Wrecks & Fires

Chapter 7

Umbrella Insurance

Covering Large Assets

  Umbrella policies are often needed by individuals with relatively large asset bases.  An umbrella policy covers liability judgments that exceed the limits of the auto and homeowner's policies (usually $300,000).  Umbrella policies are generally priced according to the number of cars owned.

  Even for the homeowner, it is necessary to insure personal property (just as renters do).  In basic, broad and comprehensive policies, personal property is typically covered at 50 percent of the coverage carried on the home.  In other words, if the home is insured for $100,000, personal property would then be insured for $50,000.  It is important to understand, however, that the belongings in the home are not normally insured at full replacement cost.  Rather, most policies take the current retail costs and deduct value according to how old the item is.  Only a policy that insures at replacement value would actually replace the item at current rates.  Not all insurance companies offer replacement value on a structure's contents.

  When personal property is removed from the home, insured values are affected.  Usually, it is covered for up to 10 percent of the total policy amount on basic and broad form coverage; comprehensive form and some basic and broad policies will continue to insure up to the 50 percent level.  There are a few policies that will cover the property up to 100 percent anywhere in the world, but the average person is unlikely to purchase this.  The property of a house-guest or resident employee, such as a baby-sitter, is covered only up to 10 percent even though the property is on the premises.

  Theft insurance sections have some special aspects, which can vary from company to company.  Each policy should be checked for the following:

1. If you have basic form insurance, you are usually not covered for "mysterious disappearance."  This means that an item or items are missing, but the homeowner is not able to prove theft was responsible for the disappearance (maybe her child loaned the article out to a friend).   Under broad or comprehensive forms, the loss would generally be covered.

2. Checks and credit cards which are stolen are generally not covered by a homeowner's policy.

3. Homeowner policies will generally pay for property stolen from a safe deposit box or a storage warehouse.

4. If an addition is being added to one's home, theft of the building materials is not covered.                                                                                         

5. Basic and broad form policies will not pay for gems which disappeared from their settings, unless theft can specifically be proven.  Usually such a loss is considered not to be theft since it is more likely that the stone simply fell out of the ring.

6. Unless forced entry can be proven, homeowner policies will not normally cover theft from unattended automobiles, boats or trailers.

7. Property lost in the mail is not covered by a homeowner's policy.

  Many personal items are either not covered at all by a homeowner’s policy or, if they are covered, the loss would generally only be covered up to specified policy limits.  Such things as motorbikes, golf carts, pets, aircraft, paintings, sculpture and business samples are not covered (unless specifically covered within the policy).  Most policies will only cover up to $100 for lost cash, coin collections, and bullion.  Only up to $500 is generally covered for securities, deeds, stamp collections, jewelry, watches, furs and gems.  Some policies put a $1,000 limit on silverware and guns.  If a person has specific items they would like covered by their homeowner's policy, they would want to purchase a floater in the amount of coverage needed.  Floaters traditionally insure against all risks, not just those listed in the homeowner's policy.

  There can be additional clauses besides the ones we just listed that would exclude coverage for personal belongings.

  Every person should keep a list of all household and personal belongings.  When each item was purchased should be listed as well as the price paid.  Claims adjusters are not likely to simply take the policyholder's word when it comes to replacing items.  Any item of special value should be appraised.  In addition, it is wise to take pictures of household items to verify the article's existence and quality.  The inventory, appraisals and pictures should be kept in a safe deposit box or a fireproof safe.  When the insurance policy is purchased, many experts recommend that copies of inventories, appraisals and pictures be given to the insurance agent for his or her files.

Choosing an Umbrella Policy

  Consumers have many choices of insurance types, coming under a variety of names.  Little wonder that they often seem confused or misinformed.  Since agents are the ones who are explaining what's what to the consumer, if you don't understand the policies then neither will your clients.  As with all insurance types, the first step for the insurance agent is understanding the policies personally.  Greater understanding of policy types also means fuller service to the general consumer because the agent will know what is needed for full coverage.

Understanding Umbrella Insurance

  Let's address the first question usually asked by consumers:  “What is umbrella insurance?”  Jane Bryant Quinn, noted financial author of Making the Most of Your Money, defines umbrella insurance in the following way:

 "An umbrella policy covers liability judgments that exceed the limits of your auto and homeowner's policies." 

  Of course, there must be an umbrella policy purchased and in place for coverage to exist.  Every agent should recommend umbrella insurance for anyone with substantial assets or the likelihood of liability in some area.  Like all liability insurance types, the policy may not be purchased to cover an incident that has already occurred.

"An umbrella policy covers liability judgments that exceed the limits of your auto and homeowner's policies."

Jane Bryant Quinn 

How Much Coverage?

  Certainly, there are variations, but typically the consumer carries $300,000 worth of liability on their basic policies.  After that, umbrella policies pick up liability claims up to $1 million or more.  Again, figures can vary, but these represent the normal situation.

Variances in Price

  Prices of umbrella coverage vary.  Premiums tend to be based on the number of vehicles that are owned, with cost based upon multiple factors.  Some companies may even include a $1 million liability option with their standard auto and homeowner's policies.  If this is the case, the consumer still must elect to purchase the option in order for it to be included.

  Although there are always possible exceptions, umbrella coverage will defend the purchaser not only against claims of damage or personal injury, but also against libel (except for some professions of a public nature), slander, false arrest, invasion of privacy, and similar charges that could cause personal harm.

  As with all insurance products, prices should be compared.  Usually price comparison is the easiest way to save insurance dollars.  Insurance agents often wrongly assume that price comparisons are only for consumers.  This attitude is unfortunate.  Even agents need to constantly compare prices.  Every other industry does so as a means of staying competitive and insurance should not be any different.  If the agent's product does cost more the agent should try to find out why; are there added benefits or security in the policy?  If the product is simply higher for no apparent reason, the agent may want to represent a different product that is more in line with comparison prices.

  Why would an agent want to sell a lower priced product?  The reason is one of logic: happy clients tell their friends.  When an agent is able to save someone money, that person tells others, which in turn brings the agent additional business.  When there are huge price differences, it is important to make sure there is not some reason for this.  Sometimes price differences reflect some element of the policy rather than insurer greed.  While some price differences may be as simple as the amount of commission offered, there may also be differences in how claims are paid.  It is important that the agent understand any differences in the policies he or she offers.

  Many types of products are not price advertised and umbrella insurance tends to be one of them.  No single company always has the best rates, so agents need to invest some time initially, but it is time well spent.  Few consumers tend to shop around.  They would rather depend upon their agent to do it for them.  Many agents prefer to carry more than one product.  In this way they can demonstrate to their clients that they did some comparison shopping.

  Whatever product or products the agent chooses to carry, it is important that financial strength is present in the issuing company.  Professionals recommend an A company rating or better.

Liability Insurance for Liability Exposures

  It is logical that liability insurance would not exist if there were no liability exposures.  Liability happens under a variety of circumstances, from accidental deaths, auto accidents, civil suits and a multitude of other incidents. Liability exposures often result in large losses. Compensatory damages compensate for actual losses. Punitive damages tend to be very large because they are awarded to plaintiffs in excess of full compensation for injuries sustained. Punitive damages are designed to:

1. Punish the defendant, and

2. Discourage others from engaging in similar conduct.

  While some types of liability claims can be foreseen and avoided, others are more difficult to recognize. This can especially be true for businesses because they are more likely to be targeted than general citizens would be.

