Introduction to Insurance

Presented by Marcus Beverly, First Vice President, Alliant Public Entity, at the Public Agency Risk Management Association (PARMA) Conference in Sacramento, California, February 2023

“Insurance may be a necessary evil, but it’s not inherently evil.” It can help you reach your goals much more quickly and efficiently in the right circumstances.

That is the message in the opening slide of Marcus’ presentation and the message to a risk pool of cities shortly after he was hired to manage the group. They had been burned by the insurance crisis of 1986 and were determined not to rely on insurance going forward. They were self-insuring up to $7.5M per occurrence with a goal to reach $10M. We reviewed options to lower their self-insured retention (SIR) to $5M and purchase $5M in excess coverage, allowing them to reduce their risk, achieve their $10M goal and save money due to the excess insurance costing less than their actuary’s projection.

After setting the stage by illustrating that insurance is one of several financial tools to reach your goals, the remainder of the presentation focused on outlining the coverages that attendees will most likely encounter, as well as how to read a policy and how to analyze policies for coverage of a specific claim.

Risk Financing

Insurance fits into the risk management process as one method of risk financing, to include retention, or self-insurance, and transferring the risk via contracts with other parties providing goods and services as well as commercial insurance. 

Retention

To retain or transfer risk depends on several factors. Retention is the least expensive option for the routine risks you can afford to pay on your own, are relatively predictable and are considered a cost of doing business for which you can budget.

Transferring Risk

You can transfer unusual and unpredictable risks you can’t afford to pay by contracting to others and/or by purchasing insurance.  Contractual risk transfer involves a contract with a good hold harmless agreement in your favor, backed by insurance from the contractor. The presentation referenced Alliant’s Insurance Requirements in Contracts (IRIC) which is updated annually.

Contractual risk transfer to insurance is the only way to transfer your sole negligence but it is limited to what the market offers, the contract terms and the limits of coverage themselves.

Insurance Coverages

First-party coverage is for losses suffered by the insured (property, auto, crime, cyber) while third-party coverage is for losses caused by the insured (general and professional liability, pollution and cyber). Cyber coverage is an example of both types of insurance since it covers insured losses as well as liability to others for a data breach.

A general review of each of the major types of coverage, included an illustration of the difference between occurrence and claims-made coverage. A review of other insurance requirements, including additional insured status, primary coverage and waiver of subrogation were included, as well as specialized coverage that may be required, including for childcare, transit, drones and employment practices liability. Also discussed was the role of risk-sharing JPAs or pools play in providing coverage for most public entities and the differences in form and content with commercial insurance.

Insurance Policy Construction

The presentation reviewed and provided sample terms for the various sections of insurance policies using the acronym, “DICED”: 

DECLARATIONS - Personalized policy

INSURING AGREEMENT - Promise to pay

CONDITIONS - Mutual obligations

EXCLUSIONS - Perils or circumstances not covered

DEFINITIONS - Special terms in bold or quotes

Coverage Analysis

Marcus provided a framework for analyzing coverage as well as the types of exposures that are ideal for underwriters and the four categories of most policy exclusions.

Ideal Insurable Loss Exposures

• Fortuitous – Occurring by chance. Uncertain as to whether, when or how a loss will occur.
• Definite – Occurrence, time and cost is clear. Can be verified and quantified.
• Large Numbers - As in law of. More similar risks = greater predictability.
• No Catastrophes – One event won’t affect many insureds.
• Affordable – Economically feasible. Not too broad for average risk.

Coverage Analysis - “PPPEC”

PERSON - Who has rights to recover?

PROPERTY- Is the property covered?

PERIL - Is the loss covered?

EXCLUSIONS - Do any provisions include “take away” coverage?

CONDITIONS - Have both parties met their obligations?

Exclusions - Most fall within 4 major categories

• Public Policy Prohibits Coverage
  • Intentional “acts”
  • Moral hazard
• Other Insurance Applicable
  • Including higher risk for affordability
• Catastrophic Exposure – war, nuclear, EQ
  • Law of “too large” numbers
• Business/“Uninsurable” Risk
  • Breach of contract, loss of market
  • Morale hazard – maintenance, neglect

Additional issues outside the policy can impact coverage , including public policy, the insurance code, case law and the fact that commercial insurance is a contract of adhesion – meaning that any ambiguity in coverage terms are resolved in favor of the insured. This has an impact on how coverage is interpreted and why the PPPEC analysis is done in that order.

“Adhesion” and Burden of Proof

• PERSON
• PROPERTY - Insured has the burden of proof and these terms are interpreted broadly to favor the insured.
• PERIL

• EXCLUSIONS – Insurer has the burden of proof and these terms are interpreted narrowly, again to favor the insured.
  • Exception to exclusion – Insured burden, broad interpretation
• CONDITIONS

For more information, consider the International Risk Management Institute (IRMI) as a resource.