involved, the carrier needs to know. The insurance policy was purchased to transfer the financial risk of defense costs and potential settlements or judgments. Failure to inform a carrier at the earliest practicable time could call into question coverage availability. Failure to provide timely notice to the carrier can result in the association incurring legal fees from its general counsel to preserve its rights, which are not recoverable if they were incurred before the claim was tendered.
Impact on Premiums and Loss History
Underwriting is the process by which an insurance carrier evaluates a risk and determines an appropriate premium commensurate with exposure, or whether the risk fits within the carrier’s guidelines. Much of that practice centers around the loss history of the insured or prospective insured. Loss notices and actual claims carry a different weight in the carrier’s evaluation:
Notices of claims that are not actively being worked carry less weight. However, frequent notices will raise carrier concerns. Carriers may ask for more details of the instances and what effort the association is taking to stem or avoid continued notices. It is also important to keep track of activity related to a noticed claim and advise as soon as possible if something changes. It is common for legal matters to drag out for months, even years. In that time, new board members may be elected, or the community manager may move to a different account. Communicating new information or activity on the claim helps preserve the record for those who may not have been a part of the original tender. Further, providing details of the potential claim will assist underwriters in their evaluation and expectation of whether the matter may develop into something more significant. In many instances, while an insured may view a matter as benign, the carrier will take a more conservative approach and escalate the matter to a formal tender and assign a legal defense counsel.
Actual claims carry a far greater impact on premiums, policy conditions, and insurability. Multiple claims indicate an issue with the operation of the association, the nature of certain owners, and possibly the decision making of the board of directors. Liability claims, particularly directors & officers (D&O) liability claims, can escalate quickly and be costly to the carrier. Carriers may increase premiums, require higher self-insured retentions (SIRs; the D&O policy form of a deductible), add policy exclusions, or non-renew the account if they don’t believe the events that brought about the claim can be resolved effectively.
A deductible on a property insurance claim works differently than a self-insured retention (SIR) on a D&O policy. A deductible
is an amount of the loss payment that is deducted from the payment of a claim. An SIR is an amount the insured must pay to the carrier-assigned defense counsel before the carrier will start paying for the legal fees and costs.
Carrier Quoting and Market Perception
At renewal, a broker may look at coverage available through several different carriers, while also reviewing the renewal offer from the incumbent carrier. All carriers are evaluating the risk with factors like the frequency and severity of claims, types of losses, predictability of recurrence, and the ratio of premiums collected over claim dollars paid (a.k.a., the loss ratio). If an account isn’t profitable, and the carrier cannot make changes to make it profitable, it is likely that carrier will non-renew the account.
A challenging loss history will limit available carriers, and those offering coverage will charge higher than market premiums, require higher SIRs, and potentially exclude similar incidents or incidents related to a specific individual. Many carriers will simply decline to offer terms. A favorable loss history, therefore, is more attractive to a carrier, and leaves open more options.
Strategic Considerations Before Filing a Claim
A board should not avoid legitimate claims, but notices and formal tenders should be approached strategically.
For property claims or property damage liability claims, consider the cost of repairs in relation to deductibles, SIRs, and long-term impact on premiums.
Consult with the insurance broker, who is presumably an expert in the insuring community associations. For legal matters, consult with legal counsel specializing in common interest developments.
Mitigate the exposure to future claims or occurrences.
Insurance claims management is not just about fixing damage or avoiding future losses. The claim history of an association directly affects the association’s financial stability, insurance expenses, and access to competitive insurance options. Understanding the difference between putting a carrier on notice and tendering a claim allows boards to make informed, strategic decisions. Consistent consultation with insurance professionals aids accurate and appropriate coverage selection. Actively working with other industry professionals will guide the implementation of proactive measures that can avoid or control exposure. Thoughtful practices, insurance or otherwise, help protect both the association and its members for the long term.
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