Torts

  The legal basis for liability claims are torts and contracts.  These are not mutually exclusive in that a person claiming to have been injured or wronged in some way may seek action either under a tort or a contract or, in some jurisdictions, under both.

  The word "tort" comes from the past participle of the Latin verb torquere.  It means "to twist", which is from the same root as the word "torture."  Funk & Wagnalls standard desk dictionary (volume 2) defines tort in the following method:  "n. Law Any private or civil wrong by act or omission for which a civil suit can be brought, but not including breach of contract." Corley and Robert define it as "A wrongful act committed by one person against another person or his property.  It is the breach of a legal duty imposed by law other than by contract."  Both are saying a tort is a wrong (other than breach of contract) for which a civil action can be brought.  Most of these claims result from negligence, but other grounds are also possible:

1. intentional interference,

2. absolute liability, and

3. strict liability.

Intentional Torts

  Sometimes acts are intentional, although the resulting consequences may not be.  When an intentional act causes injury to another, that act is deemed an intentional tort, even though the intent may not have been to cause injury.  Even acts that were thought to be beneficial may result in unintentional harm to others.

Intentional Interference - Two Types

  Intentional torts may be classified as

1. intentional interference with the person, or

2. intentional interference with property.

  Battery, assault, infliction of mental and emotional disturbance, defamation and false imprisonment are all examples of the first type, intentional interference with the person.  The second type will be discussed later in this chapter.

Battery - Unwanted Contact

  Battery can be any contact that is not wanted, although actual contact must be made in order for battery to exist.  It includes not only the person themselves, but also anything connected to or associated with them, such as the clothes they are wearing, the cars they are driving, or the packages they are carrying.  Therefore, if the person has packages knocked from their arms, or their jacket is tugged, it can be considered battery.  Actual harm is not required for a charge of battery to be legally upheld.  In fact, it is not even necessary for hostility to be involved.  For example, a person is shopping downtown, carrying packages.  A man approaches asking for spare change.  The shopper continues to walk attempting to ignore the man.  The beggar then reaches out and grasps the shopper's arm, though still asking politely (without anger or harsh words) for change.  The moment the man-made contact with the shopper's arm, he could be charged with battery.  Only the absence of expressed or implied consent of the shopper is necessary to constitute battery.  Pushing too hard for a sale?  Don't make the mistake of touching your potential client!

Only the absence of expressed or implied consent of the shopper is necessary to constitute battery.

  Some personal contact, however unintentional, occurs every day.  Most people would not charge battery.  People are bumped by other shoppers, sometimes even scattering their packages.  Even so, battery is not implied.  Why do battery charges get filed?  Usually because the person feels intimidated in some way.  Most of us assume that some unintentional contact (even undesired contact) with others is inevitable in daily life.  We may not like it when another steps on our foot, but we do not file battery charges against them; it takes a feeling of intimidation.

Assault

   Assault is an act of violence or the physical threat of violence.  It is different from battery because assault requires apprehension over threatened contact, whereas battery requires actual physical contact.  It is not necessary for the aggressor to actually intend to carry out an assault; a belief by the threatened person that the threat may materialize is enough cause for action.  For example, if a weapon is pointed at a person, even though no physical action is actually taken, assault has still occurred, as long as it produced apprehension.  On the other hand, if the person was not aware of the intimidation, no assault occurred because no apprehension occurred.  Verbal insults do not necessarily mean that assault is involved.  If verbal insults are accompanied by threatening gestures, however, that is an entirely different matter.

Assault is different from battery because assault requires apprehension over threatened contact, whereas battery requires actual physical contact.

  We often hear of "assault and battery charges."  Assault and battery do seem to go together.  That is because first the aggressor intimidates causing apprehension (assault), and then physical contact is made, resulting in battery.

Mental Distress

  Liability can arise from intentional acts that cause another person to experience mental or emotional distress.  This distress must be proven to be severe and extreme.  Insults or abuses that simply cause anxiety do not qualify.  Often the abused person must actually experience physical illness which was caused the by emotional or mental distress.  This is most often seen in claims from debtors who file claims against creditors for harassing collection actions.

Defamation

  Defamation involves injury to one's reputation.  Defamatory acts may be either libel or slander.  Historically, libel is written defamation while slander is spoken defamation.  Today, with E-Mail, fax machines and other forms of communication, these distinctions are no longer clear.  Therefore, the trend has been to base the differences on the performance of the form of defamation or on its potential harm with the more permanent or harmful forms considered to be libelous.

  In order to be legally viable, defamatory statements or written forms must be intentionally or negligently communicated to someone other than the defamed party.  It is not illegal to state or write defamatory statements directly to the person.  The defamed person must prove that (1) the action was intentional or negligent and (2) the defamatory meaning is reasonably understood by others.

  Libel and slander laws vary widely among jurisdictions.  Among these jurisdictions there is inconsistency, so it is important for those who feel they have been wronged to seek the correct counsel for the area involved.

False Imprisonment

  False Imprisonment has been used far more than most people realize.  False imprisonment is the intentional restraint of another's freedom of movement.  Years ago, this was used to free our nations so-called mentally ill from undesired institutionalization.  It is now much harder to commit those we feel are mentally incompetent because of false imprisonment laws.

  For a false imprisonment liability claim to occur, the imprisonment must be total, even if it happens to be brief.  It must be an intentional act, although not necessarily malicious in nature.  The restraint need not be physical, but it must contain threats of physical force which would intimidate the person into compliance.

  Sometimes false imprisonment is confused with malicious prosecution, which is the malicious institution of groundless criminal proceedings against another person.

Intentional Interference with Property

  This has become widespread and often goes unpunished because the guilty party is not known.  There are multiple types of interference:

1. Trespass

2. Conversion

3. Privilege

4. Mistakes

5. Consent

6. Protective Acts

  Trespass involves real property rather than personal property.  Real property is land and the items attached to it.  Trespass is the wrongful entry upon the land of another or the failure to remove property from another’s land when an obligation exists to do so.  Trespass includes entry of the area above and below the land as well as the surface of the land.  In other words, when a trespass order exists, it is illegal to fly over the land in a plane or balloon as well walk upon the actual surface.  It would also be illegal to dig or otherwise enter below the surface.

  It is not necessary to establish that any damage to the property happened for a liability claim to be filed.  Trespass exists by merely entering or walking into the area forbidden.  The original trespass order, however, probably came about due to damage or interference of some kind.

  Conversion is the intentional interference with the personal property of others.  Personal property is anything capable of being owned that is not real property.  Personal property would include everything that is not land or items permanently attached to land, such as crops and houses.  For conversion to exist, there must be action which was designed to deprive the owner of the property from use and possession to such a degree that a forced sale of the property existed.

  Conversion is accomplished by:

1. taking possession to exercise control which is adverse to the owner,

2. depriving the owner of control through an unauthorized transfer,

3. refusing to surrender goods to the one who has a legal right to them,

4. misusing an owner's possessions without authorization (such as driving a car left at a parking lot or business), and

5. intentional damage to, destruction of, or alteration of property.  This could include changing the appearance of something with the intent of confiscating the property.

  The point of tort law dealing with conversion is to give the wronged person the ability to recover the property or its value of which they were wrongly deprived.

