By John Brennan Larkin
I have been getting a great deal of mail from people who can’t understand why the standard insurance market (St. Paul, Travelers, Hartford, AIG, etc.) does not want their business. The majority of the time, the answer is the insured’s loss history or high risk business. This can apply to those water softening, water filtration and bottled water enterprises with a poor loss record. Inadequate safety measures, using poor quality products, lack of driving checks prior to hiring or installers who are cheap but do not know what they are doing… when these incur losses and those losses add up, the standard market carriers are likely to decline your business.
Excess and surplus lines carriers
When the standard markets say no, the excess and surplus lines markets are an option. Excess and surplus lines markets exist to ensure that coverage is available when insurance companies in the standard market reject an applicant as too risky. The majority of the people reading this article today are likely to be utilizing (or will soon be) the E&S marketplace.
People tell me all the time that they cannot believe their insurance company cancelled them. “I’ve been with that company for 10 years! So what if I have losses? They’re in the insurance business!” Then I look at the premium the account generated over that 10-year period versus the frequency and severity of the losses. Invariably, I find myself saying, “I can’t believe they kept you all these years”!
How it works
Why would the E&S marketplace take on the risk of covering your business when the standard insurers decline to do so? Think of it this way. How do sports betting companies pick a line on a game (i.e. this team should win by this much, lose by this much or will have this amount of points)? They do it by statistics. They look at the history of the team, how they have been doing lately and any injuries that may affect the outcome.
One team may have a tremendous advantage over another, so much so that there would not be bettors on both sides of that game. To get folks to bet on both teams and not just the one with the better performance history, the sports betting people change the odds by adding or removing points from a particular team to even out the competition. Likewise, if an E&S carrier adds more premium and a larger deductible to your policy, then it may make sense write your business.
An insurance company will look at your history (and that of your industry), assess how you have performed in the short and long term, investigate any new issues affecting your industry and then determine if you are a good risk to insure. Viewed through the eyes of a standard carrier, they may not be able to charge enough premium and large enough deductible to make a profit on your business. Standard carriers are admitted in one or more states and their rates are subject to regulation. This is not true for the E & S carriers. When they don’t want your business, the Excess and Surplus Lines market or your state’s insurance department may be the only game in town.
Be careful difference of deductible vs. self insured retentions (SIR). In laymen’s terms, deductibles require you, the insured, to pay a portion of every claim. If you had a $5,000 deductible for a certain loss, the insurance company would handle the claim and pay the injured party damages minus your deductible. You would pay the difference to the injured party.
An SIR requires you to be responsible for the first dollar of every claim (including defense) and also requires you to work (and pay for) third party administrator fees to handle the claim up until a certain dollar threshold (usually $10,000 and up). This requires more time and care than with a deductible program.
Regulations, procedures and taxes
A large portion of E&S insurance companies are termed ‘non-admitted’ in the states they do business in. Is that important? Yes it is. State insurance regulators have considerably more control over admitted insurers than over carriers writing business through the E & S market. To exercise some control over non-admitted insurers and to protect their states’ citizens from fraud and other potential dangers in working with these less-regulated carriers, many state insurance departments have established a number of requirements that must be met in order to place coverage with a non-admitted insurer:
- The broker (and in some case the insured) must certify by notarized affidavit that the risk has been submitted to and refused by several – often three – admitted insurers.
- The selected non-admitted insurer may need to be an approved carrier for surplus lines in the state whose law governs the contract.
- All states impose a tax on surplus lines polices (generally between two and five percent of premium) and many states charge additional stamping or service fees. (In some states, surplus lines premiums are also subject to a municipal tax.) These taxes and fees are part of the cost of coverage placed in the E & S market and will be itemized separately on your invoice for each coverage placed with a non-admitted insurer.
Check out the carrier
One significant risk of doing business with an excess and surplus lines carrier is the potential for the carrier to go bankrupt. If your carrier is non-admitted, it is important to check the financial rating of that company with A.M. Best or another similar rating company to ensure that financial stability. Unlike utilizing an admitted carrier in your state, should the non-admitted carrier fail, your state insurance fund is not obligated to pay your property, general liability, auto or worker’s compensation claim. YOU WILL BE RESPONSIBLE FOR PAYMENT OF SUCH CLAIMS. Didn’t know that, did you? Take the time to check the carrier you do business with!
With that caveat, please do not be scared of using the E&S market. I place many of my clients with them all the time. The key is to be aware that not every carrier is created equally. Take the time to know what you are dealing with. Remember, most standard and E&S policies of the water treatment and purification industry are written on an occurrence basis. That means that whoever your carrier was at the time of the incident is the one who pays the claim. You may get a claim in today that occurred two years ago. Look at the strength of the carrier you want to use today. If they are in financial trouble now, will they be in business two years from now?
The majority of those in the E&S market today take a greater interest in their loss history, hiring practices and products they use prior to getting into trouble. I find that an insured usually has to stay a year or two in the E&S market after years of larger-than-normal incurred losses. The key is to limit your losses through risk management and to take the time to recognize your organizations weaknesses and then to fix them.
About the author
John Brennan Larkin has been in the insurance industry for over 11 years and is one of the largest insurance brokers for the bottled water, water softening and water filtration industries in the United States today. He has insured new start-up water companies and large national franchisors. For more information on risk management or the Excess and Surplus lines market, you may call John Brennan Larkin toll free at (877) 987-7873.