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Commercial Property: Stated Values, Total Limits and Calculating Premiums

Why would premium be charged on values that exceed the limit of coverage? 
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commercial property: stated values, total limits and calculating premiums

The ISO value reporting form—CP 13 10 0402—includes a section, "Reports In Excess Of Limit Of Insurance," which states that if the values reported exceed the limit of insurance, “We will determine final premium based on all the values you report, less 'specific insurance.'" However, the amount of coverage won't exceed the limit of insurance. 

Q: Why would the premium be charged on values that exceed the limit of coverage? 

Response 1: Having a total limit that is lower than the total insured values is a common issue for catastrophic risks including flood, wind and earthquake. An insured with a $10-million building may only have only a $1-million limit for flood. 

It also occurs on layered insurance programs and large property schedules. A primary property policy on a $100-million schedule may only provide the initial $10-million primary limit. An insured may also choose not to purchase full limits if they have a good geographic spread of risk. They may model their exposure and only buy limits up to their probable maximum loss. 

In either case, the underwriter considers both the total insured values and the total limit provided.

Most losses are partial losses. As the total values increase, both the likelihood of loss and the expected amount of loss usually grow. By disclosing all values to the underwriter, you provide them with the opportunity to charge an appropriate premium for the risk. 

Response 2: The purpose of the value reporting form is to allow the insured to pay for only what they report. It is the most accurate method of premium payment. However, it is the insured's responsibility to buy enough insurance for the highest limit they feel they will be reporting. The limit of insurance is the critical number because underwriters need to know their maximum exposure.

Insurance carriers only retain a certain amount of risk and reinsure the rest. The limit of insurance is what they work from for both reinsurance purposes and underwriting acceptability. The insured has the option of changing limits midterm, subject to underwriting approval.

Therefore, the insured has agreed by contract to report their actual values—even though the insurer has only agreed to pay up to the limit shown on the policy. If the insured has values in excess of their limit, then they should increase their limit of insurance or accept the fact they have chosen to self-insure the amount in excess of their limit—plus potential co-insurance penalties.

Response 3: I have accounts with hundreds of millions—or more than a billion—in property values, but the policy limits are tens of millions. The 500- or 1,000-year projections for flood, earthquake and windstorm are very modest compared to the aggregate sums at risk. 

The values reported represent the sums at risk. The limit of insurance is in the contract. 

Response 4: That provision is built into the form to encourage insureds to keep their agent up to date about increases in exposures. The audit process is all about pricing and rating. Coverage should always be determined between the insured and their agency.

And one more thing: Agencies are very wise to go through audits carefully and get in touch with clients who need higher limits. That can avoid errors & omissions losses based on the agency knowing the values are up and not doing anything about it.

This question was originally submitted by an agent through the Big “I" Virtual University's (VU) Ask an Expert service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

This article is intended for general informational purposes only, and any opinions expressed are solely those of the author(s). The article is provided “as is" with no warranties or representations of any kind, and any liability is disclaimed that is in any way connected to reliance on or use of the information contained therein. The article is not intended to constitute and should not be considered legal or other professional advice, nor shall it serve as a substitute for obtaining such advice. If specific expert advice is required or desired, the services of an appropriate, competent professional, such as an attorney or accountant, should be sought.

Monday, March 25, 2024
Commercial Lines
Virtual University