  Some activities do not bring about liability.  A person will not be held liable for an intentional tort if the conduct is considered privileged.  For this to be the case, the person must have acted in a manner which served public interest.  Of course, not all will agree on this.  Whether or not the action is considered privileged will depend upon the circumstances involved and the attitude of the court.  There is no assurance that conduct will be considered privileged in most cases.  Common situations that are deemed privileged by the courts include mistakes, consent and protective acts.

  Mistakes can happen to anyone.  Even though an act may be a mistake, whether or not it is privileged will depend upon specific circumstances; many “mistakes” are not exempt from liability claims.  A mistake that is often considered privileged involves acts causing damage that were intended to protect another's rights (even if the danger is mistaken and did not actually exist).

  When consent exists and damage results, this is often considered privileged.  Therefore, no liability claim would exist.  If someone has given permission to another to perform a specific task and damage results, liability may not exist, due to the given consent.

  Protective acts: when action or reasonable force is necessary to protect another from harm, privilege usually exists.  In fact, a person is typically privileged to use reasonable force to prevent interference with one's own property or person, as well as others.

It is very important to point out that reasonable force is allowable; exactly what is reasonable often has to be determined by the courts.

  It is very important to point out that reasonable force is allowable; what is reasonable often has to be determined by the courts.  Killing someone stealing is not necessarily reasonable force.  Killing someone who was raping another person would be reasonable, while killing someone for stealing a bicycle would probably not be considered reasonable force.

  There are no guarantees when it comes to privilege.  Courts are often not consistent in their rulings, although we do have an appeals process when we think the courts are wrong.  It would be foolish to act simply because we felt the action would be privileged.  Most acts ruled privileged do depend upon some measure of common sense, however.

Absolute Liability

  There are different types of liability.  One type is absolute liability.  Absolute liability is sometimes known as Liability Without Fault.  It is imposed where public policy demands that a person be held liable for specific acts, even if they were neither intentionally nor negligently inflicted.  Sometimes people actually make this type of claim more likely.  One example of this are those who post signs such as “Danger-Bad Dog.”  This implies prior knowledge of a dangerous situation.

  Absolute liability can result from many different situations.  This might include such things as damage from earth vibrations as a result of blasting operations, aircraft use, storage of dangerous materials and potentially dangerous animals.  Keeping wild animals imposes absolute liability even if their keepers have domesticated them.  Basically, the rationale of absolute liability is that in ultra-dangerous activities where losses are inevitable at some point, the loss is shifted to those best able to control it.

  Absolute liability, like other types of liability, will vary with the location.  There may always be local modification or interpretation.

Strict Liability

  Strict liability is typically applied to product liability, rather than personal acts.  It is felt that manufacturers and merchandisers of goods are held liable for injuries caused by the defective products they produce.  This could be true even if the manufacturer had no intentional negligence or fault.  The claimant must prove that the product was defective and that the defect produced unreasonable danger.  Manufacturers may not be liable if the product was experimental or for products that are unavoidably unsafe.  Many sports products are considered unavoidably unsafe, for example.  For a claim to be valid, the product must have been used as intended.  This is an important point, since many products would become unsafe if used outside of their intended parameters.

Negligence

  Most policyholders are aware of negligence claims and this is where insurance agents are most likely to become involved when selling products.  Everyone is exposed to loss from damage claims involving allegations of negligence.  Law requires all persons to use care in their actions to prevent negligence.  If a person fails to perform as a reasonable and prudent person would under similar circumstances, a negligence claim can occur if someone is injured or property is damaged.

  Obviously, an injury or loss must occur before a claim can be filed.  While this might seem like an obvious statement, there have been misunderstandings.  Even if a person is acting recklessly, if no injury or loss results, there can be no claim filed.

  It should also be pointed out that negligence claims are always unintentional.  Intentional acts would fall under battery or assault.  Negligence can be due to carelessness, thoughtlessness, forgetfulness, bad judgment, or stupidity.  It can even result from a bad temper.  Negligence never involves intent, even if bad temper is involved.  A negligent person has no desire to cause harm, but because of some type of negligent behavior, he or she does so.

A Reasonable Man

  Agents often hear the term "the prudent and reasonable man" rule.  This is the standard used for determining negligence claims.  It was established by the Common Law of England.  Although they never talk of a "reasonable woman" (is there such a thing?), the intent is to cover both equally.  The assumption is that the term "man" covers the human race as a whole.

A reasonable man is assumed to have the minimum perception, memory, experience and information common to the community in general.

  A reasonable man is assumed to have the minimum perception, memory, experience and information common to the community in general.  He is considered to have normal intelligence and mental capacity.  Therefore, this definition would exclude the legally insane, children not of legal age, and those who are senile or have some other mental impairment.  When it involves a trade or profession, such as an insurance agent, they are also expected to have corresponding knowledge.

  The legal basis for liability claims come from tort law and contractual relationships.  Like all liability insurances, umbrella insurance follows certain procedures.  Possible losses are the costs of defense against lawsuits alleging liability and the damages which must be paid when the defense fails.

Third Party Forms

  The role of insurance is to prevent the losses from falling on the insured.  The loss is transferred to another entity; in this case, the insurance company.  Since the contract between the insured and the insurance company benefits a third party, liability insurance is often referred to as third-party forms.  Most policies pay claims to the third party directly, rather than releasing the funds to the insured.

  Some claims may occur due to intentional action or even criminal action on the part of the insured.  In such a case, the insurance company is seldom liable, even though they may hold a contract with the insured.  In fact, the responsible party may be subject to criminal proceedings as well as suit under civil law.  The difference between the two has to do with offenses committed against an individual and those committed against the state.  With civil claims, the offender is not prosecuted unless such prosecution is initiated by the offended party, whereas under criminal offenses, prosecution is brought about by some aspect of our society to discourage similar conduct.  In this case, the aspect of society may well be the insuring company who issued the policy.

  The insurance company's obligation to pay a claim would not extend to jail time or related fines from intentional acts.  The insurer's obligations only extend to the insured's obligations under civil law (those proceedings initiated by the injured party).  Direct bodily injuries committed intentionally by or at the direction of the insured would not be covered, but other than such intentional acts, civil liability resulting from criminal law violation would usually be covered by the policy.

General Liability Forms

  There are, of course, different types of liability forms.  The general liability insurance program is similar to many fire and inland marine programs and multi-line forms (such as homeowners insurance).  Standard policies insert appropriate forms, which outline the common provisions, conditions and definitions which would apply to all policies under the program.  Special aspects are applied thereafter, as policies are applied for.

  As we know, everyone is exposed to some amount of liability, no matter how careful they think they are.  The law requires people to behave reasonably, under the Prudent Man rule (doing what a prudent man would do).  When they do not act reasonably, they may be held legally liable to pay damages to those injured either physically or materially.  Some negligence cannot be foreseen, so even a prudent man can experience liability losses.

  Liability comes from a number of different areas.  Damages to a person or property can happen due to business activities, recreational activities or personal activities.  Some of the largest liability claims have resulted from the policyholder entertaining guests at their home or place of business or when permitting others to use their property in some way.

Actual Claims Result From Negligence

  Actual claims come about as the result of negligence in some form.  We have all heard of the salesperson that falls on a child's toy and sues the resident (whether renting or buying) for the resulting medical bills.  Successful liability claims prove negligence in some way, whether by leaving a roller-skate on the sidewalk, allowing a pet dog to bite a visitor, or committing some overt action that causes harm.

