By Brad Henderson, Network Insurance Services
Lloyds of London is an insurance carrier familiar to many as the carrier who will insure anything for the right price. In the 1980s, Bruce Springsteen insured his voice with Lloyd’s for $6 million. David Beckham, former professional soccer player, insured his legs with Lloyd’s for $144 million.
Lloyds contributed to the founding of the modern insurance industry in 1652, with humble beginnings at Edward Lloyd’s coffee shop by the river Thames in the UK. Lloyds has remained an industry leader in placing hard to insure risks deemed too risky or unusual for standard insurance companies to insure. Lloyds, along with other excess & surplus lines (E&S) carriers, have the flexibility to provide coverage for unique or high-risk assets without being subject to the same regulatory constraints as traditional insurers.
As the United States Property & Casualty Insurance industry year over year faces billions in net underwriting losses, more standard market carriers are pulling back or often completely out of the marketplace, often leaving E&S carriers as the only viable solution for insuring Colorado homeowners associations.
Standard market carriers, also known as admitted carriers, are those carriers most of us have seen commercials for on TV. These admitted carriers are licensed by the states in which they write policies in and must conform to regulations and rates set by each states regulating authority. In Colorado, this is DORA’s Division of Insurance. These regulations are generally designed to protect and benefit the consumer.
Excess & surplus lines carriers, or non-admitted carriers, are not subject to a particular state’s coverage form or rate regulations. With the ability to deviate from a state’s coverage form regulations, E&S carriers can add exclusions, restrictions, and policy conditions that standard market carriers cannot. Among other things, this flexibility allows excess & surplus carriers to exclude high risk exposures, like coverage for aluminum wiring. Their ability to adjust the premium to adequately price for a unique risk enables E&S carriers to insure risks that a standard market cannot adequately price for.
E&S carriers used to be primarily for communities with high-risk characteristics like aluminum wiring, hazardous circuit breakers, polybutylene plumbing, wildfire risks, or poor claim history. In today’s insurance market, it is more common for communities without these unfavorable risk characteristics to be pushed into the E&S market with no standard market carriers willing to offer a quote. Without the E&S carrier solution, the community may otherwise be uninsurable.
Securing a quote from an E&S carrier is a very different process than securing a quote from a standard market carrier. Standard market carriers commonly offer online quoting platforms where you can secure a quote without much or any interaction with an underwriting professional. A clever commercial quip suggests obtaining a quote can be done in less than 15 minutes by homeowners with no insurance experience.
Securing an E&S quote typically involves many layers of insurance professionals. E&S carriers like Lloyds don’t work directly with the retail insurance brokers that community managers and their boards work with. Instead, they work with surplus lines brokers or wholesale intermediaries with whom retail brokers work to secure quotes for their clients. This distribution system serves an important function. With so much flexibility to adjust premium and coverage forms, interpersonal relationships are key in negotiating E&S quotes. E&S quotes cannot be built in 15 minutes or less, but the premium can certainly vary by 15% or more.
With so many Colorado communities now insuring with E&S carriers, premium increases are not the only change communities need to be prepared for. E&S carriers have incredible flexibility to manuscript coverage forms. These forms can be detrimental to a community if the broker isn’t thoroughly reviewing the coverage language. Below is an example of a manuscript coverage form our team recently identified in a carrier’s renewal quote.
We will not pay for loss or damage caused by or resulting from a fire that is lit in any outdoor cooking vessel, including but not limited to gas or charcoal grills, hibachis, kettle or drum grills, rotisseries, smokers, deep fat fryers and any other device intended for, or adaptable to, outdoor cooking, wherever used, including but not limited to inside the insured premises, outside of the insured premises on a balcony, patio, interior walkway, or outside and within ten feet of the insured premises.
The carrier including this coverage exclusion did not require grills to be prohibited from use as a condition of the renewal, nor did they draw attention to this exclusion being added to the renewal quote. Our long-standing relationship with our wholesale intermediary partner combined with their relationship with the carrier allowed for this unreasonable Outdoor Cooking Exclusion to be removed from the renewal quote with no change in premium. This was a big win for the community that avoided a potentially detrimental gap in coverage.
A common inclusion in E&S policies is the ‘Minimum Earned Premium Endorsement’. The minimum earned premium is the least amount of money an insurance carrier will accept for writing a policy for any period of time. A 25% minimum earned premium endorsement means the community is obligated to pay 25% of the annual premium regardless of how long they keep the policy in force. This helps the insurance carrier manage risk and cover administrative costs while also deterring policyholders from binding coverage only to cancel shortly thereafter.
In addition to the minimum earned premium endorsement, most E&S carriers include a short rate provision in their policy. This allows the carrier to charge a penalty when a policy is canceled before the expiration date. The short rate penalty is generally applied as a percentage of the unearned premium and can vary between policies and carriers.
Negotiations with E&S carriers often continue right up until the renewal date, leaving many boards wondering “Where is our renewal quote?”. As the insurance market continues to harden, often no single E&S carrier is willing to insure the total property value of a community. Your broker must work with their wholesale partner to build a ‘tower’ of insurance carriers to share in insuring your community, splitting the coverage into different layers. This is a complex process that takes time, switching carriers and their positions in the coverage tower to secure the most favorable combination for a community. A reputable broker experienced in insuring HOA’s will be able to provide the community with a realistic premium estimate within 30 days of the renewal, but a firm quote may not be ready until a few days before renewal.
The insurance market is cyclical. Excess & surplus lines carriers will not be the only viable option for so many Colorado communities forever. Standard market carriers will inevitably reenter the market, and competition will drive premiums down. Until then, insuring your community in the E&S marketplace should be done with care and in partnership with a broker with the experience and attention to detail needed to navigate the complexities of the surplus lines marketplace. Just as icons like Bruce Springsteen and David Beckham trusted the E&S marketplace with their most valuable assets, your community can find confidence in the E&S market. With experience and attention to detail, a reputable broker can guide you through the unique challenges of the surplus lines marketplace, ensuring your community's assets are properly protected.
Brad Henderson is the Executive Vice President at Network Insurance Services and leads their Community Association Division. His passion for problem-solving and building relationships led him to his niche focus in Community Association Insurance, where he enjoys a consultative approach to partnering with property managers and board members in navigating the complexities of commercial insurance.
