CHAPTER ONE - COMMERCIAL AND BUSINESS OWNERS’ INSURANCE

 

HISTORY

 

During the period of time when civilization moved from an agrarian society to an industrial society, goods and methods of production of the population became more concentrated.  With this concentration, the possibilities of losses increased due to situations beyond the control of the owners; primarily by fire, wind and water.  While farmers have always suffered such losses, they compensated for part of the cost by helping each other in time of need.  The “barn - raising” of rural America was well documented as part of history, particularly in situations where property was destroyed because of fire.

As the industrial society expanded, protection against losses was very conservative, originally covering only losses by fire.  Policies were written by hand covering each situation differently.  As more and more businesses required this protection, more standardized wording became available, and with financial institutions investing in commercial ventures, insurance had to be provided to protect the investors interests.  This further pushed the burgeoning insurance industry to standardize coverages and policy provisions.

Marine Insurance is considered as one of the oldest (if not the oldest) types of insurance, as ships and their cargoes were protected against losses at sea by consortiums of wealthy persons who “underwrote” the protection by signing “under” the contract and noting their share of the risk.  Throughout the years certain words used in the contracts became standardized and recognized by law as having specific meanings.  To this day, many marine policies contain language that may seem archaic, such as referring to risks as “perils”, but is used because of the legal interpretations that has evolved. 

Other forms of insurance have changed so that it is easier to understand by the consumer, and most of the antiquated language is no longer present.

As soon as protection from fire perils was available, protection against windstorm, hail, water damage, and other such risks was created.  These coverages became known as “property insurance.”

Soon legal recourse against someone wronged by another was considered an insurable situation, and the idea of protection against liability grew into what is now called “casualty” or “liability” insurance.  Many insurers became “Property and Casualty Insurers.”  Others preferred to continue to cover only one type of peril, such as fire insurance, and these companies became known as “monoline” companies, and policies that cover only one type of peril, became known as monoline policies.

MONOLINE INSURANCE POLICIES

 

With the complexities of modern life and modern commerce, many commercial enterprises were faced with an increasing number of situations that were determined to be insurable.  Also, the number of types of commercial businesses also increased each type with its own peculiarities and situations that are unique to their business.  With the increase in insurance situations, the number of insurance policies needed to cover each contingency increased dramatically, to the point where many customers had many policies.  The problems with this approach soon became apparent.

The sheer number of such policies became overwhelming, with a variety of coverage’s provided by a variety of insurers, frequently represented by a variety of insurance brokers.

With so many policies, it was inevitable that there would be duplication of some coverage’s, and with no coverage provided for other risks.

Legally, it became reminiscent of the biblical scholars who debated for years as to how many angels can dance on the head of a pin, i.e. since there was little standardization of wording, legal interpretations were abundant.  Many consumers paid for years to protect themselves and their businesses against certain risks of doing business, only to find that the wording of the policy did not provide the coverage they thought they had purchased.

 

ILLUSTRATION: 

 

MULTILINE POLICIES

 

It soon became apparent that the only solution was to “package” policies.  Therefore, the “multiline” policy was born, which is several of the risks previously insured under separate policies, now packaged into one policy.  This has several advantages:

To the Insured:

 

 

There are fewer policies to purchase

and maintain.

 

 

 

 

The chance of delay in loss settlement due to disputes of different insurers is substantially reduced.

 

 

 

 

 

 

                             The insured benefits from reduced  

                              administrative expense.

 

 

 

ILLUSTRATION:

 

To the insurance company:

• The administrative expense is lessened because it costs less to underwrite and issue one policy instead of several.
• Package policies help insurers avoid adverse selection by spreading the risk among various insureds and among the various risks covered under the package policy.

Packaging is also advantageous for the insurance agent as it facilitates selling a policy to cover the insured’s entire account, and many packages are more easily sold and rated, so the agent can quickly and efficiently provide quotes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THE ROLE OF THE INSURANCE SERVICES OFFICE

 

Insurance is a statistic - driven business.  The premiums to be charged for any insurance coverage must be based upon statistics derived from actual experience, either of the insurance company itself, or from an industry average.  And statistics can only be meaningful if there is enough experience to provide a broad base upon which to forecast future losses and expenses.

If each insurer attempted to collect sufficient statistics to provide adequate premiums, the expenses would be excessively high, and the reliability of the statistics could be questioned, as it would probably not be based upon an adequate base.  However, if companies banded together and shared their experience, the expenses would be drastically reduced for each company. 

Therefore, most companies use the services of the Insurance Services Office (ISO) which is a statistic - gathering organization located in New York.  While it initially was involved in providing advisory rates to its subscriber members, it has since withdrawn from providing rates, and now provides policy forms and endorsements and manual rules for its members.  It should be noted that subscriber members are free to use whatever policy forms and rates they choose, but the information provided by the ISO is considered as “Standard” wording for the purposes of this text. 