  Sometimes liability results not from an overt action, but the lack of action.  Failing to pick up the roller-skate would be an example of this.  The renter or homeowner failed to pick up the roller-skate and this lack of action caused the harm.  A dog that is not fenced in and bites someone means the owner failed to take necessary action to prevent the harm that resulted.  In all cases, the insured is expected to do what a prudent man would do to prevent harm to a person or property.

  Liability awards often tend to be much higher than the actual dollar loss.  The amount of damages awarded will depend on the preconceptions and bias of the jury.  Therefore, the type of loss and the circumstances under which it occurred often affects the amount of the award.  Since the general person could not pay for large liability losses, they transfer the risk to an insurance company through the policy purchased.

Primary Underlying Policies

  Umbrella insurance takes over after other policies or the self-insured person has already paid some of the losses.  Typically there are two underlying insurances, which are usually referred to as the primary policies.  Those two are homeowner’s insurance and personal automobile policies.  These two policies promise the insured protection of indemnification and defense.

þ Indemnification means the insurance company pays for claims which the policyholder is legally liable for (if not legally liable, the insurance company will not pay anything) which have resulted from the policy's covered perils, to the limit of liability amounts which have been purchased.  In other words, if the insured purchased $25,000 of protection per occurrence, even if the claim amount is $40,000, only the $25,000 will be paid.  Coverage will usually apply for claims resulting from activities on the insured's property, as a result of the insured's actions or as a result of the actions of an insured's home employee, such as a cook, cleaning person, or baby-sitter.

þ Defense means that the insurance company who issued the policy must defend or settle any covered claim or lawsuit that is brought against the insured for property damage or bodily injury.  There is often inadequate coverage purchased for defense.  Once the policy limit purchased has been reached, the policyholder must cover any additional legal fees themselves.  Legal fees are not limited to an attorney; they can also include investigation and negotiation of claims.  Because a legal defense can easily eat up the typical $100,000 of purchased coverage, suits are often settled out of court, even though the insured may not feel they are at fault.

Terms: Coverage & Liability

  There are two terms that need to be understood in liability claims: coverage and liability.  The word coverage refers to the contractual obligation of the insurance company.  It is the amount the company agrees to pay to indemnify the insured for claims brought against them, which they are legally liable for.  Liability refers to the legal responsibility of the policyholder to other persons for damage done to them physically or materially.  This is important to understand, because a person may be liable for a claim, but not necessarily have coverage for it, under the terms of their policy.

  Regarding liability and coverage, the reverse can also occur.  A policyholder may have coverage for an occurrence, but not be legally liable.  Why would this be an issue?  Say, for example, that good, old Uncle Charlie drinks too much.  While intoxicated, he falls on the road in front of his nephew's home.  Charlie was not actually on the nephews property, but even if he were, the nephew played no part in the fall.  There was no demonstrable negligence on the part of the nephew; all the negligence was with Uncle Charlie.

Legal Liability Must Exist

  Even though the nephew has no legal liability, he feels sorry for Uncle Charlie, so he turns the claim in to his insurance company.  Although he has coverage under the liability terms of his policy, there is no legal liability.  Therefore, the nephew's policy will not pay for Uncle Charlie's medical bills, even if the policyholder wants the policy to do so.

  Sometimes a policyholder may feel responsible for damage done to another or their property.  However, if no legal liability exists, the policy will not pay.  Liability policies pay only when legal liability exists.

Liability policies pay only when legal liability exists.

  Legal responsibility also does not hinge on insurance coverage.  Whether or not one is covered for a legal liability by an insurance policy has no bearing on what may be required of the individual.  If legal liability exists, the individual is responsible - with or without insurance coverage.

  Insureds can be found responsible for a loss, even when no apparent liability seems to be present.  This is why so many cases end up in court - there is disagreement over who is liable.  Usually, there are three elements that will make the determining decision: the public's attitude towards the claim, the application of the laws of negligence in any given state, and the jury's (if applicable) opinion about damage awards.

Public Opinion

  Public opinion exists on every subject.  These opinions are often what laws are formed from.  For example, the public thinks it is wrong for oil tankers to allow oil spills, so public opinion and law holds them responsible.  This is simplistic, but basically it is how society's views become law.

Ownership & Liability

  Sometimes people assume that not owning anything removes the need for liability insurance.  What they fail to see is that liability judgments do not consider personal ownership.  Whether or not one owns anything substantial has nothing to do with liability lawsuits.  Where negligence exists, lawsuits will follow.  It is ironic that public opinion considers those with this attitude to be especially negligent.  In fact, such attitudes can often weigh heavily in favor of the injured party because it is felt that lack of coverage is an element of negligent behavior.

  Besides lack of liability insurance coverage, other things will also affect society's view of liability claims.  Current events often trigger higher claim awards because juries are more aware of particular circumstances or views.  There is no maximum monetary limit for liability losses and no person is immune from lawsuits, no matter how careful they try to be.

Everyone Wants a Chunk

  The news exposure given large liability awards has seemed to encourage lawsuits.  More claims than ever before are being filed.  There has been talk of limiting the amount that attorneys can collect, even on successful claims, as a means of limiting frivolous or excessive lawsuits against others.  Certainly, attorneys would fight any such legislation.  With the expectation of large rewards, lawsuits are filed even when the dispute could have easily been settled between the two parties.  Jury awards in the millions of dollars are now commonplace, where once it was a rarity.  Defendants are finding themselves losing everything they own to large liability awards.

  When judgments are brought against a party, they do not only reflect what is currently owned.  They also obligate the defendant to pay from whatever resources they may have or acquire in the future.  This includes income as well as assets.  Many defendants find themselves forced into bankruptcy as a result of successful liability claims.

Paying For A Legal Defense

  Even if the individual feels they will be able to prove their innocence, the costs of a legal defense can be staggering.  Even after winning the case, these individuals may face years of paying off legal fees and investigative fees, as well as court costs.  Winning does not necessarily mean the other party will be liable for legal fees.  Often, they are not.

It Can Happen To Anyone

  It is probably easier to maintain high insurance limits, such as purchasing an umbrella policy, than to leave oneself unprotected.  Certainly, no one wants to be involved in litigation involving a negligence claim, but it happens to the most careful of people.  When a person fails to meet certain legal standards regarding negligence, a successful liability claim can occur.

Successful Liability Claims

  For a successful liability claim to occur, some elements must exist:

1. The defendant must have been under some legal duty to act in a certain way to prevent harm to people or property.  As previously stated, this is often referred to as the Prudent Man rule.

2. The defendant must have failed to exercise reasonable care.  When there is a legal duty to exercise reasonable care, it must be proven that the defendant failed to do so.  When an individual fails to act in a way that avoids endangering others, that person is negligent.  Reasonable care is care that an ordinary prudent person would take in similar situations (the Prudent Man rule).                                                                                

3. Even if reasonable care was not taken, there was no intention to cause injury to another or their property.  Of course, intentional acts causing harm to persons or property bring the issue into criminal intent, which is another matter entirely.                                                                                      

4. For a claim to be brought, the failure to exercise reasonable care must have resulted in loss to another.  That loss can be physical or material.  If no loss results from the carelessness, no claim can be brought.  There must be a chain of events beginning with the negligence and ending with the loss.  If there is no injured party, there is no claim of liability.

  Certainly, agents need to be aware of liability opportunists.  There will always be those waiting for a liability claim with the possibility of high rewards.  Therefore, it is the responsibility of agents to bring this to the attention of their policyholders.  Changes in how liability laws have been interpreted have resulted in larger monetary claims.  Individuals are also being held to higher standards of "reasonable care."

