Blanket Coverage & Margin Clause
New Challenges for Agents
By Maureen Gallagher
CIC CRM CILMA LIA LIC CWCC CWCA CWCP RPLU
For years many agents and insureds have relied on the “blanket” protection most
standard insurers offer on property coverage to protect against inadequate limits on
buildings or personal property. When blanket coverage combined with the “Agreed
Amount” endorsement to waive coinsurance is provided by the carrier, loss settlement
worries with regards to the limits are greatly reduced and in most instances, eliminated.
With the Insurance Service Office (ISO) 2007 introduction of the CP 12 32 06 07 –
Limitation on Loss Settlement - Blanket Insurance (Margin Clause) endorsement that
took effect November 1, 2008, the safety net that used to be provided under blanket
coverage may be forever altered. Agents and insureds should beware of this
endorsement. Recovery reverts to the statement of values on file with the insurance
company for each individual property item plus a stated percentage of that value.
Typically margin percentages have been anywhere from 110% to 125% of the stipulated
value. So long blanket coverage.
Blanket versus Scheduled Limits
By combining the limits of various scheduled property into one large limit, blanket limits
offer a reassuring allowance for error. Some carriers “blanket” buildings, contents and
business income separately; others blanket all property limits together. Some will
provide an “occurrence” limit that could be less than the total values combined, but
would cover the maximum probable loss at any one location. The occurrence limit is
usually a form of blanket coverage. Loss limits, however, rarely have any blanket
component. A loss limit is the most the policy will pay in the event of a loss. Recovery is
limited to the amount shown for the property item on the statement or schedule of values
on file with the insurance carrier.
Statement of Values
A statement of values is filed with insurance carriers by the insured. The statement of
values outlines the properties and the replacement cost or actual cash value of the
properties the insured is covering under their property policy.
The below schedule of values will illustrate the various ways the limits can be insured:
Example of Scheduled Limits on File with the Insurance Carrier
Location Building Contents
Business
Income
Total Location
Values
1 $400,000 $250,000 $75,000 $725,000
2 $300,000 $100,000 $60,000 $460,000
3 $250,000 $40,000 $45,000 $335,000
4 $600,000 $400,000 $125,000 $1,125,000
Totals $1,550,000 $790,000 $305,000 $2,645,000
§ Blanket limit of $2,645,000 based on the statement of values.
§ Blanket limits as follows: $1,550,000 for buildings, $790,000 for contents, and
$305,000 for business income.
§ Blanket building and contents limit of $2,340,000 and a separate blanket
business income limit of $305,000.
§ Occurrence limit of $1,125,000. This is the most that will be paid in any one loss.
This limit was determined by establishing the maximum loss possible at any one
location.
§ Loss Limit of $1,125,000. This is the most the policy will pay, which, once again,
represents the maximum loss at any one location. However, recovery is limited to
the amount shown on the statement of values. If location 1 building suffered a
$450,000 loss, the most the policy would pay is $400,000 assuming there were
no coinsurance issues.
§ The new ISO margin clause endorsement applies. The policy has a blanket limit
of $2,645,000; however recovery is limited to the amount shown on the
statement of values plus a margin percentage of 120%. If location 1 building
suffered a total loss of $450,000, the policy would pay a maximum of $480,000
($400,000 x 1.20) assuming there were no coinsurance issues. The insured
would be paid the total loss of $450,000 less deductible.
It should be noted in all the above scenarios, the premium is based on the total insured
values (TIV)…in this case $2,645,000.
Anytime a margin clause applies, a detailed statement of values is required. Some
carriers have specific methods for determining the value of the property if the values are
not individually shown on the statement of values and this new ISO CP 12 32 06 07 –
Limitation on Loss Settlement - Blanket Insurance (Margin Clause) endorsement is no
exception. The endorsement says “…If the statement of values does not state
individually the value of each building and the value of contents at each building or
premises, we will determine values as part of the total reported prior to application of the
Margin Clause Percentage”. Determining the value of a property after a loss is inviting
loss settlement disputes and should be avoided by preparing a detailed statement of
values.
Why wouldn’t Agents always request blanket coverage?
