Frequently Asked Questions
What is a claims-made policy and how do claims work under it?
Claims-made policies cover claims made during the policy period, regardless of when the underlying incident occurred (subject to the retroactive date). This differs from occurrence policies and affects how you manage claims.
How claims-made coverage works:
Claim timing: Coverage applies if the claim is first made during the policy period.
Retroactive date: The policy only covers incidents occurring after the retroactive date.
Both must be met: The incident must be after the retroactive date AND the claim must be made during the policy period.
Reporting: Claims must be reported to the insurer during the policy period or any extended reporting period.
Common claims-made coverages:
Professional liability: Most E&O policies are claims-made.
Directors and officers: D&O coverage is typically claims-made.
Employment practices: EPLI is usually claims-made.
Cyber liability: Most cyber policies are claims-made.
Reporting requirements:
Timely reporting: Report claims during the policy period.
Potential claims: Many policies allow you to report circumstances that might lead to claims.
Continuous coverage: Maintain coverage without gaps to protect against claims from past activities.
Extended reporting period (tail):
What it is: Additional time to report claims after a policy ends.
When needed: When you’re canceling coverage, retiring, or changing to a new insurer.
Cost: Tail coverage typically costs 100-300% of annual premium.
Duration: Tail periods range from one year to unlimited.
Managing claims-made coverage:
Retroactive date protection: Never let your retroactive date move forward.
Continuous coverage: Maintain uninterrupted coverage.
Early reporting: Report potential claims as soon as you’re aware of them.
Tail planning: Budget for tail coverage when planning business changes.
What is a deductible and how should I choose mine?
Deductibles represent the portion of losses you pay before insurance kicks in. Choosing the right deductible balances premium savings against financial risk.
How deductibles work:
Per-claim deductible: Applies to each claim separately.
Per-occurrence deductible: Applies once per occurrence, even if multiple claims arise.
Annual aggregate: Total deductible exposure capped annually.
Split deductibles: Different amounts for different coverage parts.
Waiting period: Time-based deductibles for business interruption (e.g., 24-hour waiting period).
Factors in choosing deductibles:
Cash reserves: Can you comfortably pay the deductible when needed?
Claim frequency: Higher frequency means more deductible payments.
Premium savings: Compare savings to increased out-of-pocket exposure.
Risk tolerance: How much financial uncertainty can you accept?
Cash flow: Can you absorb unexpected deductible payments?
Higher deductible advantages:
Lower premiums: Higher deductibles reduce premium costs.
Fewer small claims: You handle small losses yourself, avoiding claim-related premium increases.
Self-insurance savings: Over time, avoiding small claims can save money.
Better coverage: Premium savings may allow purchasing higher limits.
Lower deductible advantages:
Predictability: Lower out-of-pocket costs when claims occur.
Cash flow protection: Less financial disruption from claims.
Small loss coverage: Insurance helps even with smaller losses.
Simpler budgeting: More of your risk is transferred to the insurer.
Deductible strategies:
Match to reserves: Set deductibles at levels you can comfortably pay.
Different by line: Different deductibles for different coverage types based on exposure.
Buy-down options: Lower deductibles for specific exposures while keeping others higher.
Annual review: Reassess deductibles as your financial position changes.
The right deductible depends on your specific financial situation and risk tolerance.
What is a loss run report and why do insurers request it?
Loss run reports document your claims history with previous insurers. New insurers request these reports to evaluate your risk profile before quoting coverage.
What loss runs contain:
Policy information: Policy numbers, coverage types, and policy periods.
Claims list: Each claim filed during the reporting period.
Claim details: Dates, descriptions, and status of each claim.
Amounts: Paid amounts, reserves, and total incurred for each claim.
Summary data: Totals and loss ratios across the period.
Why insurers want loss runs:
Risk assessment: Claims history indicates future claims likelihood.
Pricing: Loss experience directly affects premium calculations.
Underwriting decisions: Severe or frequent losses may affect coverage availability.
