(December 2019)
Underwriting the Insurance Services Office (ISO) OP 00 01–Capital Assets Program Coverage Form (Output Policy) involves examining a number of different areas, beginning with broad general information and narrowing down to specific issues. Various insurance companies may add to these or emphasize some areas more than others.
Ownership or management is an underwriting component that affects every line of business. The length of time the risk has been in business must be considered, as well as its financial stability. New businesses have higher failure rates that vary by class. A new business in which managers with a proven track record of success have a better chance to succeed than one without the benefit of such experience. New franchise operations are usually more successful because they work with a successful business model and benefit from the franchisor's background support. These issues revolve around stability and are usually more significant when combined with other elements or risk characteristics. This information may also provide some insight into other related areas.
Dun and Bradstreet (D&B) produces different types of information used to analyze the financial aspects of a business. This includes background and public information on the company, its owners and officers, payment history, and details on late payments, past failures, or bankruptcies. The amount of information available varies from risk to risk because it is based on public records, documents, and interviews with the company’s management and its customers. Publicly held or large companies usually disclose a great deal of relevant information. Smaller companies, especially Limited Liability Companies (LLC's) or privately-owned companies, are not usually as willing to share their financial information.
Money issues can lead to moral and morale exposures that can destroy an operation. The moral exposure is one where the insured or a member of the insured’s team takes active steps to fraudulently create a loss for gain.
|
Example: Raphael thought his space-age comfort chairs would revolutionize relaxation, but his years of effort have produced only frustration. He considers torching the business, taking the insurance proceeds, and retiring to his own living room and relaxing. He intentionally leaves a space heater running on high inside the finishing room over the weekend that causes a fire that destroys the entire facility. |
The morale hazard is less obvious than the moral hazard, but it can be even more insidious. The insured becomes lackadaisical in monitoring potential loss situations. It does not actually cause a loss but does not take precautions to keep one from happening. A business may be strapped for cash, cancel the contract with the waste removal firm, and take its trash to the landfill "as needed." Dust and grease accumulate and becomes residue. Employees with time on their hands replace the professional cleaning crew. Small losses begin to appear in the loss history.
|
Example: Sylvester had his fill of the auction business. After 40 years of hauling property, appraising it, selling it and, worst of all, storing it, he wants to spend his remaining years traveling to National Parks throughout the country. Without anyone to take over the business, he cuts back on both the amount of his work and the number of employees. Service standards decline, as do maintenance of the facility and housekeeping. Merchandise accumulates rapidly and some must be stored in the furnace room. Sylvester is both sad and relieved when the combustible contents stored too close to the furnace ignite and result in a major fire. |
Note: Once the insured is no longer overly concerned with continuing the business, major losses can and do occur.
Underwriting property exposures begins with the basic property-underwriting acronym of C.O.P.E. This stands for Construction, Occupancy, Protection, and Exposure. Although the primary underwriting concern is for loss or damage due to fire, all other covered causes of loss must also be considered.
One critical consideration when evaluating property is the building or structure's susceptibility to loss or damage from this coverage forms covered causes of loss. They are extremely broad and include more different types of property than most standard property coverage forms.
Fire is the primary consideration. A building of wood or frame construction is more susceptible to a fire spreading quickly and causing greater damage than one constructed of fire-resistant materials where a fire is less likely to spread very far, if at all.
Buildings in areas subject to tornadoes, hurricanes, or high winds should be built to eliminate or at least reduce the damage from these causes of loss.
Another construction feature to consider is the building or structure's age and the dates when the various systems were updated. Issues such as when the heating system, the roof, plumbing, and electrical systems were last updated or replaced must be addressed. When any of these elements is not properly maintained or updated on a scheduled and timely basis, they can cause, contribute to, or increase the likelihood of a significant loss occurring.
Construction quality is equally important. Inferior construction that does not meet current building codes because it is grandfathered and does not have to conform to them is always a cause for concern. The building must have an adequate number of properly constructed load bearing walls. OP 00 01 covers foundations, underground pipes, flues, drains, retaining walls, bulkheads, piers, pilings, docks, and wharves. Each of these should also be properly constructed and in good repair.
