Margin Clauses

Blanket insurance is often the most effective and safest way to write property insurance on risks with multiple locations. Since the limit can be applied to any location, it lessens the likelihood of inadequate insurance due to fluctuating values. However, there appears to be an increasing use of margin clauses that limit coverage at a specific location to a percentage of the statement of values entry for that location. Here’s why you should be concerned….

Recently, we received the following email from someone obviously concerned about what appears to be an increasing trend in the use of margin clauses in blanket insurance. His concerns are followed by some opinions from our faculty. First, here are his concerns:

Margin clauses are being attached to Blanket Property programs all across the US. I have seen four in recent weeks, and only one was disclosed by the provider. I ran this by several other people and received responses from around the country affirming my sightings.

A Margin Clause is insidious. They are scary, scary, scary additions to the marketplace. First, they restrict blanket property coverage. Second, they aren’t a specific endorsement but rather a change either in the definition of limits or the application of blanket coverage. The producers, and occasionally the underwriters, aren’t disclosing their existence, and often don’t know what they do. Like I said, scary. This is a big-time E&O exposure.

The most common Margin Clause will change the Blanket Property coverage to either 110% or 125% of the amount shown for the respective location on the Statement of Values. I received a note today advising of a “Blanket” policy that limited coverage to the exact amounts shown on the Statement of Values. So much for Blanket coverage.

Let me provide the wording found on a major provider file I have had in the office for several years. It was rare three years ago, but it is widely used today.

Supplemental Coverage Declarations

A. BLANKET LIMITS

Insurance applies on a Blanket basis only to coverage for which a Limit of Insurance is shown below. The most the Company will pay for loss or damage in any one occurrence at any one premises is 125% of the value(s) for each Building or Structure and separately for the total of Business Personal Property (including but not limited to furniture and fixtures, machinery and equipment, “stock”, all other Business Personal Property owned by the Insured and used in the Insured’s business and the Insured’s use interest in Improvements and Betterments) at each location as shown in the latest Statement of Values or other documentation on file with the Company, nor shall liability exceed any specific Limit of Insurance applying to any Insured loss, coverage or location(s).

If, at the time of loss, the values shown on the latest Statement of Values or other documentation on file with the Company are not individually stated for each Building, each Structure, and Business Personal Property at each location:

1. The value for each Building and Structure will be developed by multiplying the total reported Building and Structure value by the proportion that the square footage of the individual Building or Structure bears to the total square footage of all Building and Structures contemplated in the total reported Building and Structure value.

2. The value of Business Personal Property at each location will be developed by multiplying the total reported Business personal Property value by the proportion that the square footage of all Buildings and Structures at the individual location bears to the total square footage of all Buildings and Structures at all locations contemplated in the total reported Business Personal Property value.

We ran this by our faculty and got the responses below. Depending on one’s perspective, there are reasons for and against the use of such clauses.

Response 1 
Think about a coinsurance clause with the blanket cover. I think these clauses are an attempt to get correct premium from insureds with large blanket limits where individual buildings are undervalued but there is more than enough blanket limit to cover any one loss.

The clause isn’t evil, it makes sense to convince insureds to properly insure the property to its ACV or RCV. Without it the insurer is asking for fraud. Agents and brokers should tell their insureds that the free lunch is gone and they should insure to value.

Response 2
I am not sure you want my opinion on this one. I have actually authored a few margin clauses for certain programs. My opinion may be slanted in a way you may not like. Anyway, margin clauses have their primary roots in market distrust. Over the years, the use of blanket limits has shifted from their original purpose of protecting fluctuating and shifting values. They are now more often used as an E&O protection and too often a marketing ploy.

When blanket values are properly used, most insureds should not be penalized by a 15% to 25% cap over SOV. If the insured truly shifts property more so, the cap should be negotiable. If the cap is limited to real property and inflation holds at under 6%, I again question the problem behind the margin cap. The problem comes when the SOV is not properly completed, either due to a mistake or knowingly under-reporting, the latter being the cause of the margin cap.

BTW, the endorsements I have written were all limited to real property and were generally at 25% over the SIGNED SOV. Without an SOV signed by the insured, the programs did not authorize blanket limits.

