Occurrence Forms and Sunset Clauses

When discussing general liability insurance, clients sometimes ask, "Now, will this policy cover me for ten years into the future because my buddy tells me I need to make sure I get a policy that covers my work for ten years?" There are many even in the insurance industry who do not understand this concept, so I wanted to provide you with some quick background information.

General Liability policies generally do not say that they cover for 10 years. Instead, a standard full occurrence policy is designed to cover bodily injury and property damage that occur during the policy period. The key is that the damage--not the work--must have occurred during the policy period. If the damage happened after the policy has ended, then the policy would not be interested in responding to the claim because the damage did not occur during the policy period. If there was damage done during the policy period but the damage was not noticed for three years, then the claim should still be covered under the original policy because the damage occurred during the policy period.

Then why do we hear about a 10-year occurrence policy if the occurrence form does not talk about 10 years and only talks about covering occurrences that happen during the policy period? The 10 years generally refers to the statute of limitations for reporting a claim. Historically, the statute of limitations for reporting a claim has been 10 years and if you want to make sure that you have a policy that will cover you throughout the time when claims can come against you, then you assume that you want the 10 year full occurrence policy even though “10 years” does not appear in the policy wording. That makes sense, but again, the full occurrence policy still only covers occurrences that happen during the policy period; not occurrences that happen eight or nine years after a policy period.

Now, many carriers do not offer the standard occurrence form but they modify it in one way or another. They typically will add a sunset clause or a manifestation provision. The sunset clause is pretty simple to understand. It basically just shortens the reporting period. If there is a 2-year sunset clause then you have 2 years to report any claims for damage done during the policy period. If there is a 5 year sunset clause, then you have 5 years to report any claims for damage done during the policy period. What is interesting about sunset clauses is that, at least in California, the statute of limitations is based on the type of defect and is often much shorter than 10 years. Here are some examples from California Civil Code section 896:

1. Plumbing and sewer issues 4 years
2. Electrical systems issues 4 years
3. Cracks in Driveways, sidewalks, pathways 4 years
4. Irrigation and drainage issues 1 year
5. Untreated wood post deterioration 2 years
6. Untreated steel fence deterioration 4 years
7. Paint and stain deterioration 5 years
8 Landscaping systems 2 years
9. Dryer ducts 2 years

The manifestation provision is a little trickier. With the manifestation occurrence form you still have the 10-year reporting period as with the standard, but the occurrence has to have become known (or made evident, or obvious) during the policy period. This form would not want to cover a situation where the damage became apparent after the policy period even if the damage occurred during the policy period and they often require that the damage be obviously apparent. That is, unlike a full occurrence policy, the manifestation policy doesn’t want to send out a team of scientists to determine whether or not there was a microscopic crack in a pipe during the policy period that caused damage to occur at a later date. The manifestation policy wants to see that there was a water leak that first occurred during the policy period and it was apparent to anyone who walked in and got his/her feet wet even if the claim wasn’t filed until years in the future.

As you can imagine, you’re generally going to pay more for the standard occurrence form than the modified forms. Some carriers will offer the manifest provision in conjunction with a sunset clause which would reduce the premium even more.

I know this is a bunch of insurance-eze, but these are important concepts for you to understand when purchasing this important coverage, especially when there are many brokers out there who are giving incorrect information on this. I hope that this information will help you in the future.

Premium Audits

It seems that I have been getting a lot of calls lately regarding premium audits. On commercial insurance policies, insurance carriers have the right to do an audit, usually at the end of the policy period. They do this to evaluate that you were charged the appropriate premium for the coverage that you received for the prior year. These audits are usually very simple and are either done over the phone with a third party auditing service, or done by a self-audit. In either case you would answer a few questions about your payroll and/or gross receipts for the policy period. Remember that your initial premium is based on estimated amounts, so at the end of the policy the carrier wants to know what the actual numbers were. This keeps people from "estimating" extremely low so as to get a cheaper premium, knowing that their actual numbers are going to be significantly higher. I generally tell people when I am asking for estimates for the coming year to give me an honest estimate, but that it is okay to estimate on the low side. Just be prepared that at premium audit time that you may be billed for additional premium at the end of the policy. It is always easier for the carrier to come back and ask you for more money than it is to get money back from the carrier later on.

BizAssure Premium Business Consulting Service

I am so excited to announce to you that as an Orr & Associates client you have access to BizAssure, Premium Business Consulting Service at no charge. BizAssure offers free help for our clients, offering quick answers to your business questions. Right when you need it. Right over the phone. BizAssure can help you with your legal, accounting and human resourse questions, and much, much more.