The American Association of Insurance Services, a competing firm, provides similar services to approximately 400 regional insurers.

The ISO developed special “Special Multi - Peril Policies (SMP)” which always included Property Coverage and Liability.  They were designed to be used only by a “Preferred” class of policyholder.  When the SMP policies were introduced, this added a new class of policy available to the monoline policies in use, adding to the number of forms available to the consumer.

In addition, because of the different needs and desires of the smaller and medium sized businesses, such as grocery stores, garages, bakeries, etc., a new classification of policies was developed, appropriately called the “Businessowners Policies.”  These policies also covered both property and liability risks, but because of the wide variety of risks peculiar to each type of business, many insurers offered a variety of coverage’s.  This class of policy will be discussed later in this text.

As the SMP policy evolved throughout the years, the ISO offered many revisions, and eventually replaced the SMP policy with the “Commercial Package Policy” (CPP) that had several new features:

• The ISO rewrote all of the standardized commercial forms into more easily understood language
• The differences between the monoline and the multiline policy forms were eliminated, with the welcome result that one set of forms can be used for one coverage or many.
• Much more flexibility was obtained as the customer no longer had to accept the standard coverages, but could construct a policy using the forms that they specifically needed.

While the Commercial Package Policy has replaced the older SMP policies in most areas, there still are some SMP policies used in a few areas that have not adopted the ISO Commercial Package Policy.

 

The Businessowners Policies (BOP) differ from the Commercial Package Policy in two significant details:

 

1) While almost any commercial venture is eligible for the CPP, there are more restrictive rules as to who may purchase the BOP policies,

 

2)  While the CPP is designed to be as flexible as possible in the types of coverage’s available, the BOP is much more restricted as to the coverage’s available, with very few options.

 

(See Discussion of Businessowners Insurance later in this text)

 

 

 

STUDY QUESTIONS

 

1.  One problem with Monoline policies is that

      A.  each coverage is in a separate policy.

      B.  frequently there is no duplication of coverage.

      C.  they try to cover too many perils in a single policy.

      D.  they do not pay enough commission.

 

2.  Monoline policies

      A.  are packaged policies.

      B.  cover only one risk.

      C.  can only be issued by Monoline companies.

      D.  can cover associated lines, such as liability, in the same policy.

 

3.  The Package Policy is advantageous to

      A.  the insurance agent only.

      B.  the insured only.

      C.  the insurance company only.

      D.  the agent, consumer, and the insurance company.

 

4.  Loss settlements can be delayed

      A.  because of disputes of different insurers of monoline policies.

      B.  because of disputes of different insurers of multiline policies.

      C.  if the losses are covered by a package policy.

      D.  because of administration problems in a package policy.

 

5.  Which of the following statements is true?

      A.  Packaging of insurance coverage makes it more difficult to rate
                policies.

      B.  It is more difficult for an agent to sell a package policy.

      C.  Packaging of policies facilitates selling policies to cover an insured’s
                entire account.

      D.  It is much more difficult to sell a package policy to a property owner.

 

6.  The ISO rewrote the SMP policy and replaced it with the Commercial Package Policy because

      A.  they wanted to be able to use more technical terminology.

      B.  the agents wanted things kept the way they were, but the companies
                wanted to show the agents who was the boss in policy design.

      C. they wanted to be able to furnish more coverage with less policy forms.

      D.  this enabled the ISO to receive a 3 year contract to simplify coverage.

 

7.  Which of the following statement(s) are/is correct?

      A.  The CPP policy replaced the SMP policy.

      B.  The Businessowners policy replaced the SMP policy.

      C.  All insurers use the ISO form for Commercial policies.

      D.  The ISO is the only organization that develops commercial forms.

 

8.  The Insurance Service Office (ISO) is

      A.  a rating service.

      B.  a statistical-gathering organization.

      C.  a private investigative firm.

      D.  a credit company.

 

9.  The original SMP policy always included

      A.  inland marine and liability coverage.

      B.  burglary, theft and liability coverage.

      C.  commercial property and inland marine.

      D.  commercial property and liability.

 

10.  The Businessowners Policies (BOP) differ from the Commercial Package Policy (CPP) because

      A.  the BOP policies are much less restrictive as to who may purchase the
                policies.

      B.  the CPP is about twice the premium for similar coverage with the BOP.

      C.  there are a lot more options available in the BOP policies.

      D.  BOP policies are more restrictive and offer fewer options.

 

ANSWERS TO STUDY QUESTIONS

 

1A     2A     3D     4A     5C     6C     7A     8B     9D     10D