Are all insurance policies the same?
We get asked this question quite frequently, or the variant, which is “Why does this policy cost more than the other one?”
We get asked this question quite frequently, or the variant, which is “Why does this policy cost more than the other one?”
In order to answer these questions, one must first understand that an insurance policy is a contract between two parties subject to certain conditions. It’s these terms and conditions which define the risk the insurance company is willing to insure. It is a very common occurrence to have multiple insurance companies evaluate the same insured, the same identical risk, and have vastly different premiums. There are other internal factors which contribute to this disparity of premium, but the most likely reasons are listed in the exclusions, i.e. what the insurance policy does not cover.
Let’s simplify this with a recent example from a client. The client has a home based petrochemical consulting business. He goes to various petrochemical plants, runs tests on the processes, and instructs operators as to the addition of various chemicals in the refining process based on the test results.
The plants required him to carry General Liability Insurance in the amount of $1,000,000 per occurrence with an Aggregate Limit of $2,000,000, listing them as an Additional Insured, before he can offer his consulting services to them.
The resulting premiums ranged from $800 to $5,000.
Each insurance company had the same General Liability and Aggregate Limits. So, at first glance, if the insured selects the $800 per year policy, he has saved himself $4,200 a year in premiums. However, upon further review, the first policy is determined to be a strictly Premises Only General Liability Policy. It offers protection against slips and falls by his clients while they are at his office (home). An extension of this policy may have an endorsement for Products and Completed Operations which would offer protection for any products the insured was selling.
However, it did not offer any Professional Liability coverage at all. Rather, it specifically excluded all Professional Liability (Errors and Omissions) exposures. Since the insured was not selling a product, rather he was selling his Professional Expertise, this $800 policy is of marginal value to him. In the event of a mistake on his part resulting in a loss to the refinery, he would have absolutely no coverage since the policy explicitly excluded Professional Liability. As such, he would have no coverage for defense costs, nor would he have any coverage for losses sustained by the refinery during the disruption of their business. In contrast, the $5,000 policy included Professional Liability (Errors & Omissions) and also included a Sudden & Accidental Pollution Endorsement, which would pay for Environment Cleanup in the event of a covered loss. A loss of any type in the $800 policy would effectively put the consultant out of business and subject him to years of legal woes without any financial recourse.
Another example is a company who imports electrical power generation equipment directly from a factory overseas. Since they are the direct importers, for all intents and purposes, they are the first “reachable” party in a law suit, since by virtue of being a direct importer, they have unwittingly assumed the liability of a manufacturer, unless the manufacturer has a US office and a US insurance policy.
While their General Liability policy will include coverage for Products and Completed Operations, most policies have a Foreign Products Exposure Exclusion specifically for this purpose. It protects the insurance company from assuming the liability to defend for products manufactured overseas under different standards and controls.
So in the event of a loss due to a malfunction of the power generation equipment, the company does not have any General Liability coverage and will have to bear the costs of legal defense and restitution themselves.
The above are examples of how important it is to know what your insurance policy does and does not cover. Having a insurance policy which protects you in time of need is paramount to your business. After all, isn’t that why you purchased insurance in the first place?
Let the professionals at Commercial Global Insurance Services navigate these waters for you. We have the expertise to review your business, expose the underlying risks, and present them to carriers who can offer the best value for your premium dollar.