Relaxed Standards for Evidence of Negligence

  We are seeing strong evidence that judges are relaxing the standards regarding "evidence of negligence."  This means that acts or omission of acts that previously were not considered negligent are now.  The flow of events following an act or omission of an act is now being extended to encompass more and more.  As a result, negligence is more easily proven.

Daily Risks of Life

Existing risks in daily life seem to be diminishing as a liability defense.  In the past, the courts felt that the injured party bore more responsibility than they seem to now.  In the past, a defendant could maintain that the injured party bore some assumption of risk in their daily life.  While that is still true to some degree, more and more courts are putting less of the risks on the injured party and more of them on the defendant.

Dual Risk Contribution

Dual risk contribution: many situations bear some responsibility with more than one person.  In the past, courts tended to feel that the injured party was only entitled to compensation for the part of the negligence that was not their own.  For example, in the past a person who had drank a couple of beers would be considered partially at fault, even if the auto accident were proven to have been the result of another driver.  Today that is not necessarily the case.  Unless it could be proven that the beers had contributed, the injured party may not be considered partially responsible.

Injury Avoidance

Some injuries to a person or property could have been avoided if the injured party had taken some precautionary steps or action (such as erecting a fence, for example).  Defendants often used this tactic to avoid liability claims.  Today, the courts are much less likely to accept this defense, unless the action not taken would have been taken by a prudent man in similar circumstances.

Shared Blame - Injured Party Preference

  As we know, many liability claims are not clearly just one person's fault.  Rather, blame is truly shared by more than one person.  Even when this is the case, courts are still tending to favor the injured party.  Often several rules could apply, and perhaps even should apply, but the judge or jury may choose to disregard some of the rules in favor of others.  Often it depends upon the exact circumstances.  For example, a landowner is not liable for the public sidewalk and injuries that happen because of defects in the sidewalk.  On the other hand, if a person trips due to a defect in the sidewalk, but lands on a spade left in the landowner's yard, negligence may exist for the landowner.  The judge could rule that the sidewalk caused the injury, or he or she could rule that the spade caused the injury.

Absolute Liability

  One person may be held strictly liable for the damages.  When this happens it is called absolute liability.  This may be done regardless of actual fault.  A good example of this has to do with employees of a business.  It is common for the business to be held liable for the actions of their on-duty employees, even though the business itself had not sanctioned the employee's actions.

Determining Monetary Damages

  There was a time when liability claims focused on actual dollar losses.  Today there are multiple ways of construing losses, with actual dollar loss being only one of them.  These additional losses, which are hard to place a monetary value on, are often referred to as general or punitive damages.

Jury Awards

  Juries were not always desired for liability claims, but today they nearly always are.  Juries tend to favor higher rewards than do judges.  Today, a jury trial on a liability claim strikes fear in the hearts of defendants and their attorneys.  There is no assurance that juries will be fair or even impartial when determining monetary damages.  How each jury member feels will depend upon their life experiences and their attitudes about the people involved.  Prejudices will exist based on a multiple of past experiences and personal interpretations.  Juries are, after all, composed of people who have been fired from large companies, faced hard financial times, and felt injured at the hands of others.  Each of these experiences will make their imprint and shape their personal views.

  Insurance companies face especially hard situations when a jury is involved.  People commonly feel that insurance companies have "deep pockets," as the saying goes.  Most people carry various types of insurances.  They often feel they pay out too much money personally, so they reason that these insurers must have lots of extra cash laying around.  If the injured party evokes sympathy, it is easy for the jury members to feel that the insurance company can afford to give them a big settlement.  This often happens even when the jury members do not necessarily feel the defendant was negligent.  If the defendant has an insurance company to pay the loss, juries are especially apt to award large settlements.

  Juries may simply want to punish a defendant whom they feel was negligent, or at the very least, unlikable.  It is not unusual for people (who make up juries) to desire to punish another for an act they feel is selfish, thoughtless, or unfair.  Sometimes, members of the jury simply like the feeling of power they have in the case.

  Of course, we seldom really know the reasons for large settlements that seem unusually harsh or unfair.  Jury members often do not say why such awards were reached, especially if they feel that stating their reasons will bring about criticism.

  Payment of damages can involve multiple things, including specific damages for losses that occurred, such as medical bills; general damages, such as pain and suffering; and the dreaded punitive damages.  Punitive damages are generally considered to be a statement of punishment.

Using Umbrella Policies Effectively

  As you can see, the need for strong liability protection certainly exists.  In past times, it was hard to identify specifically who needed liability coverage beyond the normal limits.  Unfortunately, consumers often mistakenly believe that their homeowner and auto policies are adequate if the simple bare minimums are included.  A man who has $100,000 in liability coverage per occurrence may feel that he carries a sizable liability limit.  He fails to realize how high awards have become in recent years.  He fails to realize the risk involved.  It is the job of the insurance agent to point this out to him for his protection and the protection of his family.

  Umbrella liability insurance forms are becoming more common among the various insurance types.  With the rising number of lawsuits, consumers are becoming more concerned with their personal liability risks.  Umbrella liability is a contract that fills the gaps in liability protection associated with basic coverage's or self-insured retentions.  Basically, they extend the insured's liability protection beyond what he or she would otherwise carry.  They can be either stand-alone policies or an extension of existing policies.

  Before Umbrella coverage is purchased, the consumer must typically have other insurance already in place.  Those required usually consist of: comprehensive general liability insurance with limits of at least $100,000/$300,000; $100,000 property damage liability insurance; automobile liability insurance; bailee liability insurance; and at least $100,000 of employers' liability insurance, if it applies.  For self-insured or uninsured exposures, most insurance companies require the insured to absorb at least $25,000 on the loss before they pay.  This amount may be less in some cases under some circumstances (such as small business enterprises).  Of course, there are going to be wide ranges in the amount of premium charged.

Excess Coverage

  Umbrella coverage is excess coverage in three areas:

1. it provides higher limits than the other coverage's would;                                                                        

2. it covers exposures not otherwise covered in other policies; and                                                                     

3. it provides automatic replacement for existing coverage's which have been exhausted or reduced by losses.

  Umbrella policies may be written on individuals as a separate policy.  This would usually be done for individuals who are business executives experiencing liability exposures, professional people, and entertainers.  Even when the policy is on an individual, they must first buy basic personal, auto, and aviation (when applicable) liability policies.

  With few exceptions, all policies are underwritten to some degree.  Some types of policies may be underwritten easier than others, but most are underwritten in some way.

Assessing Policy Risks

  There will be a difference in underwriting when it comes to personal or business umbrella policies.  Each has their own risks.  Agents, of course, want to offer the best policy they can for the least amount of money.  Therefore, as an agent, you will want to check around for the best offering from those companies with a secure financial rating.  Unfortunately, those consumers shopping for an umbrella policy are often doing so because they have found themselves to be a higher than average risk.

  Insurance companies are perhaps the best score keepers around.  They know from past experience and other accounting methods approximately what their losses will be on a block of business over a given time period.  For insurance companies, one of the most important elements has to do with "selection."  By that, we mean selecting risks that are likely to be profitable as a group.  There will be claims, of course, within the block of business.  That is expected.  As a block of business, however, profit is likely. 