Experience rating: Workers’ comp experience mods are based on loss data.
Pattern identification: Recurring claim types suggest underlying issues.
Obtaining loss runs:
Request from current insurer: Contact your current carrier’s service department.
Prior insurers: You may need reports from multiple prior carriers.
Timeline: Allow time; reports may take days or weeks to produce.
Standard period: Most insurers want three to five years of history.
Written request: Some insurers require written authorization.
Loss run considerations:
Open claims: Unresolved claims with reserves affect the picture more than closed claims.
Explanation opportunities: Be prepared to explain significant claims or patterns.
Subrogation recoveries: Recoveries should be reflected in net incurred amounts.
Corrective actions: Document steps taken to prevent similar claims.
Managing your loss history:
Claims management: Active involvement in claims helps control costs.
Safety programs: Prevention reduces future claims.
Return-to-work: Early return to work reduces workers’ comp claim costs.
Documentation: Maintain records of improvements made following claims.
What is a proof of loss and when is it required?
A proof of loss is a formal sworn statement documenting your claimed loss. Insurers may require it before finalizing property claim payments.
What a proof of loss contains:
Policyholder information: Your name and policy details.
Date and cause of loss: When and how the loss occurred.
Property description: Detailed description of damaged or lost property.
Value claimed: The dollar amount you’re claiming.
Other insurance: Disclosure of any other coverage that might apply.
Sworn statement: Your signature under oath affirming accuracy.
When proof of loss is required:
Policy requirement: Many property policies require proof of loss upon insurer request.
Larger claims: More commonly required for significant losses.
Complex claims: When claims involve detailed documentation.
Disputed claims: When claim amounts are contested.
Timeframe: Policies typically specify deadline for submission (often 60 days).
Preparing a proof of loss:
Gather documentation: Compile all evidence supporting your claim.
Accurate valuation: Provide supportable values for claimed items.
Complete inventory: List all damaged or lost property.
Cause explanation: Clearly explain how the loss occurred.
Professional assistance: Consider help from your agent or public adjuster.
Implications of the proof of loss:
Sworn statement: Inaccuracies can be considered fraud.
Claim limitation: You generally can’t later claim more than stated.
Documentation commitment: You’re committing to the facts as stated.
Processing trigger: Submission may trigger insurer’s payment timeline.
Common mistakes:
Incomplete inventory: Failing to include all damaged items.
Inaccurate values: Overstating or understating property values.
Missing deadline: Submitting after required timeframe.
Inconsistencies: Conflicts with other claim documentation.
Take proof of loss requirements seriously; they’re formal legal documents.
What is a reserve on an insurance claim?
Reserves are amounts insurers set aside for expected future payments on open claims. Understanding reserves helps you interpret your loss history and manage claims effectively.
What reserves represent:
Estimated future payments: The insurer’s estimate of what they’ll ultimately pay on a claim.
Not yet paid: Reserves are for anticipated future payments, separate from amounts already paid.
Case reserves: Established for specific known claims.
IBNR reserves: ‘Incurred but not reported’ reserves for claims expected but not yet filed.
How reserves are set:
Adjuster judgment: Claims adjusters estimate reserves based on claim facts.
Historical data: Similar claims inform reserve estimates.
Medical reports: For injury claims, medical information guides reserves.
Legal assessments: For litigated claims, defense counsel input affects reserves.
Regular review: Reserves are adjusted as claims develop.
Why reserves matter to you:
Experience rating: Workers’ comp EMR calculations include reserves, not just paid amounts.
Loss history: Loss runs show both paid amounts and reserves.
Total incurred: Paid plus reserved equals total incurred, which insurers use for pricing.
Premium impact: High reserves on open claims affect renewal pricing.
Managing reserve impact:
Claim involvement: Stay engaged in claims to help ensure accurate reserves.
Information sharing: Provide relevant information that might reduce reserve estimates.
Medical management: Active medical management can improve outcomes and reduce reserves.
Return-to-work: Getting employees back to work reduces workers’ comp reserves.
