Search SFAA.org

feature

Read Between the Lines

by Ann Krilanovich

Some apartment owners have noticed that insurance companies are choosing not to renew their policies, even for clients who have never filed a claim. Are insurance companies allowed to do this? Usually, yes. There are several rules applicable to canceling insurance. These rules vary by state and by the type of insurance. This article will focus on a commercial package policy covering an apartment building in California.

California Insurance Code Sections 675.5 and 676.6 state that: A notice of nonrenewal shall be in writing and shall be delivered or mailed to the producer of record and to the named insured at the mailing address shown on the policy. An insurer, at least 60 days, but not more than 120 days, in advance of the end of the policy period, shall give notice of nonrenewal, and the reasons for the nonrenewal, if the insurer intends not to renew the policy, or to condition renewal upon reduction of limits, elimination of coverages, increases in deductible, or increase of more than 25% in the rate upon which the premium is based.

The code noted above sets forth that they must give you a reason. But, if the reason is not politically correct, the insurance company can just say they are going to double or triple the premium. The “reason” issue, in general, can be skirted. Something must be included on the notice of cancellation, though. If nothing is noted, then you have a right (and duty) to raise a little hell.

Notice that last reason: price. You will be seeing a lot of that in the months to come. In fact, some insurance companies will issue these “notices” just so they will be able to raise the premium as high as the market will bear, which, often, is hard to determine 120 days away from renewals. Why? Insurers do not know the cost of reinsurance (the insurance they buy to cover or cap their total losses), claims experience may not be fully interpreted, and/or investment outcomes may not be apparent, among other reasons. It’s hard to know how much you can charge and still keep the good business the insurance company may want to keep.

The insurance code cited above goes on to give various situations that apply to nonrenewal. Let’s take the situation of nonpayment. Nonpayment only requires a 10-day notice of cancellation (unless your very smart insurance agent/broker negotiated something longer). A 10-day notice gives you a chance to pay the policy. If the insurance company does not receive your money, you have no coverage. (The exception in California is automobile coverage, which can only be canceled/nonrenewed if there is fraud/material misrepresentation, nonpayment of premium and/or a substantial increase in the hazard insured against.)

Let’s review some “between-the-lines” reasons that insurance companies stop writing policies for a type of business.

First, the type of business is not profitable. Not surprsingly, that’s the reason at the bottom of most of the decisions. Those apartments in the Bay Area might have looked really profitable, but the insurance company took a bath. Now they want out.

Second, the type of business will not be profitable in the future. We might ask ourselves, can they see that coming? Yes, they can. Often there are changes in tort law, building regulations and claims precedents (like paying for floods when floods are clearly excluded) that make the future look bleak.

Third, the reinsurers don’t like the business and charge the insurance company an arm and a leg for reinsurance.

Fourth, economic conditions (like the real-estate slump) may cause the properties insured to change, meaning less maintenance, increased vacancies and even an increased possibility of arson. Back in the mid-1990s, when interest rates were approximately 5% and the equity market was robust, insurance companies were able to increase their financial strength despite generating underwriting losses, according to Anthony Diodato, vice president at the A.M. Best Company, one of the largest insurance rating and information agencies. Note to habitational property owners: now the insurance companies must get profits from premiums, so the prices are going up.

Fifth, legislative changes, like in 2001 when mold claims for buildings came rushing in and changed everything for insurance profitability in short order.

Sixth, some insurers (and I won’t name names) get out of the habitational business every once in a while. Some insurers go in and out of the habitational business every three or four years. During my tenure as an observer of the insurance market for many years, I’ve seen them come and go.

Protect Yourself by Planning Ahead
How do you protect yourself in this situation? Well, you and your agent/broker have been getting optional quotes in the past, (like every three years) right? You’ve been keeping your finger on the pulse of the market place, and your agent/broker has led the charge. So, you should know where to go.

If you have not done this market research, do it now. There are big changes on the horizon, and you should double check the market. There are several kinds of insurance distribution that you can take advantage of: direct writers (State Farm, Farmers, Allstate); programs (CIBA, Specialty); insurers that use agents (Chubb, Travelers, Fireman’s Fund); and programs through your property manager. This final category is becoming more and more common and these programs often can give you coverage and price advantages.

What you want to avoid are the sub-par insurance companies that write through the smaller insurance agents and charge more for their coverage. You’ll be able to tell who they are when you shop around. Don’t count on one insurance agent to do the shopping for you forever. You must check with others some of the time. Your insurance agent will only know the “world” that your insurance agent knows. There is always a creative seller of insurance out there, if only you can find one.
All of the above information assumes that you have a package policy: a policy that combines property coverage (including loss of use) and liability coverage (liability written on an “occurrence” basis.) What if you have a liability policy written on a claims-made basis? First of all, the rules and insurance codes still apply. But you have the added burden of covering claims that are occurring but are not reported to you yet, like when someone has fallen down but they don’t know it’s your property yet or have not found that very special attorney who will take the case for them.

With a claims-made policy, you must carefully read the nonrenewal provisions, including the “discovery period” section. My advice is to get rid of that claims-made policy and get back to an “occurrence”-type policy as soon as you are able to do it. Yes, you must buy the discovery tail (additional time to report a loss that occurred during the policy period, even if it was discovered after cancellation).
Should you feel bad if an insurance company cancels you after a claim or two? Not really. First, this was never the “If I’m loyal to you, you’ll be loyal to me” situation that you thought it was. It’s just business. I know insurance agents/brokers talk about building loyalty with an insurance company and other “intangibles,” but that is all hooey. At the end of the day, an insurance company pays a claim if it is covered and doesn’t pay it if its legal department says that it is clearly not covered. The previous statement goes double if the claim is a big one. What about those grey area claims? The insurer will have liberal claims settlement interpretations if times are good, and they will definitely get stingy and penny-pinching if things are bad.

So, should you submit this claim and take the chance at a nonrenewal or an increase in premium? I recommend that you submit the claim in commercial insurance. Then, do your shopping and make sure you are not a cornered mouse when the nonrenewal comes floating in. This commercial insurance market belongs to the proactive buyer. There is always a way to find the
lowest price.

Commercial insurance on your business exposures are a tiny bit different than your homeowners’ insurance policy. I would think it through very carefully before even calling my homeowners’ carrier and asking whether to submit a property claim or not. (Always report liability claims immediately.) Claims that are never paid or never submitted get noted in certain claims databases that insurers use to share claims information.

Times are changing in insurance. It used to be that everyone wanted everything covered, with only a small deductible. The reality is that the nature of insurance has changed. No longer can you submit claims willy-nilly for a few thousand dollars; it’s really just for catastrophes. Be careful and shop smart.