Another important consideration is the building's occupancy and use. The operations performed or conducted in the building that could start or contribute to the spread of a fire must be determined. The types of property, contents, processes, chemicals, flammables and other combustible elements that can add fuel to a fire if one begins must be examined carefully. For example:
Fire is one concern with respect to evaluating the occupancy but not the only one. Some risks involve property that is attractive to burglars or are targets for theft.
Some operations have a higher exposure to loss or damage from vehicles or aircraft, such as being adjacent to an automobile racetrack or near an airport. Certain occupancies, such as alcoholic beverage bottlers, may raise extreme or emotional social responses and contribute to or increase the potential for loss. Even though these operations are not overly hazardous in the usual insurance sense, these types of operations have a high potential for vandalism, burglary, and arson losses.
Also, consider OP 00 01’s broader coverage features. It includes fine arts coverage for a $100,000 limit of insurance. Does a particular risk have exposure to the full limit? Personal property is covered when situated within 1,000 feet from a covered building, not just within 100 feet from it. Extra perimeter security and fencing may be required.
Protection falls into two broad areas. One is public protection. The other is private protection.
When considering public protection as it relates to fire, the type of public protection available, the water supply, and the fire department's response time are all crucial factors. Public protection ranges from the volunteer fire department available on an irregular and unpredictable basis to the fully paid municipal department available around the clock.
Water supply is another extremely important component. The source and amount of water, water pressure, and rate of flow are all important. The public grading system developed over time grades and evaluates public fire protection on a scale of one to ten, with one being the best public protection available and ten representing no public protection at all. It is critically important to understand the components of the grading system and the public protection grade that applies to the risk being considered as part of the overall evaluation of loss by fire.
Private protection means individual risk protective measures installed or in place used to eliminate or reduce loss. When considering fire, examine and determine if the risk has an automatic sprinkler system, standpipes, and hoses, fire suppression systems, water flow alarms, water storage tanks, fire brigades, an adequate number of the correct types of fire extinguishers, or other similar types of protection.
The protection provided to deter, reduce, or eliminate theft, burglary, and other crime losses must also be considered. Other issues in this area to consider are the types of safes, burglar alarm systems, watchpersons, locks, fencing, lighting, and other similar types of protective devices in place to protect against these kinds of losses.
When evaluating loss potential from wind and hail, determine the measures and procedures established to prevent or reduce losses involving damage to windows, glass, and property in the open.
The construction and occupancy of surrounding or adjacent properties exposed to the insured's location and their distance away from it must be examined carefully. These are important factors for the insured to consider because its proximity to an operation with significant potential for fire or explosion affects it and its ability to secure adequate property insurance coverage. An extreme example to illustrate the point is the retail shoe store with minimal hazards that is an attractive insurance prospect except that it is located next to a chemical manufacturing complex. The point is that part of the overall underwriting and risk evaluation process must include evaluating the hazards and exposures that surrounding and adjacent operations present. This affects both the building and its owner or its tenants if the owner leases it to others. A heating and air conditioning equipment distributor adjacent to a heating and air conditioning manufacturer is a much different risk than if the distributor is next to a natural gas company. Exposure analysis must include evaluating of firewalls, fire doors, construction of both structures, vegetation between the buildings, and different building heights.
The risk’s geographic location and the increase in hazards, as a result, is another major consideration in evaluating and underwriting an account. A few common examples are:
The risk's loss history must be reviewed once exposures and hazards are identified and evaluated. In most cases, at least three to five full years of information is needed, and more may be required because property losses tend to occur infrequently. It should include details on the types of property losses, when they occurred, the cause of loss, circumstances, amounts paid, and deductibles. It is also important to determine what the insured did as a result of the losses to keep them from recurring. Loss frequency and loss severity are important issues that must be considered as part of an overall risk evaluation.
Developing accurate and complete loss information is also important in developing and cementing the relationship between the agent, the insured, and the insurance company necessary to establish an effective and affordable insurance program. Loss history is also used as part of the Capital Assets’ property rating formula when the deductible is less than $5,000. For this reason, having at least five years of accurate and credible loss information is very important.