Books of Business

  Insurance companies do have other goals besides profit.  Because profit is based upon a growing book of business (also called a "block" of business), they also strive to provide proper insurance coverage, while maintaining risk and pricing standards.  By doing so, this block of business will grow because it will be something that consumers wish to purchase.  Only when consumers want to buy something can it be profitable, whether that happens to be a computer, furniture, or an insurance policy.  For insurance companies, this means properly selecting, classifying, rating and monitoring umbrella liability contracts.

  Insurance itself is fairly basic.  For a premium (a predetermined small financial loss), the insured transfers the threat of a large financial loss over to another entity, the insurance company.  The insurance company then spreads the risk out over a group of similar policyholders with similar risks of financial loss, so that payout of benefits can be somewhat predictable.

For a premium (a predetermined small financial loss), the insured transfers the threat of a large financial loss over to another entity, the insurance company.

  Insurance companies are careful to select members of the group so that claims do not overpower premiums taken in.  The insurers want a "pooling" effect, with everyone paying into the pool of money, but only a few needing to take out of it.

Underwriting Based On Exposures & Risks

  Any risk exposure can be underwritten, if someone is willing to do it and the price charged is enough to cover the exposed risk.  Therefore, underwriting and pricing are interrelated; one function cannot be discussed without the other.  Both parties are also interested in both functions -- the insurance company is interested in underwriting and the consumer is interested in price.

  Underwriting itself is the process of either accepting or rejecting the applicant in exchange for a given financial payment in return for a specified protection from financial loss.  This rather long sentence is really only saying one thing: what benefits for how much money?  Once the applicant is deemed acceptable, other concerns then take priority: the terms under which the company is willing to accept the applicant.  This would relate to the policy itself, the insuring agreements, exceptions and other provisions of contract.

Underwriting itself is the process of either accepting or rejecting the applicant in exchange for a given financial payment in return for a specified protection from financial loss.

Adverse Selection

  Adverse selection is always a concern.  A student of theory might say: "Because insurance is based on the law of averages, why not simply insure anyone wanting insurance trusting in the laws of probability?"  If every person would apply for the contract, that might work.  The problem is, not everyone would apply.  Therefore, those most likely to apply for the policy would be those with the largest risk factors.  This is called adverse selection.  Those needing the protection most apply; those needing the protection least do not.  Therefore, claims rise as more and more of the "insurance needy" collect benefits.  In any competitive market, such as insurance, selection always occurs, either by the insurance companies or by the consumers themselves.

Risk Classifications

  All consumers do not have the same risks.  Some drive automobiles; some do not.  Some consumers work at jobs that carry special risks.  Some consumers do not work outside of the home at all.  Some consumers are very conscience of safety; others are not.  Some consumers are older than others, and experience special risks due primarily to age (such as the risk of entering a nursing home).  These are not the only factors, of course, that determines risks for given insurance contracts.  The types of risks vary extensively and often depend upon the actual policy being applied for.

Pricing Specific Contract Risks

  Insurers look at the contract being applied for and then consider the particular risks involved.  Within each type of contract, or class variation, there will be common loss expectancies.  Of course, not all of the insureds will experience the loss; only a portion of them will.  The insurance companies strive to eliminate those applicants who are likely to have higher-than-average loss expectancy.  By doing so, the companies will see a profit.  The more selective the insurance company tends to be, the lower the premium charged often is.  This is because they have fewer losses which means they can afford to charge a lower premium.  Those companies who accept virtually everyone will have higher losses and, therefore, be forced to charge higher premiums to cover those losses.  As the premiums continue to rise, those policyholders who can will change to companies with more severe underwriting and lower premium costs.  Gradually, the company who accepts virtually everyone will be left only with the highest risk people and this will drive the premiums up even higher.  Adverse selection has now occurred.  Anytime selection is left up to the buyers rather than the sellers of insurance, the insurance company is likely to experience loss.

Gradually, the company who accepts virtually everyone will be left only with the highest risk people and this will drive the premiums up even higher.  Adverse selection has now occurred.

Actuarial Equity

  Sometimes government branches or consumer advocates claim that insurers are overly selective and perhaps even unfair in their underwriting practices.  Usually such claims are aimed at social issues.  The term actuarial equity may be used in such references.  This typically implies conditions where each risk is charged a premium in accordance with its chance of loss.  This tends to deal with issues where insurance is necessary, such as mortgage insurance or auto insurance, and the consumer's difficulty in meeting the premium rate charged.  This can be a common issue in city areas where claims against homeowners may be extremely high, for example.  In poorer areas claims may be higher, driving rates up.  Because it is a poorer area, those who live there may be the least able to handle the higher premium rates.  In such cases, consumer advocates may pressure the companies to broaden the area's boundaries so that lower risk areas are combined with higher risk areas.  This would bring down the rates in the higher risk areas, but raise the rates in the lower risk areas (giving an average rate somewhere in the middle of the two).

Subsidizing Rates

  There may be other ways to lower rates.  Those high-risk individuals can be subsidized by charging lower than actuarially fair rates.  This loss would be subsidized by those who experience lower rates due to lower risks because the lower risk individuals would pay higher than their actuarially fair rates in order to offset the company's losses on the high risk consumers.  Government subsidies may also be imposed to allow lower premiums for the higher risk groups.

  Although some advocates seem to feel that insurance companies are unfair in their selection practices, seldom is a better system suggested.  Rather, it tends to fall on those who have to subsidize those who have not.  Although it is not morally feasible to allow the poor to suffer, most insurance companies also feel it is not fair to put the burden on their backs entirely.  They are, of course, a business entity following standard business practices.  Therefore, a mix is usually the best answer: some allowance for business practices and some allowance for subsidization by one group in favor of another.

Exposure Distribution

  The primary purpose of underwriting is no surprise: the profitable distribution of policyholder risks.  This does not necessarily mean that insurance companies try to avoid all losses (payout of claims), but it does mean that they try to minimize those payouts.  Insurance companies expect some claims to happen.  It is the nature of their business to experience claims.  Without claims, consumers would have no reason to even purchase insurance.  In fact, some well-publicized claims are actually good for their business because it shows consumers the need for their products.  This pushes sales.  However, insurance companies do not want an excess of claims that cause financial losses for the company itself.

  The book Fundamentals of Insurance by Robert I. Mehr tells this story:

  A client who just bought a fire policy one morning asks his agent: "Now that I've just bought this fire policy, what would I get if my house burned this afternoon?"

  Replied the agent: "About 10 years."

Recognizing the Underwriters

  It is not uncommon to hear of insurance fraud, most notably arson.  For the most part, luckily, consumers are honest people.  Insurance companies do certainly experience claim abuse, but abuse is not the same as fraud.

  To consider underwriting procedures, we must first consider who the underwriter actually is.  Consumers probably picture a studious person with eyeglasses, a frown, and little awareness of the "real" world.  In fact, underwriters consist of those considered to be experts in the type of policy being written.  Therefore, the persons underwriting cancer policies are likely to be different than those underwriting auto policies.  Both persons will have common factors, however.  They will be schooled in mathematics (or probabilities of exposures), schooled in their particular field of expertise, and they will be realists.  They know what to expect from those being underwritten.

You're the First Guy on the Scene

  As the first guy on the scene, you are also an underwriter in a way.  You make a preliminary appraisal of the possible risk exposures your company will face.  This is done through the use of an application process.  You ask the potential policyholder questions and you judge from the answers received whether or not that person should be considered for insurance.  If the answers given are unfavorable, you know that the application should not be completed.  Even though agents help in the underwriting procedure, they are not actually underwriters according to the true meaning of the word.  Each of you simply aid the process of underwriting.  Even so, insurers rely heavily on their field agents.

