Built to Suit.
One of the most mishandled and misunderstood of any commercial inland marine coverages is the blanket installation floater. This coverage is designed to cover material, supplies, machinery, equipment and fixtures during the course of construction, fabrication, installation and/or dismantling. It covers insured items in transit to the job site, at the job site and while temporarily located elsewhere.
In spite of its apparent simplicity, this class of business often is written with policy limits that have no relationship to the exposure at risk. In order to more accurately establish policy limits, it is imperative that the maximum single-job completed value (projected at completion) be established according to the terms of the valuation clause (materials, labor, profit and overhead, for example). It is wise to build a 25% cushion into the single-job limit to make sure this limit is sufficient.
The overall policy-disaster limit also needs to be established by using the maximum probable loss at any one time, involving all jobs under way. The disaster limit generally turns out to be window dressing, unless there is a hurricane or other natural disaster that hits most of an insured's jobs when they are almost all complete--which is unlikely. But most insurers are very liberal with the overall disaster limit. Premium should be determined by average values at risk and average duration, so the insured shouldn't be paying anything extra for a high disaster limit in most cases, unless reinsurance is involved.
The following is an example of an improper limit and improper rating under a blanket installation floater:
Suppose there is a heating, ventilation and air-conditioning contractor doing $4 million in annual gross receipts, with a flat nonadjustable premium of $1,000. This is based on a rate of 2.5 cents per $100 of annual gross receipts. The contractor does 50 jobs per year for an average of $80,000 per job. The maximum job is $150,000 and the average duration is six weeks. Given the risk, the annual premium for this example should be somewhere between $2,300 and $3,450, subject to annual adjustment, as opposed to the $1,000 flat annual premium.
Here is how the higher premium was determined. A prudent insurer would be likely to set an annual premium rate of 50 cents per $100 applied to the average $80,000 job, giving $400 annual premium for one job. Since the average duration of each job is only six weeks, the insurer multiplies the annual premium of $400 times 0.115 years (six weeks divided by 52 weeks equals 0.115) to get a $46 premium per job. That premium is multiplied by the average number of jobs per year-rn this case, 50--to get an annual premium of $2,300. The annual gross receipts rate would be 5.75 cents per $100, applied to the estimated $4 million in annual gross receipts.
The $3,450 premium mentioned would be the result for an insurer that charges an annual premium rate of 75 cents per $100 applied to the average $80,000 job.
In an example such as this, some companies use an arbitrary limit of $25,000 when requested to do so by the agent, knowing full well that the maximum single job is $150,000. It is unwise to afford lower limits than the insured needs. It's a messy situation for all parties concerned, and the agent is exposed to a possible errors-and-omissions loss. This insured should have a limit of at least $150,000 at any one job site. The insured also needs appropriate sublimits for transit and off-site risks. Generally, insurance companies are not willing to provide the same limits for transit and elsewhere as they are providing at the job site, especially when the job-site limit is rather high.
It is doubtful that the insured in this case needs more than $25,000 or $50,000 for these sublimits, but the agent needs to discuss this with the insured to make sure proper sublimits are established. The agent should find out what the highest single transit and/or elsewhere exposures have ever been and what the insured would find comfortable for these sublimits. Usually, the rate and deposit premium would be the same whether the sublimits were $15,000, $25,000 or $50,000. If the insured requested $100,000 for transit and for elsewhere, the underwriter probably would ask some questions to ascertain whether the requested sublimits were realistic. If they were, the underwriter probably would increase the rate and deposit premium.
Agents should request, and underwriters should use, the annual gross receipts rate on any risk where the estimated annual premium reaches or exceeds $1,000. The premium would be subject to adjustment. An annual deposit provisional premium, subject to annual reporting and annual adjustment, is the most efficient for all parties concerned. If the annual deposit provisional premium is quite high--$10,000, for example--it is best to use installments to spread the premium outlay for the insured. Most insurance companies will offer four equal payments, on a quarterly basis.
In the previous example with a $2,300 deposit for the contractor doing around $4 million in annual gross receipts, the contractor could have a bad year because of economic conditions or illness. The contractor shouldn't have to pay $2,300 if the annual gross receipts were less than estimated. Conversely, the contractor should pay an additional premium if the annual gross receipts were higher than projected. The agent should check periodically with the insured to determine how the gross receipts are trending, especially on the larger risks.
It is extremely important that coverage is afforded during the period when the contractor is performing testing. Many installation floaters exclude any loss or damage during testing. Most underwriters will afford an exclusion buyout--except for large petrochemical risks or any others with a large volatile catastrophe exposure. An insurer covering an electrical contractor certainly wants to cover loss or damage during testing before the contractor's customer signs off and pays for the job. During testing, there could be fire and/or explosion, and the electrical contractor is still responsible for any loss or damage to the materials, equipment and machinery he or she has installed.
Inclusions and Exclusions
If the insured wants to cover just the cost of machinery, equipment and materials--rather than including labor, profit and overhead--the insurance contract can be so constructed, and the limits and premium adjusted downward accordingly. The insured also can limit the coverage to apply only "while in the open" at the job site and "in transit and elsewhere" away from the job site if the insured so desires. If the insured is a subcontractor, the general contractor might be taking care of this exposure once the machinery, equipment and materials become a physical part of the realty prior to the customer's acceptance of the entire job. In other words, the insurance contract can be tailor-made to fit the needs of the insured with the proper premium charge reflecting those needs. This would not apply in states requiring filed forms and rates for this class of inland marine business, unless a deviated filing was made and approved. However, this class of business is nonfiled in most states.
Because the blanket installation floater is a nonstandard form, agents need to familiarize themselves with each company's form. Agents should be sure to do the following:
* compare the exclusions;
* check to see whether there is a coinsurance clause;
* compare the valuation clauses;
* make sure there are no gaps or overlaps in coverage; and
* be sure they have given the insurance company the information it needs.
Harry Bordner retired In January 2000 after nearly 40 years of insurance underwriting, mostly In Inland marine.
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|Title Annotation:||blanket installation floaters|
|Date:||Aug 1, 2001|
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