Settlement timing: Sometimes settling claims appropriately reduces total incurred.
Reserve review:
Request reserve information: Ask for reserve amounts on open claims.
Question inaccurate reserves: If reserves seem excessive, discuss with the adjuster.
Document improvements: Share information about improvements in injured worker condition or claim status.
What is an experience modification rate and how can I improve it?
Your experience modification rate (EMR or mod) is a multiplier applied to workers’ compensation premiums based on your claims history. Improving your EMR directly reduces premium costs.
How EMR is calculated:
Comparison basis: Your claims experience is compared to similar businesses in your industry and size.
Three-year period: Calculation uses data from the three policy years prior to the most recent year.
Expected vs. actual: Your actual losses are compared to expected losses for your classification and payroll.
Frequency emphasis: The formula weights claim frequency heavily; many small claims hurt more than one large claim.
Understanding your EMR:
1.0 is average: An EMR of 1.0 means your experience matches the average for similar businesses.
Below 1.0 is good: An EMR of 0.75 means you pay 25% less than average.
Above 1.0 is concerning: An EMR of 1.25 means you pay 25% more than average.
Competitive impact: Many contracts require EMRs below 1.0 for contractor qualification.
Strategies to improve EMR:
Prevent injuries: Safety programs, training, and hazard elimination reduce claim frequency.
Return-to-work programs: Getting injured employees back to productive work reduces claim costs.
Claims management: Active involvement in claims helps control costs.
Accurate classification: Ensure employees are properly classified to avoid inflated expected losses.
Medical management: Prompt, appropriate medical care improves outcomes.
Long-term improvement:
Consistent safety: Sustained safety performance over multiple years improves EMR.
Time heals: Bad years eventually age out of the calculation period.
Trending matters: Improving trends are viewed favorably even if current EMR is elevated.
Documentation: Document safety efforts for underwriting discussions.
EMR improvement requires sustained attention to workplace safety and claims management.
What is an insurance appraisal and when can I request one?
Insurance appraisal is a dispute resolution process for disagreements about the value of losses. Most property policies include appraisal provisions.
When appraisal applies:
Value disputes: You and the insurer agree something is covered but disagree on what it’s worth.
Not coverage disputes: Appraisal doesn’t resolve whether something is covered, only its value.
Policy provision: Your policy must include an appraisal clause.
Either party request: Either you or the insurer can invoke appraisal.
How appraisal works:
Demand: Either party makes written demand for appraisal.
Appraiser selection: Each party selects an independent appraiser.
Umpire selection: The appraisers select an umpire to break deadlocks.
Investigation: Appraisers investigate and determine their values.
Agreement or umpire: If appraisers agree, that’s the value. If not, the umpire decides.
Binding result: The appraisal result is typically binding.
Costs:
Your appraiser: You pay your appraiser’s fees.
Umpire: Umpire fees are typically shared.
Other costs: Each party bears their own costs (attorneys, experts, etc.).
Cost-benefit: Consider whether the disputed amount justifies appraisal costs.
When to consider appraisal:
Significant gap: The difference between positions is substantial.
Negotiation failed: Direct negotiation hasn’t resolved the dispute.
Supportable position: You have documentation supporting your valuation.
Coverage is clear: Only the amount, not coverage, is disputed.
Selecting an appraiser:
Qualified expert: Someone with expertise in valuing the type of property at issue.
Independence: Not employed by or affiliated with the insurer.
Experience: Familiarity with insurance appraisal process.
References: Check reputation and past appraisal work.
Appraisal is a tool for resolving value disputes without litigation.
What is business interruption coverage and when does it apply?
Business interruption insurance replaces income lost when a covered event forces you to suspend operations. Understanding when it applies helps you evaluate coverage needs and file claims appropriately.
What business interruption covers:
Lost income: Net profit you would have earned had operations continued.
Continuing expenses: Fixed costs that continue during shutdown (rent, loan payments, utilities).