Blanket limits are recommended whenever possible. However, other alternatives are
used usually for the following reasons:
§ The carrier has a capacity problem…they cannot provide the full values
§ Premium costs are prohibitive
§ Facultative reinsurance agreements may impose restrictions
§ Blanket is not available…many carriers refuse to blanket certain property
exposures
Problems with valuing property
Underinsurance has become a problem for insurers where blanket coverage has been
provided along with the agreed value option. Indeed, several studies by insurers and
independent property valuation firms reveal that somewhere between 70 and 75 percent
of all properties are underinsured. The average amount of underinsurance ranges from
25 to 35 percent. It is the responsibility of the insured, often counseled by his or her
agent, to provide property values to the insurance carrier. Some insureds rely on the
blanket limit and knowledge that the penalties of coinsurance have been waived by the
agreed amount endorsement; others may not understand what a policy (loss) limit
means or how coinsurance applies. Since premiums are based on the total insured
property values, insureds are often motivated to underestimate their property values to
save cost.
Some carriers will calculate values based on valuation software they use in-house and
will only continue the coveted blanket coverage and coinsurance waiver if the insured
increases their values to a more appropriate level. Others will insist upon appraisals,
while some carriers pay very little attention to what the insured submits…especially if
written on a loss limit or schedule value basis and/or a coinsurance clause applies as the
insured will be penalized for underinsuring in the event of a loss.
Insurance carrier decisions to continue blanket coverage and coinsurance waivers with
known inadequate limits can be motivated by competitive factors. (e.g., soft market,
desire to secure the order on the account or carriers relinquish to market pressures to
retain an account). The insurance carriers have a legitimate complaint with blanket
coverage and coinsurance waivers. The insured often underinsures yet carriers are
providing high limits with no consequences for underinsuring. In the event of a loss, the
entire blanket limit is available to the insured to pay for the loss without any coinsurance
worries.
Margin Clause
Margin clauses have actually been in use for quite some time. For those agents insuring
property in high hazard areas such as those areas subject to earthquakes and
hurricanes, there is a good chance these agents rarely have the opportunity to write
blanket coverage. Most of the property written in the excess/surplus lines or wholesale
market is written on a scheduled basis often using loss limits. The pricing is based on
the total values the insured has, but coverage is limited to a policy limit and further
restricted by referring back to the statement of values as the maximum amount the
carrier will pay for the item involved in the loss.
In the example above, the insured has $2,645,000 in total values at four locations, but
the maximum probable loss at any one location is $1,125,000. Therefore, the insured
buys a policy with a $1,125,000 “loss limit”. This does not mean the insured has
$1,125,000 in coverage for any loss. It means this is the most the policy will pay is
$1,125,000. It is important to remember the policy reverts to the schedule of values on
file with the company to determine the limit of any individual property item in the event of
a loss. To reiterate, if the insured had a loss for $450,000 on building 1 that is reported
as $400,000 on the statement of values on file with the insurance carrier, all the insured
would collect is $400,000 less the deductible even though there was a $1,125,000 loss
limit.
Hence, the need for a margin clause. Margin clauses came about as a goodwill gesture.
Many insureds with multiple properties attempt to value all their property correctly, but
mistakes are made. Appraising the replacement value of property is not an exact
science and the true value is never really known until you replace it. If every effort has
been made to insure property correctly and blanket coverage is not available, many
carriers would add a margin clause to the property coverage for this type of situation.
Had the above insured had a 120% margin clause the loss would have been adjusted as
follows: $400,000 x 1.20 = $480,000 (limit available but limited to the loss of $450,000)
– deductible = Loss Settlement. Margins Clauses are looked upon very favorably in the
excess surplus lines marketplace. They are a true advantage to insureds that can only
purchase coverage on a scheduled basis.
The situation is much different for insureds that have obtained coverage in the standard
marketplace and have routinely secured blanket coverage. Going from full blanket to
scheduled limits with a margin clause is potentially a significant reduction in insurance
coverage in the event of a loss if the values reported by the insured are underinsured.
Coinsurance
In most instances agents securing blanket coverage for their insureds were getting
coinsurance waived as well through the Agreed Amount endorsement. Coinsurance
could come into play if it was not waived when insuring on a blanket basis. Although
blanket coverage offers protection against underinsurance, it does not necessarily
prevent a coinsurance penalty because the coinsurance clause usually contains a
provision that specifies the coinsurance clause applies to the total value of all of the
property covered by the blanket limit.
Securing coinsurance waivers (along with establishing appropriate scheduled property
values) will be very important if the new endorsement applies. Page two of the ISO CP
12 32 06 07 endorsement outlines three examples of how the margin clause will apply in
a loss settlement. Example number three is clear how the coinsurance will apply. The
coinsurance factor is calculated before the application of the margin clause.
