ELIGIBILITY

The Businessowners policy is designed for specific types of occupancies. These can be grouped together, and rates can be established due to common characteristics. Because of the rating technique utilized, only those occupancies that match the eligibility requirements can be included. This means the first part of underwriting is establishing the risk is eligible.

Related Article: AAIS Businessowners Policy Eligibility

GENERAL ACCEPTABILITY

Eligibility is an important factor, but it is not the only consideration. The insurance company must also assess whether an eligible risk is acceptable. The application provides a significant amount of information about the risk. Many insurance companies do not conduct inspections of these businesses, so the agent's understanding of the risk typically serves as the basis for underwriting decisions.

Any information not disclosed when the risk is submitted often remains unknown until a loss occurs. An agency that regularly withholds relevant information or fails to provide adequate details may face difficulties in securing business with the company due to declining loss ratios.

MANAGEMENT

Management plays a crucial role in underwriting across all lines of business. It is essential to assess how long a risk has been in operation and its financial stability. New businesses tend to have a higher failure rate, which varies by industry. However, new businesses led by managers with prior success in similar ventures have a better chance of thriving compared to those without such experience. Additionally, new franchise operations typically perform better than non-franchise businesses because the owners benefit from a proven business model, as well as support and advertising from the franchisor.

FINANCIALS

Dun and Bradstreet (D&B) and other financial reports supply essential information that underwriters use to assess the financial condition and risks associated with a business. These reports include background details about the business, its owners, and its officers, as well as payment history and information on any previous bankruptcies or failures. The amount of information available varies, as it is based on public documents and interviews with the management of the business and its customers.

Generally, publicly traded or larger companies tend to provide more comprehensive information than smaller ones. In contrast, smaller businesses, particularly Limited Liability Companies (LLCs) or privately-owned companies, are often less willing to disclose their financial information.

LOSS INFORMATION

Loss analysis is a crucial aspect of underwriting. It is important to evaluate loss ratios, loss frequency, and loss severity because these risks typically result in small premiums; even a single loss can lead to an unacceptable loss ratio. While this information was previously provided by the named insured, advancements in computer technology now make it much easier to obtain it directly from the insurance company.

PROPERTY

Property underwriting always begins with the basic property elements of Construction, Occupancy, Protection, and Exposure (COPE). This approach is used primarily to evaluate the fire hazard, but it is also helpful to identify and measure other potential perils and causes of loss.

Construction

The procedure used by AAIS to classify construction types is straightforward, particularly for buildings that incorporate multiple construction types. If a building has mixed construction and contains more than one-third combustible material, it is classified as frame, regardless of any other construction types present. It is the agent's responsibility to investigate and accurately determine the type of construction as defined by AAIS.

· A building is considered non-combustible if at least two-thirds of the floor, roof, and exterior wall area is made of non-combustible materials.

· If more than one-third of the floor and roof consists of combustible materials, the building is classified as combustible.

· A building is deemed fire-resistant only if at least two-thirds of its floor, roof, and exterior walls are fire-resistant.

· Buildings with brick veneer over frame walls are classified as frame rather than joisted masonry.

After establishing the type of construction, the quality of the construction must also be evaluated. If the building is older, any updates or renovations should be disclosed and assessed. This includes details about what changes were made, who performed the work, and when it occurred.

Overall, the construction quality must meet acceptable standards. Furthermore, the building's design should not create potential loss issues, such as those caused by windstorms or ice buildup.

Example: Graber's Shoe Store is a small store in a joisted masonry building in the downtown area. After it closes one Friday evening, the walls suddenly sag, the roof collapses, and the building is destroyed. The construction quality is determined to be inferior, which was an issue compounded by the weight of multiple layers of roofing material that caused the loss.

Occupancy

Risk eligibility is primarily determined by the occupancy of the premises and how effectively the risk manages its exposures. It's important to assess the vulnerability and potential damage to the covered business personal property. Additionally, the overall maintenance and cleanliness of the premises should meet satisfactory standards. The risk should also implement appropriate loss prevention and control measures for fire, theft, and other potential causes of loss.

Protection

This primarily addresses how well the building is protected against the peril of fire. It includes both external (public) protection and internal (private) protection.

External protection means the risk's access to public protection. AAIS uses three classes: Protected, Partially Protected, and Unprotected.

Protected buildings are within 1,000 feet of a public fire hydrant and less than five miles from a responding fire department.
Partially Protected buildings are more than 1,000 feet from a public fire hydrant but are still within five miles of a responding fire department.
Unprotected risks do not meet either of the above criteria. They are more than 1,000 feet from a public fire hydrant and more than five miles from a responding fire department.

