May 20, 2020

Premiums on the Rise: How to Ensure Protection From Uninsured Third Party Claims

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Auto insurers made headlines last month issuing more than $10 billion in premium refunds and discounts due to the coronavirus pandemic. The bad news is that not everyone is getting money back when it comes to their other insurance plans. In fact, most policy holders can expect to pay higher premiums for reduced coverages at renewal time. 

Global advisory Willis Towers Watson conservatively estimates $11 billion in COVID-19 insured losses across select policy lines in the U.S. and U.K. The pessimistic projection shows losses of up to $80 billion. Insurance companies will not be absorbing these costs alone – they are passing them along in the form of higher prices to customers. 

Global insurance rates rose 14% in Q1 compared to the year prior. Insurance and risk management firm Marsh LLC anticipates rates will continue to rise throughout the remainder of 2020. Analysts predict increases across 23 business lines with umbrella/excess liability, business interruption, directors’ and officers’, and general liability being some of the hardest hit. 

Broad insurance rate increases are the product of current business conditions and the strength of financial markets. Individual policy holders have limited control in combatting these types of increases. However, insureds do hold significant sway in minimizing individual rate increases by managing a certificate of insurance tracking and risk transfer program for subcontractors, tenants, and other third parties. 

A defined insurance risk management plan prevents: 

  • Additional premiums or coverage denials from increasing loss histories
  • Compromises to risk reserves and overall financial strength
  • Negative impacts to the Experience Modification Rate used to calculate Workers’ Compensation premiums
  • Out-of-pocket costs associated with underinsured claims, uninsured losses, and lengthy litigation. 

To lessen rate hikes at renewal time, following these five important steps. 

Step 1: Track Certificates of Insurance Regularly from Every Third Party

Increased insurance rates combined with the current economic recession will lead to many coverage lapses for small businesses. Third parties with inactive coverage that cause losses on projects leave upstream parties holding the bill. Validate a certificate of insurance from every third party operating on the premises before work commences. Verify the insurance remains active throughout the project and track expiration dates for proactive renewal reminders. 

Step 2: Require Upstream Parties be Named as Additional Insureds

Additional insured endorsements extend coverage from a subcontractor, vendor, or other third party’s insurance policy to another entity, typically the contracting party. The additional insured benefits from coverage and rights under the named insured’s policy in the event of a claim. Request a copy of the endorsement to confirm the information is accurate and aligns with contract requirements. 

Step 3: Check for Ample Coverage Amounts

Should a claim happen, the liable party must have coverage thresholds in excess of the value of the damages. Coverage amounts typically come from a combination of general liability, umbrella, and excess liability policies. With all three of these policy types experiencing some of the highest rate increases, business may look to lower their coverage thresholds to reduce premiums. Ensure every company working on a project has enough insurance to fully cover the cost of a serious claim.

Step 4: Review the Insurer’s Rating

As insurance companies continue processing the catastrophic losses caused by COVID-19, financial insolvency will become a greater concern. Contractually require that a third party’s insurer hold an A- rating or better by AM Best, a top-tier credit rating agency for the insurance industry. High ratings indicate a strong financial position for the company and provide piece of mind that the funds exist to cover claims.  

Step 5: Ask Questions about Worker Exclusions on the COI

Companies can elect to exclude proprietors, partners, executive officers, and board members from their workers’ compensation coverage. This practice helps lower the overall compensation costs that factor into the calculation. Excluding these individuals is acceptable if they have no direct affiliation with work on a project or property. However, as businesses try to run lean operations while the economy recovers, individuals typically stationed in offices may need to make their way onto jobsites. This means they must be covered under a workers’ compensation or directors’ and officers’ policy. If the COI shows this exclusion, ask questions to ensure coverage is not needed. 

For more risk strategies, check out “10 Tips for Transferring Contractual Risk.” 

About myCOI

When rates are on the rise, managing a risk transfer program becomes even more important. myCOI makes certificate of insurance tracking easy with an automated platform for requesting, reviewing, and storing insurance documents to keep your company protected. Our platform erases the worry of costly claims with intuitive software backed by a team of insurance experts. See myCOI in action and discover how our platform is helping clients win as loss prevention.

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