You may have run into these terms if you have been looking for liability coverage. What are they all about? There are two types of Texas insurance companies. Admitted and non-admitted.
Non-admitted carriers are less well known unless you are in certain trades. Their policies are sold through wholesalers and surplus lines brokers. Some are very large, and in fact, may be a subsidiary of an admitted carrier. Others are smaller and some are very small. They provide insurance to riskier types of policies. They normally have a much lower volume of business than admitted carriers, so the wholesaler may offer many different non-admitted carriers in order to satisfy a number of needs.
Non-admitted carriers do not offer the protection of the state guarantee fund, so it is important that the surplus lines carrier selected to write a policy is thoroughly researched as to financial strength. That way they are less likely to go insolvent, leaving claims on the table. In the late 1990s when the workers’ comp marketplace suffered a depression many carriers went insolvent, leaving claims unpaid.
Sometimes the lines cross between admitted and non-admitted. For example, I have referred to a plumbing contractor, for whom I submitted applications to the usual surplus line’s companies. Then I discovered that there are two admitted companies who might take on a plumber with low receipts, new in business, no track record, and so on. You never know if such markets exist unless you have access to many, many markets.
When you purchase a non-admitted policy through a surplus lines wholesaler, there is a disclosure to sign. It is in bold, all capital letters, warning the purchaser that they are buying a non-admitted policy and there are risks of claims going unpaid.
The A.M. Best Company is a rating bureau most often used to evaluate the financial strength of a carrier and is a good source for researching a carrier’s credentials. A carrier must pay to be audited, and some very small carriers may choose not to be audited.
The state of Texas offers a LESLI list (list of eligible surplus lines insurers) of approved non-admitted carriers who are likely good prospects. They have had state audits and are recommended as a viable alternative to admitted carriers.
The state wants to make sure you select an admitted carrier when at all possible, so they require documentation that your agent has done a diligent search prior to offering you a non-admitted carrier’s policy as an option.
In general, though there is nothing to be feared if your business can only be insured through a non-admitted insurance carrier if it is a quality carrier.
Admitted insurance carriers are approved by the state to do business. They are subject to audit and must join the state guarantee fund, a sort of safety net which would pay for any unpaid claims if the company becomes insolvent. Interestingly, these are generally very large insurance companies with lots of assets and can afford the costs involved with being admitted in Texas. And not incidentally, they are unlikely to go insolvent due to their size. Admitted carriers are the ones you mostly hear about. They are large and they advertise. They are household names. They appoint agents and brokers directly if they are promised a certain minimum amount of business, and sometimes require exclusivity.
Business Property and Coinsurance
Trying to save money by insuring for less? Let’s think this through. This concept will apply to business property insurance, which, for a small business can be pricey. There is therefore a temptation to insure for less than the actual replacement value of your business property. Sure, why not? I will never lose all of my business property. If there is a theft, it will only involve some property and I have enough coverage for that amount. That is definitely not how property insurance works. There is a clause called a coinsurance clause which, stated simply is “if you insure for half, you will be paid half, even in case of a partial loss. This situation could come back to haunt you.
How is the process in more detail?
If you have $100,000 of inventory and fixtures, but you want to save a few dollars on the insurance, you may be tempted to insure, say, $25,000 of it and call it a day. The chances are slim that you would lose it all in one incident, right? My example comes from a true story, and I hope it motivates you to always “insure to value,” and review annually.
I had a client who insured his office contents for $25,000, which included both property, and fixtures installed by him. Every year, I would ask him if the coverage was correct, and he would assure me that it was. One night, on a New Year’s Eve, as it turned out, he had a burglary, where his proprietary computer system was stolen. The total loss was about $40,000. So, did he receive the full $25,000 for which he was covered? No, he did not.
The assumption with insurance is that an insured will insure to value. If you have $100,000, you insure that much, otherwise, you only get partial coverage.
As it turned out, he should have been insuring for about $75,000. He insured for one-third of value, and since property coverages have a coinsurance clause, he got paid one-third of his partial loss, minus his deductible. This, even though he had more coverage than that. In my client’s case, he received $25,000 divided by $75,000, less deductible; about $8000, on his $40,000 loss.
As you can see, even a partial loss will not be paid in full if not insured in full. The moral is to insure to value. And don’t depend on your insurance agent to read your mind. You must inform your agent of any changes to operations, management, inventory, fixtures, or anticipated receipts and payroll. Do it when you have the changes, so you won’t forget………better yet, do it before it happens so your agent can anticipate any possible repercussions. And do it in writing. Send a copy of the email to yourself and keep it on file.