  Many agents have heard the phrase "red flagging."  It is often used in relation to agents and their applications that are submitted to the underwriting departments.  When an underwriting department notes a particular agent who continually fails to find or disclose important underwriting information, or whose clients seem to have an unusually high claim experience, that agent may find themselves "red flagged."  It means that the underwriters feel that agent is either disregarding required procedures or intentionally ignoring them.  Whatever the reason, the underwriters will begin to pay special attention to their applications and will reject any questionable person simply based on the agent submitting the application for insurance.  In some cases, the insurance company may even cancel the agent's writing contract.

  It is important to understand that insurance companies keep records of the loss experience of their agents.  Whether the agent is simply uninformed, poorly trained, or truly fraudulent does not matter.  No company will keep an agent who falls outside of the normal boundaries on a consistent basis.

Staff Underwriters

  Once applications for insurance are submitted, the actual underwriting falls on the underwriting departments.  Seldom are they made up of a single person; more likely they are groups of people.  Most are made up of two sections, called staff and line.  Staff underwriters concern themselves with the company's general underwriting requirements.  They make recommendations, as an overall picture, to the company regarding product development, rate structures and general guidelines.  They analyze operating statistics to determine if the guidelines they are using are working as they anticipated.  The staff underwriters are generally located in the home office, rather than field posts.

Line Underwriters

  Line underwriters are responsible for the actual acceptance or rejection of applicants.  They may be located in the home office or in field branches of the company.  The line underwriters are the ones who will be most familiar with the individual insurance agents.  These are the underwriters that are referred to when policy application is discussed.  They are, in fact, the true underwriters because it is their decision that will decide whose application is accepted and whose is rejected.  Expert line underwriters are the lifeline of the company; their decisions can make a company a good profit or cause them to experience losses.

Actual Underwriting Processes

  Underwriting effectively requires that all parties act responsibly.  This includes the agent, but also the consumer.  It is the responsibility of the consumers to give correct information, but it is also the responsibility of the agent to ask application questions in a way that is understandable and easily answered.  Many states have mandated application language in an effort to minimize misunderstandings.

  Underwriting itself includes both preselection and post-selection of applicants.  Preselection is the process of gathering relevant information regarding possible risk exposures and arriving at a decision regarding the acceptance or rejection of the applicant.  Post-selection happens after the risk has been accepted by the insurance company.  It is the process of reviewing those already insured and terminating those no longer desirable, if the termination is both possible and acceptable under the terms of the contract and under the state laws where the policy was issued.  Post-selection is not possible under some insurance policies, most notably in most health insurance policies.  This is understandable.  If health insurance policies could terminate those persons with the highest claims experience, no one would be safe when sickness or injury occurred.  The point of having health insurance is to protect oneself from catastrophic losses.  However, in automobile insurance, post-selection does make sense.  If a person consistently drives poorly, there is no reason why the insurance company should be forced to continue to insure the risk.  The insured, in some types of policies, does bear the responsibility of acting in a safe and acceptable manner.

Insurer's Rely On You, The Agent

  Obtaining information is one of the most important parts of insurance operation.  The underwriter needs information to make an informed opinion regarding possible claim losses.  Insurance companies do, of course, desire to make a profit.  Consumers may not realize that it is also important to them that companies maintain a profit level; otherwise the company would fold and insurance protection would be lost.

  The amount and type of information needed will depend, to some degree, on the type of policy being underwritten.  Automobile insurance wants different types of information than does health insurance, for example.  There are basic pieces of information that all policies will want:

1. the applicant's name

2. the applicant's address

3. the applicant's Social Security number

4. and usually, the applicant's date of birth.

  Underwriters will then require detailed information in specific areas.  The more common types of information requested include:

1. past loss experience

2. financial information to determine certain qualifications

3. living habits (how safe are they?)

4. the property's or applicant's physical condition

5. the applicant's personal character.

  Not all of these things will apply in all circumstances and there may be additional areas of interest for some types of policies.

  Information sources will vary, but the underwriter will have specific methods that he or she routinely uses.  The sources used will depend upon the specific risks involved, practicality and certainly costs.  Some information sources can be expensive.

  Agents are one of the best information sources because they have been to the applicant's home or place of business and personally talked with them.  The agent will (hopefully) have noticed the oxygen tank in the corner of the living room, or the walker that the applicant used. 

  Since the agent personally talked with the applicant, he or she will have gotten a "feel" for the person.  The agent, once experienced, will develop the ability to suspect when the consumer seems to be holding something back, telling less of the story, or appear over-anxious to receive the coverage.  Through general conversation and a feeling of one-on-one, the consumer may open up and give full disclosure.  Certainly the agent will also ask the pertinent questions that determine the consumer's eligibility.

  Some applications require the agent to submit an Agent's Report form.  This form asks questions regarding specific things, such as the presence of an oxygen tank sitting in the corner.  Of course, the questionnaire does not specifically say "Was an oxygen tank in the corner?"  Rather, it asks the agent to disclose anything that would not be compatible with the policy application.  The Agent's Report, in effect, is asking the agent to state anything that seemed unusual in relation to the application.  On it will be questions relating to risk and asking for a recommendation from the writing agent as to acceptability.  It is not unusual for the underwriter to accept or reject an application solely on the basis of the Agent's Report form.  This may especially be true when the underwriter knows from past applications that the writing agent is truthful and experienced.

Information & The Inspection Company

  Insurance companies commonly hire outside companies to aid in their underwriting process.  These companies are usually referred to as Inspection Companies.  They are often nationwide investigating firms which utilize all public information sources.  They submit a report concerning the applicant to the insurance company, with specific attention to certain areas of desired information.  For example, an umbrella application would not require the same information that a health application would.

   In the past, there has been some controversy regarding much of the information that these Inspection Companies offer.  The controversy usually centers on how the information was obtained and how reliable it happens to be.  Ultimately, of course, it is the insurance underwriters who must determine whether or not the information is relevant.  The typical consumer would probably be shocked at the amounts and types of information (and misinformation) that is held on them by these reporting firms.

  Perhaps the best known of the inspection companies is Underwriters' Laboratories, Inc. of Chicago, Illinois.  We generally know them as a testing facility.  Many policies require companies to use items bearing their label in order to get insurance coverage.  The UL label has become the symbol for safety.

  The actual sources used will depend upon the company issuing the policy and the type of policy being issued.  There are many inspection companies available.  Insurance companies also may use loss-control engineers, who provide safety information to help identify liability exposures.  Sometimes the value of additional information is simply not worth the cost, so the insuring companies do not bother obtaining it.  Again, this is why the Agent's Report can be so important to the underwriters.

Accepted or Rejected

  Once the information desired has been obtained, the underwriter will decide whether to accept the applicant or reject the applicant.  The information that was obtained will be the deciding factor.  Since underwriters know that some information may be limited or perhaps even wrong, they use their experience and knowledge in their decision making, along with the Agent's Report.  Some types of policies can be only accepted or rejected.  Other types can be accepted, but with restrictions in the policy due to the information obtained.  These are often referred to as modified policies.

Standard Risk Applicant

  Applicants tend to be one of three categories of risk: standard, preferred, or substandard.  Standard risk applicants could be compared to an average risk.  They do not represent higher claim risks for the insuring company, but neither do they represent lowered claim risks.  They are an average or standard risk.