Extra expense: Additional costs to minimize shutdown duration or maintain operations.
Payroll: Employee wages during the interruption period (coverage may be limited).
When coverage applies:
Covered property damage: The interruption must result from physical damage to covered property.
Covered peril: The damage must be from a peril covered by your property policy.
Your premises: Typically applies to damage at your location.
Waiting period: Coverage typically begins after a waiting period (often 24-72 hours).
Extended coverage options:
Contingent business interruption: Losses caused by damage to a supplier’s or customer’s property.
Civil authority: Losses when government action denies access to your property.
Ingress/egress: Losses when access to your property is blocked.
Service interruption: Losses from utility service disruptions.
Filing a business interruption claim:
Document the physical damage: The interruption claim depends on an underlying property claim.
Track lost income: Maintain records showing what revenue you would have earned.
Document continuing expenses: Record fixed costs that continued during closure.
Extra expenses: Keep receipts for costs to minimize the interruption.
Mitigation efforts: Document steps taken to reduce losses.
Coverage limitations:
Period of restoration: Coverage ends when repairs should reasonably be complete.
Sublimits: Some coverages have sublimits below the main limit.
Exclusions: Pandemics, utility failures, and other events may be excluded without specific coverage.
Business interruption is often the most significant loss from property damage. Ensure coverage is adequate.
What is loss control and how can it lower my insurance costs?
Loss control encompasses practices that prevent losses and minimize their impact when they occur. Effective loss control reduces claims, which reduces premiums over time.
What loss control includes:
Risk identification: Finding hazards before they cause losses.
Prevention measures: Actions that prevent incidents from occurring.
Mitigation measures: Actions that reduce severity when incidents happen.
Training: Educating employees on safe practices.
Procedures: Documented processes for safe operations.
Physical safeguards: Equipment and modifications that reduce risk.
Insurance company loss control:
Inspections: Insurers may inspect your premises to identify hazards.
Recommendations: You may receive recommendations for improvements.
Resources: Many insurers provide safety materials, training, and consultation.
Compliance requirements: Some recommendations may be required for continued coverage.
Premium impact: Good loss control performance can lead to better rates.
Implementing loss control:
Management commitment: Leadership must prioritize and fund safety.
Employee involvement: Workers often have the best ideas for safety improvements.
Regular assessment: Continuously look for hazards and improvement opportunities.
Incident investigation: Learn from every incident and near-miss.
Measurement: Track leading indicators (training, inspections) and lagging indicators (incidents).
Areas to address:
Workplace safety: Prevent employee injuries through training, equipment, and procedures.
Property protection: Fire prevention, security, and maintenance.
Vehicle safety: Driver training, vehicle maintenance, and fleet policies.
Liability reduction: Product safety, contract review, and customer interaction protocols.
Cyber security: Technology controls and employee training.
Return on investment:
Premium reduction: Better experience leads to lower premiums.
Avoided losses: Prevented losses save money directly.
Productivity: Safe workplaces are often more productive.
Morale: Workers appreciate employers who prioritize safety.
Loss control is an investment that pays returns through reduced claims and lower premiums.
What is subrogation and how does it affect my business?
Subrogation is your insurer’s right to pursue recovery from parties responsible for losses they’ve paid on your behalf. Understanding subrogation helps you navigate claims involving third-party responsibility.
How subrogation works:
Insurer pays your claim: Your insurance company pays for your covered loss.
Rights transfer: You transfer your right to pursue the responsible party to your insurer.
Insurer seeks recovery: Your insurer pursues the negligent party or their insurer for reimbursement.
Recovered funds: Recoveries may be shared with you, particularly for deductible amounts.
Common subrogation situations:
Auto accidents: Your insurer pays your claim, then pursues the at-fault driver’s insurer.
Product defects: Your property insurer pays for damage caused by a defective product, then pursues the manufacturer.
Contractor negligence: Your insurer pays for damage caused by a contractor’s work, then pursues the contractor.
Landlord/tenant: One party’s insurer pursues the other for property damage claims.
