Margin-Clauses
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Margin Clauses Are Not Just Investment Matters Anymore
Lack of Understanding and Communication of Margin Clauses May Cause E&O Claims
For the last few years there has been great concern in our Industry with insurance to value on property coverages. The inCP 12 32 – Limitation of loss settlement – Blanket Insurance (Margin Clause) The Big “I” Virtual Risk Consultant Powered by Rough Notes (“VRC”) includes details on margin clause, its usage and history. As usual the PF&M section simplifies the discussion of margin clauses and makes it easy to understand. Here an excerpt: “This clause is a radical departure from the current approach to writing blanket coverage. Instead of each type of property covered at each location having the entire blanket limit of insurance available to pay the loss, the most paid for a building and/or its contents at a given location is the margin clause percentage multiplied by the value for the building and/or contents indicated on the statement of values. Example: We update the first example and treat it as if this endorsement is attached. Mars and Sons select a 120% margin clause on all its buildings and contents. The building destroyed by fire with a value of $650,000 on the statement of values but actually worth $5,500,000 receives $780,000, the $650,000 value indicated on the statement of values multiplied by the 120% margin clause. ”
The Coinsurance Clause has been the traditional method by which the insurer protected itself from under-insurance. Every beginning insurance student has to learn how the insurer can determine at the time of loss if the insured has purchased enough insurance and how the insurer can adjust the loss if the insured has not bought enough insurance. The fear of coinsurance problems has encouraged agents and insureds to circumvent the coinsurance clause by using techniques such as blanket coverage and/or agreed value provisions. Rather than solving the underlying problem of undervaluation, blanket coverage and agreed value provisions may have actually made the problem worse. The pressures of the market place on insurance price levels may have caused these techniques to encourage undervaluation by protecting the insured from the penalties not adequately insuring the property.
In response to this problem, the insurers are finding ways to address the undervaluation issues within the blanket coverage mechanism. Some insurers are insisting on provisions in blanket coverage that limit the loss recovery to the amount scheduled in the Statement of Values. This is not a standard ISO provision and therefore can be called by many different titles and located in different places in different policies. This is a particularly dangerous provision if undetected as it removes one of the principle advantages of blanket coverage.
A second way in which insurers are attaching the problem of undervaluation in blanket coverage is the “Margin Clause.” While this clause is less offensive than limiting coverage to the Statement of Values, it still mitigates the principle advantage of blanket coverage. A Margin Clause operates to limit the recovery in the event of a loss to a specified percentage in excess of the amount scheduled in the Statement of Values, such as 125% or 150%. This does give some margin of error in the valuation process but does not open up the entire policy limit to a loss as does a pure blanket coverage.
Both of these methods to limit coverage available under blanket coverage have been used for years in very large schedules or property programs with very large limits because of the difficulty in valuation and the consequences of undervaluation. However, recent evidence indicates that these provisions are beginning to show up in property policies of lesser size and complexity. Agents should be warned to ask their underwriters about the presence of such provisions and examine new and renewal polices for these provisions. Once discovered effort should be made to have them removed from the coverage. If the insurer is not willing to remove such provisions, then the agent should make sure that insureds are advised of the presence of such provisions and have good file documentation of the disclosure. Disclosure and documentation are our best defense against E & O claims.
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