Response 3
Yes, of course, it obviously defeats the whole purpose of blanket coverage. If this kind of thing is being written on admitted paper, and the forms have not been filed and approved, I would question whether they are legally enforceable by the carrier. I believe there are at least a couple of NY cases on the issue of “bootlegged” forms.

One such case is National Union Fire v. Ambassador Group, 556 NYS 2d 549 (Appellate Division, 1st Department, 1990). It says that an unfiled form (endorsement to a D&O policy containing certain exclusions) is void “…only if the substantive provisions of the clause are inconsistent with other statutes or regulations. That is not the case here because there are no statutory standard forms for directors and officers policies in New York.” It refers to “penalties for non-filing” under Secs. 2307 and 3102 of the Insurance Law, and cites Metropolitan Life v. Conway, the famous opinion of Judge Cardozo about the incontestable clause in life insurance, and a case called Reddington v. Aetna Life, which had to do with double indemnity and total disability benefit riders to a life insurance policy.

So it appears that, for example, if a company has a filed form such as an ISO form it has adopted, and it uses a non-filed endorsement that is less favorable to the insured, that is not quite the same as having a non-filed endorsement that attempts to change a statutory form or statutorily required provision in a way that is less favorable to the insured.

Like a lot of NY insurance case law, this makes no sense to me because what is the real difference between: (1) a statutory form or a provision required by statute, and (2) a form that has been filed and approved when a statute says it must be filed and approved?

So unless this margin stuff could be said to conflict with the Standard Fire Policy in New York, I guess a company can get away with applying such a non-filed provision.

Plus, of course, in property insurance there is always the problem of which state’s law applies when you have a multi-state account.

Response 4
We are finding a reluctance to provide blanket at all. I think the industry still has a problem with underinsurance and one of the ways they are dealing with it is to refuse to blanket. Typical reaction of our industry…instead of trying to FIX the problem, we just penalize the insureds. I have not seen a margin clause, however.

Response 5 

1. Valuation is a problem in the insurance industry as old as time. Some of the clay tablet writing in ancient Middle east involved settlement disputes and the value of cargo.
2. Insurance to value is uncommon today. The 1999 Marshall & Swift review of over 900,000 properties using their system to determine valuation found 70% were under valued. The average under-valuation was 30%.
3. Some agents are notorious for abusing the concept of blanket property and playing the undervaluation game.
4. I have never performed an audit where we didn’t make substantial increases in values in property values. I want the insured to value the property at 100% of the replacement cost. We often add 5% as a margin for error. On a project we completed last week, their current school construction costs for new facilities are $68.50 per square foot. However, the property manager said that construction costs in their area are well below the norm due to the downturns in the economy. So we valued their schedule at $75.00, which is where he sees the cost to be if there is a little upturn in the construction business.

On this particular account, we found schools valued in the low $30.00 range and one well over $100. The average was probably $45.00 per square foot. In addition, we found between 25 and 30 facilities omitted completely. Several omitted items were valued in the $100,000 to $350,000 range. The board of education increased their property value to $75.00 average value, added millions in omitted facilities and EE coverage, increased their liability limits, and fired their prior agent. It was a $500,000 account.

5. Margin clauses on personal property are death to an agent. For example, school boards dispose of old texts in late May and June. They receive enormous sums in new texts in new books in July and August. The texts are distributed throughout their system prior to school starting. This throws the margin clause right out the window in terms of adequacy for about four weeks a year.

6. The process of administering an account with a margin clause is very difficult. On the account we placed last week, we made arrangements for each department head to receive a copy of the Statement of Values with property divided by department. Each department head knows the amounts of insurance assigned to their facility. They were each told that any change in the value of any building or the contents within any building must be reported to the finance department PRIOR to receipt of the property.

7. There will be a ton of E&O suits over margin clauses.

READERS…
What do you think about the validity and use of margin clauses? What is your recent experience…have you seen an increased use in them and, if so, what is the reasoning given by the underwriter? If you have an opinion, email it to me at Bill.Wilson@iiaba.net and we’ll (anonymously) post your comments here.

Response 6 
Your feed back here….