Your obligations regarding subrogation:
Preserve rights: Don’t release potentially responsible parties without insurer consent.
Cooperation: Assist your insurer in pursuing recovery.
Documentation: Provide evidence supporting the claim against responsible parties.
No settlements: Don’t settle with third parties for covered losses without insurer involvement.
Waivers of subrogation:
Contract provisions: Some contracts require you to waive your insurer’s subrogation rights.
Policy endorsement: Your policy must permit the waiver.
Effect: Your insurer can’t pursue the party covered by the waiver.
Common situations: Landlord-tenant relationships, construction contracts, and vendor agreements.
Understanding subrogation protects your ability to recover losses and maintains your insurance coverage in good standing.
What is the difference between actual cash value and replacement cost?
Actual cash value (ACV) and replacement cost are two ways policies value property losses. The difference significantly affects claim payments.
Actual cash value:
Definition: The cost to replace property minus depreciation.
Depreciation: Reduction in value due to age, wear, and obsolescence.
Example: A five-year-old computer originally costing $2,000 might have ACV of $400.
Lower premiums: ACV coverage typically costs less than replacement cost.
Out-of-pocket gap: You pay the difference between ACV payment and replacement cost.
Replacement cost:
Definition: The cost to replace property with similar new property.
No depreciation: Age and condition don’t reduce the payment.
Example: That same five-year-old computer would be valued at current replacement cost.
Higher premiums: Replacement cost coverage costs more than ACV.
Full restoration: Allows you to fully replace damaged property.
How replacement cost claims work:
Initial payment: Insurers often initially pay ACV.
Replacement requirement: You must actually replace the property.
Supplemental payment: After replacement, you receive the difference between ACV and replacement cost.
Time limits: Policies may require replacement within a specified period.
Which to choose:
Critical assets: Equipment and property essential to operations should have replacement cost coverage.
Older assets: Significantly depreciated items may be adequately covered at ACV.
Budget considerations: Balance premium savings against potential coverage gaps.
Business impact: Consider whether you could afford the ACV-to-replacement gap out of pocket.
Special valuation methods:
Agreed value: You and the insurer agree on value at policy inception.
Functional replacement: Cost to replace with property performing the same function.
Market value: Sometimes used for buildings, though problematic for insurance purposes.
Understand your policy’s valuation method before a loss occurs.
What records should I keep for insurance purposes?
Maintaining proper records supports insurance claims, demonstrates compliance, and facilitates coverage management. Organized documentation protects your interests.
Policy documentation:
Current policies: Complete copies of all active insurance policies.
Endorsements: All endorsements and policy changes.
Certificates: Certificates of insurance issued and received.
Historical policies: Past policies for at least ten years (longer for some exposures).
Premium records: Payment records and audit documentation.
Asset documentation:
Property inventory: Detailed inventory with descriptions and values.
Purchase records: Receipts and invoices for significant purchases.
Photographs: Regular photos of property and equipment.
Appraisals: Professional appraisals of valuable items.
Serial numbers: Equipment identification information.
Business records for interruption claims:
Financial statements: Profit and loss statements, balance sheets.
Tax returns: Business tax filings.
Sales records: Revenue documentation by period.
Expense records: Fixed and variable expense documentation.
Projections: Business plans and forecasts.
Incident documentation:
Incident reports: Written reports of all incidents.
Photographs: Photos taken at time of incidents.
Witness information: Contact information and statements.
Police reports: Copies of any filed reports.
Medical records: For workers’ comp, treatment documentation.
Claims documentation:
Claim submissions: Copies of all claims filed.
Correspondence: All communication with insurers about claims.
Settlement documents: Final claim resolutions.
Payment records: Documentation of claim payments received.
Record retention:
Permanent: Policies, major claims, and asset records indefinitely.
Seven years minimum: Most business records should be kept seven years.
Long-tail exposures: Keep records longer for exposures that may surface years later.
Digital backup: Maintain off-site copies of critical records.