Preferred Risk Applicant

  In some cases, the information gathered by the agent and underwriters may indicate that the applicant has a lower-than-average loss experience or potential loss experience, which allows them to be considered a preferred risk applicant.  This usually means they also pay lower premium rates, so it is a desirable risk category for many applicants.  The coverage itself would usually be a standard policy, with the only difference being lower premium rates.

Substandard Risk Applicant

  When an applicant appears to have higher-than-average loss expectancy, they are classified as substandard risk applicants.  This usually means they pay a higher premium than either the standard risk classification or the preferred risk classification.  Because the insuring company is taking on higher risk expectancies, the policy may be issued with modifications in the coverage.  This is not always true.  Some types of policies are dictated by state mandates, which do not allow modifications.  In those cases, the company must decide whether the increased risk is worth the premium collected.  Substandard risk applicants do, of course, have much higher rejection rates than would a standard risk applicant.

  Where state laws do allow policy modifications, substandard risk applicants are likely to be issued policies which restrict certain coverages and may also contain larger deductibles.  In some cases, substandard risk applicants can receive a standard policy, but at higher premium rates.  How substandard risk applicants are handled will vary according to the issuing company.  That is why such applicants really should shop around.

Where state laws do allow policy modifications, substandard risk applicants are likely to be issued policies which restrict certain coverages and may also contain larger deductibles.

  Of course, some applicants will simply present too many potential losses.  In such cases, they may find that they are ineligible for the desired policy.  Insurers do not believe that those with substantial risk factors can be profitable at any feasible premium or with any policy modifications.  As a result, these applicants are totally rejected and cannot receive a policy at all.  It should be noted that we stated "at any feasible premium."  The key word here is feasible.  If companies were allowed to charge unlimited premium, at some point some amount of premium would make the risk acceptable.  However, the premium charged would be outrageous and probably beyond the applicant's ability.

Post-Selection

  As we said earlier, post-selection is the process of reviewing those individuals who are already insured, and terminating those who are no longer desirable.  Underwriters periodically review renewal applications, using state approved techniques similar to those that were utilized upon the original application.  Some types of policies do not allow the company to terminate the contract due to loss experience, but other types do allow this.  Those policy types that do allow post-selection allow it because the loss experience is due not to circumstances beyond the policyholder's control, but rather to actions or non-actions that they themselves are responsible for.

Policy types which allow post-selection do so because the loss experience is not due to circumstances beyond the policyholder's control, but rather to actions or non-actions that the policyholder themselves are responsible for.

  One claim does not necessarily mean that the policyholder will be terminated.  However, if the insuring company's investigation of the claim reveals information either not discovered when the original policy was issued, or shows a lack of responsibility on the insured's part, then termination could be a possibility.

Unique Aspects of Post-Selection

  Post-selection has several unique aspects.  There has been much public criticism from consumers and consumer groups regarding post-selection.  There are those who feel that insurance companies are obligated to provide coverage at affordable prices regardless of the circumstances.  This, of course, could fuel consumer irresponsibility.  Auto insurance is a prime example.  If the insured did not have to worry about his or her driving responsibilities, knowing that insurance must be provided no matter how many claims occur, would there be any reason for the driver to become more responsible?  Is it not the cost of insurance that encourages people, at some point, to become responsible drivers?  Less claims mean lower rates.  If rates were not dictated by driving behavior, would there be less inclination to drive within legal limits?  These are questions whose answers have become a dividing line between insurance companies and consumer groups.

  Because post-selection does cause image problems, rather than terminate contracts, insurance companies prefer to simply refuse renewal of them.  The companies feel consumers are less irritated by a "non-renewal" than they are a "termination" notice.  Of course, agents know that either type of notice may still create difficulties for them.  They live and work in the neighborhood and consumers expect the agents to keep them insured.

  When a company decides that one of their policyholders has become an undesirable risk, they have to make a choice:

1. wait for the policy to expire, and then do not renew it; or

2. terminate the policy before renewal time.

  Of course, whatever the company does, they must comply with any applicable state laws.

  If the insurance company decides to simply wait until the policy is due for renewal, even though they realize the policyholder is a bad risk, they still must cover any claims due under the policy terms.  Once the agent is notified that the company will not renew the policy, he or she may then place the business elsewhere, if other companies are available.

  If the insurance company decides to terminate the existing policy (where state law allows this), there must generally be some compelling reason for doing so.  For example, if a follow-up inspection of insured property were to reveal a problem or an unsound business practice, the underwriter might recommend immediate cancellation.  This would especially be true if the policyholder were causing the problem in some way.

  Post-selection is available only if the policy can be canceled.  Some types, as we mentioned, will not allow cancellation.  For those types of policies which are not cancelable, all underwriting information must be obtained by the insurer prior to issuance.  In such policies, the insurer has only a two-year period in which they may cancel the policy for misrepresentations or concealment of information.  After two years, even if the applicant misrepresented the facts, the insurance company cannot cancel the policy.

Retention

  Once the underwriters have accepted an application, decided the type of policy to be issued and determined the appropriate premium rate, they must decide how much of the insurance they want to retain.  Insurance companies do not necessarily keep the full amount; sometimes they offer a portion of the business to other insurers, who then assume the risk for the amount they insure.  This process is called reinsurance.

Line Limits

  Even under the best of circumstances, there are limitations established on the amounts of insurance that one insurer can sell.  Underwriters seek a safe distribution of exposure units.  The financial condition and size of the insurer are important in determining how much one company can safely underwrite.  A basic question always asked is "What is the largest single amount the insurer can afford to lose on one exposure?"  Although insurance companies underwrite to minimize their potential losses, losses can still occur.  The answer to the question must be supplied by the insurer's financial officers and approved by the board.  The answer helps to establish line limits, which is the maximum amount of insurance an insurer will write on one exposure.  Line limits for particular exposures are compiled into a line book, which serves as a general guide to underwriters.

  The actual line limits vary.  Their establishment in the property insurance field is more complicated than in the life field, because there are more variances.  It is important to realize that line limits do not represent the amount that can be written on the property, but rather the amount the insurance company is willing to lose on one of them.

Underwriting & Production

  There is always some amount of conflict possible between underwriting and production.  Those selling want to be able to write applications and those underwriting want to weed out potential risks.  Therefore some conflict in inevitable.  Those selling often believe that underwriting is too conservative.  Sellers would like borderline applicants to be accepted.  Underwriters must obtain a safe and profitable distribution of exposure units.  Communication between the two is not only necessary, but vital.

  There are, in some areas of insurance, pressure from the government regarding underwriting.  This is especially true concerning property and auto insurance in inner-city areas.  It can also be true for liability insurance.  Underwriters do not view insurance companies as charitable institutions; rather they are business entities desiring to use sound business practices.  It is not surprising that government and insurance companies should have some disagreements.

Measuring Cost

Premium is the name given for the price paid for insurance.  Premium is the rate per unit of coverage multiplied by the number of units of insurance purchased.  Different types of insurance measure units of insurance differently.  For example, nursing home insurance typically prices their units in $10 daily benefit increments while property insurance may measure by square footage of a building.

  At one time rates were often figured individually.  Each case was judged by the underwriter separately.  This eventually became too expensive to do as the volume of business continued to rise.  Cooperative rate-making bureaus were formed in most insurance lines to develop equitable rates.  They published rates which are used by most insurers.  Subscribers sometimes deviate from these rates, but they are still used as a foundation.

End of Chapter 7