Orr & Associates has invested in this program on your behalf to help protect our clients because we recognize that protecting your business can require more than insurance. For example, we help clients with fire insurance, but we have seen more clients suffer financial loss from issues involving firing an employee than an actual fire burning their building. Protecting yourself from this kind of "fire" is just as important to your financial future and we are pleased to provide this service as a benefit to you for placing your business with Orr & Associates.

All you need to sign up for this program is an in-force insurance policy with Orr & Associates (it can be any line of business). You will need to sign the BizAssure membership agreement and get it back to me. Shortly after that you will receive a welcome packet from BizAssure with your membership number and directions on how to access their service representatives.

Those of you who are already O&A clients can give me a call and I will get the BizAssure membership agreement to you, or you will notice that is will be included with our quote to you upon your policy renewal.

If you would like more information about this program before signing up, you can always give me a call or you can check out their website at www.bizassure.com.

I hope that you take advantage of this wonderful service. We do not make any additional money from your BizAssure membership. It is purely a benefit we offer to our clients. As a BizAssure member myself, I have used the service for legal advice, employment practices advice, tax advice and much more. Trust me, no question is too big or too small. Once you become a member we encourage you to use the service and experience how this consulting service can benefit your business.

California Admitted vs. Non-Admitted Carriers

I get asked quite often about admitted and non-admitted carriers when providing quotes to my clients. This is a good question since it causes confusion about the type and quality of the coverage we are offering. I hope the following explanation helps to clarify the difference. For more information, please visit my website at www.insuranceprotection.net.

Some insurance companies do business in California on an "admitted" basis and some do business on a "non-admitted" basis. This designation does not indicate the financial strength of the insurance company or the insurance company's ability or willingness to pay claims. An independent company that rates insurance companies can be visited on the web at: www.ambest.com. For example, Evanston Insurance Company is a non-admitted carrier in California and they have an A, IX (9) rating. This is a very high rating and you can see the explanation of the ratings at the A.M. Best website. Lloyds of London also does business in California on a "non-admitted" basis and has a rating of A+15. By comparison, a large percentage of our building contractors are insured with a company called Lincoln General. Lincoln General is admitted, but has a lower rating of A-,VII.

You can also check the California Department of Insurance for more information. http://www.insurance.ca.gov/. The list of companies that are allowed to do business in California on a "non-admitted" basis are on what is called the LESLI list. You can type this in the website's search for more information on this list. I have been told that the requirements for being on the LESLI list are actually more stringent than for those that want to pay the dues to be on the list of companies doing business on an "admitted" basis.

In a nutshell, I see no problem with non-admitted companies and think that you should look at the financial rating of a company as determined by A.M. Best instead of whether a company wants to pay into California to be called an "admitted" company. We send requests for quotes out to underwriters and receive back quotes from admitted and non-admitted companies in nearly equal amounts depending on the work being performed by the insured. We ask them for the best price with solid companies, but we can ask them specifically to provide us quotes only with admitted companies if you want to see if there is an admitted company that would insure you and at what price. Keep in mind, however, that often times if the underwriter provides us with a quote from a non-admitted carrier it is because there is not an admitted market for the type of work you may be doing.

Performance Bonds

It seems I have gotten a lot of calls lately from my contractor clients asking about performance bonds. Being in a building project myself where my general has abandoned the project (thankfully not a client of mine), I can see why people are requiring this type of bond before allowing a contractor to begin work on a given project. Usually there is a required bond amount set forth by the owner or other interested party and this bond becomes available to that party should the contractor fail to complete the project or portion of the project. Contractors usually have to have these bonds in place, or at least the cost included at the time of bidding a particular project. So, I get calls wanting to know how much these bonds cost so that the contractors can include the price in the bid. Well the rates on bonds is associated with the credit and financial outlook of the contractor. Generally the rate is 3-5% of the bond amount depending on credit. Depending on the size of the bond the application process can be lengthy, and it can take a few days to get the formal quote from the surety company.

Welcome

Welcome to my weblog and thanks for paying my site a visit. The intent of this blog is to bring some clarity to the maze you face when buying insurance for your business. You probably get confusing messages along the way between what you are told you should have and what someone else is requiring you to have to protect your business. You've probably got all kinds of new terms thrown in your face that you need an insurance dictionary to help you translate. I'm here to help. You can check out my website for additional information or feel free to send any questions my way and I will make sure your topics get addressed here.