(September 2022)
The Insurance Services
Office (ISO) BP 00 03–Businessowners Coverage Form is intended to protect small
to medium-sized businesses in specific classes of business. Its underlying
rating philosophy is that many small to medium size risks have more in common
with similar risks of the same size and class than with larger risks in the
same class. The CPP and other similar insurance coverage forms and policies are
available and more appropriate for larger risks.
When the Businessowners
Coverage Form was first introduced, it was underwritten in a manner similar to evaluating
a homeowner's policy. As the number of eligible businesses, classes, and
coverages increased, the underwriting process shifted to a commercial
underwriting approach.
If a business does not
meet the eligibility requirements, it must be disqualified. Writing ineligible
risks often distorts both BOP and business class loss ratios.
Each insurance company
has its own eligibility requirements that may be broader or more restrictive
than the ISO criteria. Risk eligibility should be verified before submitting it
to the company. If a given risk's eligibility is questionable, it should be
submitted to the insurance company as a CPP using ACORD applications and
request Businessowners treatment if it meets the company’s Businessowners
eligibility requirements.
The agent provides
information about the risk using the application, loss reports, and other data.
Most insurance companies do not usually inspect these risks, so the agent’s
knowledge is critical to underwriting.
Management is one
component of underwriting that affects every line of business. This includes
the length of time the risk has been in business as well as its financial
stability. New businesses have higher failure rates that vary by class. New
businesses started by managers with previous success at similar businesses are
more likely to succeed than new businesses run by inexperienced personnel. New
franchise operations usually have greater degrees of success because they work
with a successful business model and benefit from the franchisor's background
support.
Dun and Bradstreet
(D&B) provides a variety of information used to analyze the business'
financial characteristics. This includes background and public information on
it, its owners and officers, history, and details on late payments, past
failures, or bankruptcies. The amount of information available varies among
risks. Sources include public records, public documents and interviews with company
management and customers. Publicly held or large companies usually disclose a
great deal of relevant information. Smaller companies, especially Limited
Liability Companies (LLC's) or privately-owned companies, are not usually as
willing to share their financial information.
Loss analysis is another
important part of the underwriting process. Loss ratios, loss frequency, and
loss severity must be evaluated because these risks usually develop relatively
small premiums. The named insured provided this information in the past instead
of company loss reports. However, computer technology and capability now enable
companies to provide this information much more easily than in the past.
Property underwriting starts with evaluating Construction, Occupancy, Protection, and
Exposure (COPE). This approach is primarily used to evaluate the fire
hazard but is also useful to identify and measure other causes of loss.
Construction
ISO is very clear in the
way it determines construction, especially when a building has different types
of construction. A building of mixed construction with one-third or more of it
being frame is classified as frame, regardless of any other type of
construction. Buildings with brick veneer over frame are also considered frame
and not joisted masonry. The agent must investigate and determine the type of
construction based on the way ISO defines it.
Once the type of
construction is determined, the next step is to examine its quality. With older
buildings, any updates and renovations must be evaluated, including what was
done, who did it, and when. The overall construction must be acceptable. The
building design itself should not create any loss issues, such as with
windstorm or ice buildup.
|
Example: Old Gospel Church was a small church of joisted masonry
construction. After the last Sunday service, the walls suddenly sagged, the
roof collapsed and the building was totally destroyed. The construction
quality was determined to be inferior, an issue compounded by the weight of
three layers of roofing material. |
Occupancy
Risk eligibility is based
primarily on occupancy. Underwriting then evaluates how the particular risk
controls its hazards. The vulnerability of covered business personal property
must also be evaluated. Overall maintenance and housekeeping of the premises
should be satisfactory and the risk should incorporate appropriate loss
prevention techniques for fire, theft, and other causes of loss.
Protection
This includes both
external public protection as well as internal or private protection.
External protection means
the public protection class grades that range from 1 (best and quite rare) to
10 (unprotected). In addition, anything that might hinder fire department
response and access to the premises must be evaluated. Issues like railroad
crossings, traffic congestion, rivers, bridges, tunnels, and other geographic
or man-made obstacles must be considered and addressed where necessary or
possible.
Internal protection
consists of automatic sprinklers and other types of extinguishing systems, fire
extinguishers, and anything else that can stop, control, or limit the spread of
fire. Exterior locks and burglar alarms must be suitable for the occupancy and should
be able to prevent, limit, or control burglary and theft losses. In certain
parts of the country, storm shutters and other windstorm protection should be
provided.
