Policy issuance is a crucial and final step in the Quote/Bind/Issue process for any insurance policy. It both finalizes and formalizes all of the steps taken in the submission and quoting process. It should take into consideration all information gathered and learned, both from the Insured’s perspective and from the perspective of the Underwriting guidelines and constraints the MGA and carrier are working with. Most importantly, perhaps, the policy supersedes anything that was discussed or promised beforehand. A finalized policy should provide adequate coverage that adheres to the insured’s wishes yet stays within the boundaries of what the carrier is willing to cover.
However, the policy issuance process itself can often lead to mistakes that will effectively provide coverage one of the parties did not consent to, or coverage that was not intended by one of the parties to be present on the policy. This article describes and examines the top 3 issues you should always be on the lookout for, as noted by Outsource Insurance Professionals’ Internal Audit Department.
1. Missing Guide Mandatory forms
Every carrier has their own guide, one that reflects their own underwriting appetite. Different companies have different business models and, therefore, are ready to take on different types of risks. This is not an isolated case, but same class codes, and, at first glance, same operations can have different forms which have to go along with it. When we say forms, we mean conditions which need to be fulfilled so that coverage can be provided. And any one form added or omitted from the policy can change the coverage(s) provided significantly. One good example would be the Taxicab companies as Carrier #1 is prohibiting these operations in connection with Ambulance or Para-Transit companies (emergency or non-emergency), while Carrier #2 is allowing Non-emergency operations to be covered under Taxicab companies risk. Similar class code, very different operations covered under it. Neglecting to verify the underwriting guidelines and add a mandatory form affects the entire structure of the policy and the underwriting appetite. In short, it forces the company to provide coverage for perils and/or circumstances it was not prepared or willing to cover. This is where it is once again crucial to understand the nature of the policy - it supersedes the quote, the binder, and any additional information provided during the quoting and binding process. Why is this relevant and why do companies differ from one another in this regard? Well, most, if not all, decisions in the 21st century are made based on data we have access to. Different insurance companies, depending on the average insured they cover or territory where they write most of their business, will see different causes of loss or general conditions surrounding their losses, and will try to exclude some of those coverages if possible, in order to provide required coverage and good service to their customers while still reducing their own expenses. This is why policy issuance personnel should always consult the guide to verify that all mandatory forms are present. Issuing a policy without mandatory forms puts the MGA in a precarious situation where they either have to go against explicit instruction provided by the insurance company providing the coverage, or go back on their original promise to the insured and modify the coverage they provided during the quoting process.
OIP is trained to understand all aspects of the Insurance Policy and to caution the client if any mandatory form is missing, and the risk this omission carries with it.
2. Inadequate valuation or Causes of Loss
Any policy that covers a set value for real or personal property has to navigate several sets of information and try to find an intersection of that information that is beneficial to both the insured and insurance company. For example, when insuring a commercial building for property coverage the three most important items are the building limit, causes of loss, and exclusions. The exclusions are covered in the above section, so let’s focus on the limit and causes of loss. The building limit is the maximum value a carrier will pay for physical damage to the building, and the initial burden of determining the adequate limit needed for the building is on the insured and their representative. With this in mind, before finalizing the policy, documentation on hand must be reviewed and the limits verified for accuracy - to ensure it complies with the coinsurance provision listed on the policy. To that effect, reviewing any supplemental application, value on documents or cost estimators is the key. This is in addition to avoiding typos in limits, which is the kind of thing that goes without saying but we will mention it anyway. To illustrate how important valuation is, let’s assume that the roof damage occurs. Any difference in regards to valuation will have a great effect. Even a simple omission may result in a policy being issued with Replacement Cost when Actual Cash Value was intended. In this case, suppose the roof is 40 years old and in need of replacement, the difference in the amount paid would be significant considering that Replacement Cost refers to the amount needed to replace the asset at the present time, while Actual Cash Value should include a deduction to account for depreciation to the original property. Furthermore, covered causes of loss are another point where policy issuance personnel must review the documentation to make sure the coverage they are about to enter into the policy is correct. This is especially true if the covered cause of loss is “Special”, as special cause of loss effectively covers anything that is not excluded by separate form. The most basic, and yet most common, mistake is to list the cause of loss as “Special excluding theft” on the property declarations page, but neglect to add the Theft Exclusion form to the policy and accurately list the locations and buildings that the exclusion applies to. This might create a conflict within the policy itself, leading to unnecessary time and money spent on evaluating the responsibilities of the insurance company, should a claim arise.
By outsourcing policy issuance to OIP, you ensure the highest quality and accuracy of each policy issued.
3. Missing Coverage Forms
With businesses becoming more and more sophisticated and their needs more and more complex, the nature of the policies that provide coverage become more and more complex as well. Many insureds are seeking insurance policies that will provide full coverage for all of their needs and protect them from all insurable events. To achieve this, an insurance policy can be supplemented with multiple additional coverage forms not found on your “bare bones” policy - such as business income, equipment breakdown, and similar coverages. When issuing a policy that contains such coverages, it’s imperative to take into consideration items listed in 1 and 2 above - verify that appropriate forms are added to the policy and make sure that adequate coverages are selected and provided in the forms attached. When issuing the policy, review the content of the declaration page and the forms list. Do they match? Do the forms listed in the forms list address coverages listed in the declarations page? As with the covered causes of loss, it’s not enough just to list the coverage provided on the declarations page - appropriate forms must be added to the policy in order to provide a product that is understandable to the insured and compliant with the carrier’s underwriting appetite. Even if Equipment Breakdown coverage is listed on the Property Dec Page, the form is actually showing rights, duties, and what is and is not covered. You won’t be aware that even if you purchased Equipment Breakdown coverage there are conditions where Carrier is not going to cover your loss, coverage will not be covered in total or your claim can be denied. Per one of the carriers, the Equipment Breakdown Coverage form states: “Computer Equipment - We will pay for loss, damage or expense caused by or resulting from an “accident” to “computers.” The most we will pay for loss or damage under this coverage, including actual loss of Business Income you sustain and necessary Extra Expense you incur, is $25,000.”
Someone would say - just follow the guide and the instructions you got from your client and you will do just fine. What do you think? Is it just blindly following the instructions and guide or actually understanding what impact forms have on the coverage and what is basically the main difference between ACV or RCV, is it one latter only or something much bigger? Can you feel safe with a perfectly populated declarations page or you need coverage forms as well as a backup?
Who issues your policy? Is the personnel educated enough to understand the scope of operation you cover? What are mandatory and optional forms of coverage? Do they know the difference between an “extra zero” typo in Named Insured and on a policy limit?
There is so much that can go wrong if policy is not issued properly. Our objective is to protect our client, safeguard their loss ratio, ensure that their clients are satisfied with the final product - a perfectly issued policy.
A good solution to ensure that your policy issuance process is conducted flawlessly is to outsource this part of your operation to a trusted partner with a proven track record, extensive know-how and experienced, well trained professionals with a meticulous and thorough approach. This way you will release the time for your in-house team to focus on core activities and writing new business while having a seamless, accurate and efficient policy issuance process handled by your outsourcing partner.
If you would like to learn more on how OIP can handle your policy issuance, please reach out to our team using this link, and we will get back to you.
OIP Internal Audit Team