Loss analysis is another
important underwriting discipline. The insured may provide this information
instead of it coming from company loss reports, but current computer technology
and capability enables companies to provide this information much more easily
than in the past.
The Capital Assets Policy does not apply coinsurance to buildings and business personal property and the named insured is not charged a coinsurance penalty for not being insured to value. Because of this, the underwriter must be reasonably certain that the property values are adequate. Property not insured to value causes a number of problems:
Despite properly classifying the risk and assigning deficiency points, pricing is always inadequate if the limit is inadequate. If the correct rate is 1.00 and the correct value is $1,000,000, the correct premium is $10,000. If the value used is $750,000, the premium is automatically 25% deficient.
If the property is not insured to value and a total loss occurs, the named insured cannot resume normal operations as quickly as planned. It must finance the shortfall, and this could be the difference between resuming operations and remaining closed.
Word gets around fast when the limit the named insured needed to resume operations is inadequate. In such cases, the named insured may seek contribution from the agent alleging that he or she gave improper advice. The named insured also usually tells friends and business associates of the problem. In addition, the insurance company may decide to review the agent’s book of business to determine if other risks are also not insured to value and are not priced adequately.
The basic deductible is $5,000. Lower deductibles are available, but surcharges apply. The Multiple Deductible option should be considered if the insured wants to assume higher deductibles on certain property but not on others.
Related Article: ISO Capital Assets Program (Output Policy) Deductibles
Underwriting controls pricing and requires attention to detail. The underwriter must properly classify and evaluate every feature of the insured’s operation and assign numerical points that accumulate and determine the appropriate premium to charge. Under the Capital Asset, the starting point is "perfect." The underwriter then adds deficiency points for any feature that is not "perfect." Because traditional rating contemplates the average risk, this is sometimes difficult for an underwriter to do. The underwriter does not say, “This is a better than average risk, so I’ll give more credit.” Instead, the underwriter says, “This is a better than average risk, but it is not perfect, so I must assign deficiency points." There are no provisions to assign judgment-based credits or debits.
|
Example: Manufacturer's Mutual insures Marvin's Metals and the underwriter always applied maximum credits because of the quality of its operation. When Manufacturers began using the Capital Assets Policy, the underwriter suggested to Marvin's agent that Marvin's property insurance should be written on that coverage form. While determining Marvin's deficiency points, she realized that it was not nearly as good a risk as she had previously thought. She scrutinized the loss control reports, loss history, and other underwriting information to properly evaluate each of the categories and assign deficiency points. |
Related article: ISO Capital Assets Program Coverage Form (Output Policy) Rating Considerations
The Capital Assets Policy contains a number of additional coverages. The underwriter must evaluate each insured to understand and determine its coverage needs. One insured may have little or no interest in or need for these coverages, but another may need one or more of them.
Inland marine coverages that are automatically included are accounts receivable, business personal property off covered location, fine arts, valuable papers and records, and property in transit. However, these coverages should be compared to the available separate coverage forms and policies to be certain that coverage is the same. If not, the named insured may be subject to a significant gap in coverage for the sake of convenience.
The electronic data coverage provided is similar to Inland Marine EDP Coverage. The Property Covered provision is broad enough to pick up computer hardware coverage. Before deciding against using the EDP coverage form, the coverages offered by each form should be compared to determine if there are any important gaps in coverage.
Employee theft, forgery or alteration, money and securities, and money orders and counterfeit money are automatically covered. Carefully review the current specific coverages provided before eliminating them because of Capital Assets coverage.
Numerous endorsements are available that reduce coverage because of the broad coverage provided. Others increase limits and broaden coverage.
Related Article: ISO Capital Assets Program (Output Policy) Available Endorsements and Their Uses
Related Articles:
Time Element Coverage Underwriting Considerations
CP 15 15–Business Income Report/Worksheet
The Capital Assets Policy has nearly every property coverage that most insureds could possibly want. While it places much of the burden on the insurance company and removes it from the insured, it might not always be the right choice. When addressing this issue, the following points should be considered: