(September 2019)
The Insurance Services Office (ISO) BP 00 03–Businessowners Coverage Form is an alternative to the ISO Commercial Package Policy (CPP) for small to medium-sized businesses in specific classes of business. Its underlying rating philosophy is that many small to medium size risks have more in common with similar risks of the same size and class than with larger risks in the same class. The CPP and other similar insurance coverage forms and policies are available and more appropriate for larger risks.
Underwriting involves evaluating the exposures each risk presents. When the Businessowners Coverage Form was first introduced, underwriting it was similar to underwriting a homeowner's policy. As the number of eligible businesses, classes, and coverages increased, the underwriting process reverted to the more traditional commercial underwriting approach.
Underwriting begins with eligibility. If the business does not meet the eligibility requirements, it must be disqualified and considered under another commercial insurance coverage form or policy. This does not mean that the risk is bad. It simply means it is not eligible for the program. One major problem with the ISO Businessowners Program is the writing of ineligible risks. The losses they generate distort the overall loss ratios for the program as well as those for the class.
Related Article: ISO Businessowners Program Eligibility
However, each insurance company has its own eligibility requirements that may be broader or more restrictive than the ISO criteria. Risk eligibility should be verified before submitting it to the company. If a given risk's eligibility is questionable, it should be submitted to the insurance company as a CPP using ACORD applications and request Businessowners treatment if it meets the company’s Businessowners eligibility requirements.
While eligibility is a major issue, it is not the only one. Eligible risks must also be acceptable to the insurance company. The agent provides information about the risk using the application, loss reports, and other data. Most insurance companies do not usually inspect these risks and the agent’s knowledge is critical to underwriting it. If the information is not provided or if it is insufficient, it will probably remain unknown until a loss occurs.
Management is one component of underwriting that affects every line of business. This includes the length of time the risk has been in business as well as its financial stability. New businesses have higher failure rates that vary by class. New businesses started by managers with previous success at similar businesses are more likely to succeed than new businesses that do not have the benefit of such experience. New franchise operations usually have greater degrees of success because they work with a successful business model and benefit from the franchisor's background support.
Dun and Bradstreet (D&B) provides a variety of information used to analyze the business' financial characteristics. This includes background and public information on it, its owners and officers, 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 and documents and interviews with both 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.
Loss analysis is another
important part of the underwriting process. Loss ratios, loss frequency, and
loss severity must be evaluated because these risks usually develop relatively
small premiums. The named insured provided this information in the past instead
of company loss reports. However, computer technology and capability now
enables companies to provide this information much more easily than in the
past.
Property underwriting always begins with the basic property elements of Construction, Occupancy, Protection, and Exposure (COPE). This approach is primarily used to evaluate the fire hazard but is also useful to identify and measure other causes of loss.
Construction
ISO is very clear in the way it determines construction, especially when a building has different types of construction. A building of mixed construction with one-third or more of it being frame is classified as frame, regardless of any other type of construction. Buildings with brick veneer over frame are also considered frame and not joisted masonry. The agent must investigate and determine the type of construction based on the way ISO defines it.
Once the type of construction is determined, the next step is to examine its quality. With older buildings, any updates and renovations must be evaluated, including what was done, who did it, and when. The overall construction must be acceptable. The building design itself should not create any loss issues, such as with windstorm or ice buildup.
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Example: Old Gospel Church was a small church of joisted masonry construction. After the last Sunday service, the walls suddenly sagged, the roof collapsed and the building was totally destroyed. The construction quality was determined to be inferior, an issue compounded by the weight of three layers of roofing material. |
Occupancy
Risk eligibility is based primarily on occupancy. Underwriting then evaluates how the particular risk controls its hazards. The susceptibility and damageability of covered business personal property must also be evaluated. Overall maintenance and housekeeping of the premises should be satisfactory and the risk should incorporate appropriate loss prevention techniques for fire, theft, and other causes of loss.
Protection
This includes both external public protection as well as internal or private protection.
External protection means the public protection class grades that range from 1 (best and quite rare) to 10 (unprotected). In addition, anything that might hinder fire department response and access to the premises must be evaluated. Issues like railroad crossings, traffic congestion, rivers, bridges, tunnels, and other geographic or man-made obstacles must be considered and addressed where necessary or possible.
Internal protection consists of automatic sprinklers and other types of extinguishing systems, fire extinguishers, and anything else that can stop, control, or limit the spread of fire. Exterior locks and burglar alarms must be suitable for the occupancy and should be able to prevent, limit, or control burglary and theft losses. In certain parts of the country, storm shutters and other windstorm protection should be provided.