In addition, anything that might hinder a fire department’s response and access to the premises must be evaluated. Some examples are railroad crossings, dead-end roads, traffic congestion, rivers, bridges, tunnels, and other geographic or man-made obstacles or impediments.

Internal (private) protection consists of automatic sprinklers and other types of extinguishing systems, fire extinguishers, and anything else that can stop or control a fire and keep it from spreading. Exterior locks and burglar alarms must be suitable for the exposure and be able to prevent or control burglary and theft losses. Storm shutters and other windstorm protection should be provided in certain parts of the country.

Exposure

Adjacency to or exposure from surrounding buildings and conditions can increase the risk of fire and other types of losses from covered perils. Underwriting risks requires evaluating neighboring buildings and their uses, as well as examining other businesses or activities within the same building as the risk being assessed. Exposures can pose significant challenges, often beyond the control of the risk itself, and cannot easily be corrected or eliminated.

While construction type, occupancy, and protective measures are factors that the risk can influence or improve, the only viable option for dealing with a serious exposure may be to relocate.

Additionally, geographic factors must also be considered during the underwriting process. Areas that are prone to earthquakes, windstorms, wildfires, hail, or other climatic issues can significantly impact the risk and should be thoroughly evaluated.

LIABILITY

Liability underwriting begins with the named insured because every operation of every named insured is covered. The nature of each named insured's business must be understood and thoroughly evaluated.

Bodily injury, property damage, and personal and advertising injury loss potential must be evaluated based on the nature of the risk’s business and the condition of the premises or location where it conducts operations. Controls to prevent accidents and the condition of the premises must also be evaluated. Adequate lighting, good sight lines and visibility, and clearly marked and accessible exits and entrances should be provided.

Customers should not have access to the entire premises. They should be restricted to certain areas to keep them from injury. Slips and falls generate a sizeable portion of all losses. They can be controlled by being aware of the facility’s conditions and correcting housekeeping problems and damaged floor coverings as they occur or on a regular, scheduled basis.

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.

OPTIONS

Several endorsements are available for businessowners' policies. It is essential to identify which endorsements each company offers and is willing to implement. Generally, businessowners' coverage cannot be significantly expanded, but there are some coverage options worth considering.

PRICING

A good risk can quickly turn into a problem if the pricing is inadequate and does not reflect the exposures involved. The most crucial factor in pricing is the proper classification of the risk. This involves determining and using the correct classification, construction type, occupancy, and public protection class associated with the risk. If any of these elements are incorrect, the rating will be inaccurate, and no discretionary underwriting credit or debit can rectify the mistake.

Another key factor is accurately assessing the property insurance-to-value. Replacement Cost (RC) valuation applies only if the insurance limit is at least 80% of the property's replacement value at the time of loss. Underinsured risks are essentially underpriced risks. To discourage the undervaluation of risks, a penalty may be applied, which can reduce loss payments from a Replacement Cost basis to an Actual Cash Value (ACV) basis.

Once the basic rating is completed, options to apply discretionary credits, debits, and other filed company deviations may be available. Businessowners’ policies typically do not offer the same level of pricing flexibility as other Commercial Package Policies. Credits or debits are available only for physical or management characteristics that are not already reflected in the basic rating. This means that factors such as management experience, types of occupancy and operations, and the risk's loss history can significantly influence the final underwriting pricing applied.

CHANGES

Endorsement and change requests occur with every risk, and businessowners risks are no exception. The agent must review and evaluate any changes requested before sending them to the insurance company. A request for a new named or additional insured, a new location, or new coverage can suggest a change in operations that could affect the risk's continuing eligibility. Alternatively, requests to reduce coverage or to delete an insured can signal significant changes or downturns in operations that could result in bankruptcy or insolvency.

These are meaningful opportunities for the agency to improve and solidify its relationship with the client. When the business is growing, the agent should take the time to apply risk management techniques and help the client evaluate its future coverage needs. This attention and time spent also keep other agents (who view the growing operation as a potential new client) from gaining a foothold.

However, a risk that experiences negative changes usually needs some insurance counseling. If it can survive the challenging times, the agent’s assistance could be the significant difference that cements the relationship and retains the insured’s business as it gradually returns to growth and profitability. In addition, the agent who recognizes the signs of financial problems early may be able to intervene and help keep them from getting worse.

CONCLUSION

Underwriting eligible risks is becoming more of a function handled by agencies. This shift presents opportunities for increased efficiency, but it also poses risks that can impact profitability and relationships. Eligible risks should be paired with the best possible products, but this should only happen when there is a proper fit, adequate pricing, and a commitment to maintaining underwriting integrity.