you should be aware of the gaps and inconsistencies that may occur. Your insurance broker is assembling a program that is complex, multi-layered, and multi-insurer. So ask a lot of questions.
Never will two insurers jointly issue one policy that will provide whole coverage to you. But although policies are not multi-lateral that does not mean they operate only individually. Excess and umbrella policies, which you may need to fulfill customer demands, refer to other policies by their nature, generally calling them the underlying coverage – and are contingent in some ways on the provisions of that underlying coverage.
A primary policy pays the first dollar of a covered claim, perhaps subject to your deductible or self-insured retention. You buy the primary and then add other policies that are excess of the primary as you deem necessary. An excess policy means the insurer only begins coverage after the pre-determined primary limits. Excess is available for just about all primary lines and there is no requirement you buy only from one underwriting company.
An umbrella policy is more of a stand-alone excess policy that offers a bit broader scope than the primary. Umbrella policies stand out over plain excess covers: like an excess policy, umbrellas provide additional amounts of cover once the primary is tapped out; but umbrellas sit more broadly, and provide cover over other types of coverage, for example, your auto or employer’s liability policies; and umbrellas can serve as primary cover outside the scope of some primaries.
Consider that excess policies “follow form” of the underlying coverage – the exact provisions of that policy – but no more. Sometimes “follow form” language takes a detour and conflicts with terms of the underlying policy, narrowing the scope with additional terms. That may be excess, but it sure ain’t what you expected.
A “DIC” policy is a stand-alone excess policy that typically drops down and serves as primary where there is a difference in policy conditions or scope, or when the underlying is exhausted. These DIC policies are often seen in D&O coverage programs.
Generally, however, excess policies attach and pick up the claim and defense when the pre-determined limits of the primary coverage are exhausted, when the primary throws in the towel.
In umbrella situations, some of the coverage may be excess to the primary, and other coverage could be first dollar.
Umbrella policies should provide additional limits over the underlying liability and, as said, they usually provide broader coverage than an Excess Liability policy.
Excess Liability policies provide additional limits over the underlying liability, but this can be more restrictive and they do not provide coverage that was unavailable to you in the underlying policy.
What About Retentions and Deductibles? Under an SIR, the insurer generally has nothing to do with losses that do not penetrate its attachment point. The insurer may, however, require notification when a claim comes in to you or when it is perceived by you and/or the insurer the claim may pierce the attachment point. Under a deductible, however, the insurer pays every loss up to its limits, and then – in theory – is reimbursed by you up to the amount of your deductible. In practice, however, if you can manage to do so, pay losses that are within the deductible from your pocket. Remember, numerous and frequent losses are considered more unfavorably than cat losses, and next year’s insurance looks for frequency.
Who pays Defense Costs? A policy with a deductible provision requires an insurer to investigate each claim and pay to defend it. The insurer controls the defense.
With an SIR policy, you can be in control of the defense. In theory since it’s your money up front, you can control your own investigation, defense, and settlement of claims within the SIR. You may be better suited to investigate than the insurance adjuster. Presumably, you’ll know of the claim first. Until the SIR has been satisfied by you, or the claim is clearly going to exceed the SIR, the insurer, in true SIR policies, has no obligation to provide or pay for the insured’s defense.
Unless the policy otherwise provides (e.g. eroding limits), the deductible relates to the damages for which the insured is indemnified, not to defense costs, so the insurer pays defense costs from the beginning. The insurer is fully responsible for defense costs regardless of the amount of the deductible, assuming there is a potential for coverage under the policy.
In an SIR policy, until the insurer becomes obligated for a loss over the SIR, the insured will pay its own defense costs. In this situation, you’re not bound to use the services of the insurer’s stable of lawyers. You can choose.
Settlement. A policy with a deductible allows the insurer to defend and settle claims against the insured without the insured’s consent. An insurer cannot settle a claim within the SIR without the insured’s consent.
Which One Should I pick? In the current insurance climate, first-dollar coverage is a luxury we can’t afford. You should go for either a deductible or SIR policy. You’ll be more in charge with an SIR.
This is not new. Policies with large self-insured retentions and deductibles have always been available, but if you have a better hand at managing your day-to-day risks, that is, you’re better at conducting a safe operation than an insurer, an SIR policy may be more attractive than a deductible. This is especially true if your CSA scores are well within limits and you preach and practice safety.
Your Insurance Market for 2017. With sagging growth and under-performing investments, the insurance industry is likely to continue consolidation, leaving you with fewer choices. There is an expected outflow of some 70,000 insurance workers – of all stripes – so insurers will need to attract and train workers and count more on algorithms (yes, CSA is only an algorithm, and a poorly functioning one at that).
Then there’s the uncertainty of the new Administration and its effects on domestic growth and trade. Expect increasing insurance costs this year.
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