insure this
Making the Grade
by Various Authors
Q. If I implement a smoke-free policy in my units, can I reduce my fire insurance premiums? If so, by how much?
A. Although implementing a smoke-free policy in a building would likely reduce the chance of a fire, given that smoking in bed is among the leading causes of fire in apartments, there is not typically a discount available for it with most carriers—probably because it has not yet become a common practice that would provide reliable data as to the true correlation between not allowing smoking and a reduction in the incidence of building fires.
Most insurance companies do, however, allow what is commonly called an IRPM or Individual Risk Premium Modification. This is a somewhat subjective way to allow a particular location to have credits or debits applied based on the individual characteristics of the property. The amount of credit or debit is generally limited to 25%, but can be higher. Examples of credit-worthy characteristics are: above-average maintenance; easy access for emergency equipment; professional management; recent rehab of utilities or building components; and 24-hour security or special lighting.
It is within this open credit and debit system that an underwriter may agree to allow credits for things like a smoke-free policy. It is likely that to get such credits, the smoke-free policy would need to be made a part of the lease and agreed to by all existing tenants, as well as future tenants. In addition, there are usually specific, objective discounts for many other building safety measures, such as fire alarms that report to a central station, onsite managers, three years or more without a claim and sprinklering the building, to name a few.
If you are not sure if your building has received all available credits, talk with your agent or broker, and be sure they know about any special situations you may have, such as a no-smoking policy.
—David Gordon
Q. Lately, when I renew my insurance, there appear to be exclusions for attorneys’ fees. What this seems to mean is that if you are found negligent by a court or by an insurance company your insurance company will pay damages but not attorneys’ fees. Is this a trend? And, because insurance companies want to settle claims, could they leave you with a bill from an attorney?
A. I will assume the policy you are talking about is a habitational building policy (apartment building or condo) that includes property and liability coverage. Obviously, the insured in a claim situation cannot go out, incur attorney fees at will and then be reimbursed for them automatically. The policy usually defines the attorney provisions, including: who picks the attorney (usually the insurer, unless it is a professional liability policy); when the attorney is paid (depends if the policy is “pay on behalf of” or reimburse); whether the fees paid to the attorney (defense costs) diminish the amount of lawsuit protection you have or are “in addition” to the liability limits (make sure you have enough coverage if the defense costs diminish the limits recoverable); the kind of fees and costs covered by the policy (see also supplemental payments); and the kind of fees and costs not covered (see also supplemental payments).
Be sure to read the coverage portions and definitions portion of your policy. You’ll find interesting reading in sections titled “Loss Costs,” “Defense Costs,” “Supplemental Payments,” “Duty to Defend,” “Pay on Behalf of or Pay Later,” and “Limit of Liability” (it’s preferable to have defense costs outside of this number). When the letter comes from the insurance company assigning the adjuster to your newly reported claim or attorney for your lawsuit, examine it carefully on the topic of who pays what.
In researching this answer, I read a lot of chatter on legal websites about fees incurred for arbitration or when the insurer feels there is no obligation to defend. Those seem to be weighty issues that dance around the topic of whether the insurance applies at all. In the good old days of broader coverage, the axiom in the insurance industry was that the duty to defend a claim was broader than the duty to pay the claim (in liability insurance). A few felony indictments later, the insurance industry learned to clarify that there is no coverage of fees for criminal cases.
In summary, insurance companies in general want to defend the policyholder and pay for the defense costs and the loss. This all assumes the policy covers the issue or cause of loss in question. The insurer does not want you to be hostile in the proceedings, so they tend to favor you, the insured. But, in certain cases, I think you could find yourself paying some attorney fees. I hope not. Beware, read and shop around.
—Ann Krilanovich
Q. I know insurance ratings are important, but I don’t quite understand what I should be looking for. Can you help?
A. As an industry standard, the A.M. Best Ratings are the benchmark for evaluating and comparing insurance companies. As stated on their website, www.ambest.com: “A Best’s Financial Strength Rating is an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile.”
Although there are many factors used in determining the strength of an insurance company, the A.M. Best Ratings use a grading scale to consolidate all the information into one indicator for ease of use. The grading scale goes from A++ (superior) all the way down to F (in liquidation) or even the dreaded S (rating suspended). As a rule, property owners should only purchase insurance from a carrier with a “secure” rating (B+ or better). Most of the carriers who are offering competitive terms in this market have been A- or better. There are occasions where a B+ carrier would be acceptable to use if they were an “admitted” carrier.
The A.M. Best Ratings are useful for the consumer, but they are also used by lenders in establishing a minimum requirement for lending. Most lenders require the mortgagee to use an A-rated or better insurance company. This provides the lender with a level of comfort that its loan is secured by a financially solvent insurance company in the event of a loss.
Insurance companies realize the importance of their A.M. Best rating as well. The higher the rating, the more secure their product and service are seen in the market. In the event their ratings fall below a secure rating, in most cases below an A rating, lenders and consumers will be forced to replace coverage with a new carrier with an A.M. Best rating that meets these minimum requirements. As carriers lose business due to their downgraded A.M. Best ratings, their premium income is reduced, which will further reduce their rating.
In summary, the easiest way to understand an insurance company rating is to review the grading scale and make sure you are with a “secure” company. If you require further information, you can use the free portion of the A.M. Best website to review the full report of any insurance company to help in your selection process. As there are hundreds of carriers competing for your premium dollars in this market, and the savings are substantial, the A.M. Best Ratings are the industry benchmark for comparing and evaluating your current or new insurance company.
—Paul C. Tradelius Jr.
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. David Gordon, CLU is an independent insurance broker who has been providing insurance products and consulting to commercial property owners for over 25 years. He can be contacted at 650-654-5555 and DGordon@GordonInsurance.com. Ann Krilanovich is a risk and insurance consultant (with a specialty in habitational insurance risks) and can be contacted at ann@insurancedynamics.com. Paul C. Tradelius Jr., is the president of Commercial Coverage Insurance Agency, which works with over 100 insurance companies on a national basis. He can be contacted at 415-436-9800. Copyright © 2009 by Black Point Press. All rights reserved.