Having the new ISO endorsement attached to a policy with a high (1.20 to 1.50) margin
clause will not be detrimental to an insured if the values are adequate as the margin
component will provide an allowance for error.
However, having coinsurance apply on a policy is never in the insured’s best interest. If
the insured has made every effort to value their property correctly, the underwriter
generally will have a comfort level with the values and most likely will be willing to
provide the agreed amount endorsement eliminating coinsurance issues.
Most agents insuring difficult properties with standard markets or in the surplus lines
marketplace are accustomed to providing loss limits and schedule values with margin
clauses. However, these agents are careful about waiving coinsurance whenever
possible. It is important to remember they are two separate issues. Carriers may be
using this new endorsement more and more; therefore waiving coinsurance will be
essential to prevent unforeseen loss settlement complications.
Analogous to Protective Safeguards Endorsements/Wording
Protective Safeguard, like the new ISO Limitation on Loss Settlement – Blanket
Insurance (Margin Clause), started out as an endorsement. The “Protective Safeguard”
name of the endorsement from an insured’s perspective may have seemed like a
coverage enhancement. However, Protective Safeguard endorsements do not
safeguard the insured; they safeguard the insurance company. There are various
requirements in the endorsement the insured must comply with or coverage can be
voided.
When ISO issued the 2007 filing changes which included the Limitation on Loss
Settlement endorsement, this was the introduction, “An advantage of blanket insurance
is that the insured can attain, in effect, full coverage at individual locations without
insuring 100% of the total value of all locations. …The policyholder retains the
advantages and convenience of blanket coverage but the maximum loss payable on
individual properties is constrained”. Well, this doesn’t sound so bad, but it can be
devastating to insureds that have relied on substantial blanket limits that have suddenly
disappeared. Initially, Protective Safeguard wording was always added by an
endorsement. However, over the years, many insurance carriers have incorporated the
wording into their policy forms, making the restrictions much more difficult to detect in
the policy. Other carriers routinely add on every policy where an insured has burglar
alarms or sprinkler systems, even though there was no mention of this endorsement or
wording applying in their quotations. Agents must be diligent in checking quotations and
policies to determine whether or not Protective Safeguards endorsements or wording
have been added. Every attempt should be made to have it removed from the policy or
explain the restriction in detail to their clients. Already agents report seeing the new
ISO Limitation on Loss Settlement – Blanket Insurance (Margin Clause) automatically
added to the declaration page wording, with some insurance carriers and other carriers
adding the endorsement to renewal policies. This is nothing new; insurers routinely add
restrictive wording or endorsements and change policy forms which reduce coverage
without notifying the agent or policyholder.
Conclusion
As agents, like our insureds, we are concerned about price, a major component in
securing and retaining accounts. In some instances this has fueled a silent complicity
with our insureds to undervalue property for premium savings when blanket coverage
and agreed amount waiver apply. Perhaps a better approach is valuing the property
correctly and driving a hard bargain with the insurance carrier underwriter on rate. In
other words, let’s assume the total values are $50,000,000 with a .26 rate per $100 in
values ($130,000 annual premium), but we learn these values are inadequate by 25%
and really should be $62,500,000. If the underwriter was comfortable with the pricing at
$130,000, is it possible for the underwriter to reduce their rate to .205 to keep the
premium level yet use the proper values?
With proper values it is easier to get the underwriter on board to continue providing
blanket coverage with the agreed amount waiver, as the new ISO endorsement is
optional. If the only way you can secure coverage is on a stated value amount, having
proper values will almost always convince the underwriter to waive coinsurance and
provide a significant margin clause, which is the next best alternative to blanket
coverage.
§ Explain to your client the need to review their values and insure properly. Assure
the insured they should approach this project without worry to premium cost as it
is your job to get the rate down so they can insure proper values.
§ Secure blanket coverage with agreed amount waivers whenever possible.
§ The only way to be certain about the coverage provided is to require a specimen
policy with all the endorsements that will be attached to the policy with the
quotation and read them. The policy form and endorsements should be
compared to the prior years to look for changes, limitations, restrictions or
exclusions.
§ Have a check list for the “red flag” items like Protective Safeguards and
Limitation on Loss Settlement or Margin Clause wording. Prior to binding, get as
many of the unacceptable terms and conditions amended or eliminated.
§ Once you have negotiated the best situation for your client, clearly explain to
your client exactly how their policy will respond in the event of a loss.