Exposure
This involves examining adjacent or exposing occupancies or conditions that could increase the named insured's fire risk or risk of loss from other covered causes of loss. Exposure analysis involves examining the surrounding area, surrounding buildings, and their occupancies or operations, as well as other occupancies in the named insured's building. Exposures can be serious problems and are usually beyond the insured's control to correct or eliminate. The named insured usually has some control over construction, occupancy, and protection that can be changed or improved. However, the only option might be to move when there is a serious exposure condition. It is important to be aware of neighboring occupancies and conditions because each could affect the named insured's loss potential.
In addition, certain geographic issues may have to be examined, analyzed, and considered. Areas prone to earthquake, windstorm, wildfire, hail, and other geographic or climatic problems must be evaluated in the underwriting process to the extent that they affect the risk because coverage for an ensuing fire may still be provided even if the particular cause of loss is excluded.
Liability underwriting begins with the named insured. Since coverage applies to the operations of every insured named, the type of business each conducts must be clearly understood and thoroughly evaluated.
Bodily injury, property damage, and personal and advertising injury loss potential must be evaluated based on the type of business involved and the condition and characteristics of the premises or jobsite where operations are performed. This involves evaluating the controls in place to prevent accidents and the condition of the premises. The risk should have adequate lighting, good sight lines and visibility, and exits and entrances clearly marked and easily accessible to both employees and customers.
Customers should be restricted to only certain areas in order to keep them from being injured and limit their access to the entire premises. Slips and falls make up a large percentage of all losses. They can be controlled by being aware of conditions in the facility and correcting housekeeping problems and damaged floor coverings as they occur or through scheduled preventive maintenance.
Operations and exposures away from the owned premises are more difficult to control. In those cases, effective and thorough job-site supervision is important. In addition, any unusual contractual obligations or additional insured requirements must be evaluated and addressed.
The number and type of
optional coverage endorsements continues to increase and this causes this
coverage form to be an increasingly attractive way to insure eligible classes
of business. It is important to know the endorsements each company has and is
willing to use, as well as the eligible classes of business. In the beginning,
the Businessowners Coverage Form was a canned, “take it or leave it” policy. It
can now be tailored and customized to a greater extent in order to meet an
individual risk’s specific needs or requirements.
A good risk can become a problem if the premium charged is inadequate for its exposures. Proper classification is the most important factor that affects pricing. This means determining and using the correct construction, occupancy, and public protection class at risk. If any of these are incorrect, the rating is wrong and the errors cannot be corrected by any amount of discretionary and available underwriting credit or debit.
Accurate property insurance-to-value is another important element to develop the proper premium. Replacement cost valuation applies only if the limit of insurance at the time of loss equals at least 80% of the replacement value of the damaged property. An underinsured risk is an under-priced risk. Underinsured risks can lose their eligibility for replacement cost valuation and/or seasonal business personal property increase.
Some classes of business base their liability rating on annual sales, gross receipts, or payroll. These risks must also use accurate estimates of these rating bases for adequate pricing. While these risks are usually subject to audit, audits may be waived and this can result in premiums that are either too high or too low.
Related Article: ISO Businessowners Program Rating Considerations
As briefly stated above, the company can apply discretionary and earned credits, debits, and other filed company deviations after the basic rating is done. The Businessowners Coverage Form does not usually have a similar range of pricing flexibility or options available that other coverage forms and policies have. Credits or debits are given only for physical or management characteristics that the basic rating does not already reflect and include. This means that management experience, exposing occupancies and operations, and the risk's loss history may significantly affect the final underwriting judgment pricing applied.
Every risk has endorsement and change requests. The producer must review and evaluate changes before sending them to the insurance company. A request for a new named or additional insured, a new location, or a new coverage may signal a change in operations that might affect the risk's eligibility. On the other hand, requests to reduce coverage or to delete an insured can signal a significant change or a downturn in operations that could mean financial problems that could lead to bankruptcy.
Change requests may solidify
the producer’s relationship with the client. When the named insured’s business
is growing, the producer should take the time to apply risk management
techniques and assist to determine and evaluate future coverage needs. Doing so
also keeps other producers that view the growing operation as a potential new
client from gaining a foothold. On the other hand, risks that experience negative
changes usually need some insurance counseling. If the risk survives, the
assistance the producer provides might be the important difference that cements
the relationship and enables the producer to retain the business as it returns
to growth and profitability.
Underwriting risks eligible for the ISO Businessowners Program is increasingly an agency function. It provides opportunities for both efficiencies and abuses that can affect both profitability and relationships. The BOP Program maintains its viability when pricing is adequate and underwriting integrity is intact.