Exposure
Exposure analysis
involves examining the surrounding area, surrounding buildings, and their
occupancies or operations, as well as other occupancies in the named insured's
building. Exposures can be serious problems and are usually beyond the
insured's control to correct or eliminate. The named insured usually has some
control over construction, occupancy, and protection that can be changed or
improved. However, the only option might be to move when there is a serious
exposure condition. It is important to be aware of neighboring occupancies and
conditions because each could affect the named insured's loss potential.
In addition, certain
geographic issues may have to be considered. Areas prone to earthquake,
windstorm, wildfire, hail, and other geographic or climatic problems must be
evaluated in the underwriting process to the extent that they affect the risk
because coverage for an ensuing fire may still be provided even if the
particular cause of loss is excluded.
Liability underwriting
begins with the named insured. Since coverage applies to the operations of
every insured named, the type of business each conducts must be clearly
understood and thoroughly evaluated.
Bodily injury, property
damage, and personal and advertising injury loss potential must be considered
according to the type of business, the condition and characteristics of the
premises as well as jobsites where operations are performed. This involves
evaluating the controls in place to prevent accidents and the condition of the
premises. The risk should have adequate lighting, good sight lines and
visibility, and exits and entrances clearly marked and easily accessible to employees
and customers.
Customers should be
restricted to only certain areas in order to keep them from being injured and
limit their access to the entire premises. Slips and falls make up a large
percentage of all losses. They can be controlled by being aware of conditions
in the facility and correcting housekeeping problems and damaged floor
coverings as they occur or through scheduled preventive maintenance.
Operations and exposures
away from the owned premises are more difficult to control. In those cases,
effective and thorough job-site supervision is important. In addition, any
unusual contractual obligations or additional insured requirements must be
evaluated and addressed.
The number and type of
optional coverage endorsements continues to increase and this causes this
coverage form to be an increasingly attractive way to insure eligible classes
of business. It is important to know the endorsements each company has and is
willing to use, as well as the eligible classes of business. In the beginning,
the Businessowners Coverage Form was a canned, “take it or leave it” policy. It
can now be tailored and customized to a greater extent in order to meet an
individual risk’s specific needs or requirements.
A good risk could become
a problem if the premium charged is inadequate for its exposures. Proper
classification is the most important factor that affects pricing. This means
determining and using the correct construction, occupancy, and public
protection class at risk. If any of these are incorrect, the rating is wrong
and the errors cannot be corrected by any amount of discretionary and available
underwriting credit or debit.
Accurate property
insurance-to-value is another important element to develop the proper premium.
Replacement cost valuation applies only if the limit of insurance at the time
of loss equals at least 80% of the replacement value of the damaged property.
An underinsured risk is an under-priced risk. Underinsured risks can lose their
eligibility for replacement cost valuation and/or seasonal business personal
property increase.
Some classes of business base
their liability rating on annual sales, gross receipts, or payroll. These risks
must also use accurate estimates of these rating bases for adequate pricing.
While these risks are usually subject to audit, audits may be waived and this
can result in premiums that are either too high or too low.
Related Article:
ISO Businessowners Program Rating Considerations
As briefly stated above, the
company can apply discretionary and earned credits, debits, and other filed
company deviations after the basic rating is done. The Businessowners Coverage
Form does not usually have a similar range of pricing flexibility or options
available that other coverage forms and policies have. Credits or debits are
given only for physical or management characteristics that the basic rating
does not already reflect and include. This means that management experience,
exposing occupancies and operations, and the risk's loss history may
significantly affect the final underwriting judgment pricing applied.
The producer must review changes
before sending them to the insurance company. A request for a new named or
additional insured, a new location, or a new coverage may affect the risk's
eligibility. On the other hand, requests to reduce coverage or to delete an
insured can signal a significant change or a downturn in operations that could
mean financial problems that could lead to bankruptcy.
Change requests may solidify
the producer’s relationship with the client. When the named insured’s business
is growing, the producer should take the time to apply risk management
techniques and re-evaluate coverage needs. Doing so also keeps other producers
that view the growing operation as a potential new client from gaining a
foothold. On the other hand, risks that experience negative changes usually
need some insurance counseling. If the risk survives, the assistance the
producer provides might be the important difference that cements the
relationship and enables the producer to retain the business as it returns to
growth and profitability.
Underwriting ISO Businessowners
risks is increasingly an agency function. It provides opportunities to address
issues that can affect agency profitability and relationships. The BOP Program’s
viability depends upon strong underwriting.