Tuesday Morning Insurance Tidbit - Identity Confusion

[InsuranceMan]

Good Tuesday Morning fellow ADI-ers,

     In today’s installment of the “Tidbit”, I am going to address a topic that I have been running into more and more lately and it is of utmost concern.  Specifically the issue of "Policy Identity Confusion".  I kid you not, out of the last dozen or so policies that I have looked at from other agents, (and keep in mind, they are not insurance superheroes like me, InsuranceMan 2.0!!!, they are just plain-old insurance drones) I have seen this issue no less than 5 times!  5 TIMES, PEOPLE!!!!!  That is almost half!!!!!!  Goodnight, that is A TON, and it is scary!!!!!  It sends shivers down my super-spine to know that this is happening.  What am I talking about?  Non-other than the scary and fearsome “Material Change of Risk” clause contained within the deep dark recesses of your insurance policies.

     Oh, this area of the policy is in the darkest, spookiest, musty smelling, nastiest, dankest, most cobweb-riddled area that only the most stoic of insurance superheroes dare tread!!!!!!  Alas, I, InsuranceMan 2.0!!! not only will tread into this fray, but I will shine my bright beacon of insurance knowledge on it for you in order to make it wither and wilt in front of your very eyes so that you do not fall victim to it!!!!

     So, what exactly is this, what is a “Material Change of Risk”?  A material change of risk, by most policy standards is defined as ”An act or omission by the insured or his representative (that means “your agent”) that constitutes material misrepresentation or nondisclosure of a material fact in obtaining the policy, continuing the policy, or presenting a claim under the policy;  Increased hazard or material change in the risk assumed that could not have been reasonably contemplated by the parties at the time of assumption of the risk; Substantial breach of contractual duties, conditions, or warranties that materially affects the insurability of the risk;  A fraudulent act against the company by the insured or his representative that materially affects the insurability of the risk”.

     OK, so now we know what the definition of this is, but what affect can it have on a policy?  Who cares?!?!  Well, you may care greatly if you fall prey to this proviso.  If it is deemed that there is or has been a “Material Change of Risk” to your policy, the carrier could do any number of things.  They could choose to increase your premiums pro-rata for the duration of the rest of the policy term (by a lot, in some cases); They could decline the payment of a claim due to this increased or prohibited change; Or they could outright cancel your coverage with the proper (albeit, short) notification. 

     “Why are we even discussing this?!?!?!  I would never intentionally do something like this!!”   I know you wouldn’t, dear reader, I know you wouldn’t.  Likely as well, your agent would not knowingly pull the wool over anyone’s eyes either, but sometimes these things can happen unknowingly, and sometimes, unfortunately, with knowledge.  But, back to the original issue at hand, as well as those highlighted in RED above.  What I have seen recently are distillery policies that have been placed with insurance carriers that improperly classify the type of business within the General Liability Class-code Section of the policy (this would be a “condition” that could “materially affect the insurability of the risk”).  This is the section of the policy that shows what classifications of business you are covered for, how much premium is to be charged based on your sales figures, and the overall “meat” of your policy and coverage determinations.  Ah, now this is all starting to come together, right!?!?!?

     I have seen many recent DISTILLERY POLICIES that have been classified under one of the following class codes:

51350  Beer, Ale or Malt Liquor Mfg. – In Bottles

51351  Beer, Ale or Malt Liquor Mfg. – In Cans

51352  Beer, Ale or Malt Liquor Mfg. – Not Bottled or Canned

     Yes, it is so much clearer now and you are tracking where this is all going, aren’t you?  If you are a “DISTILLERY” but you are classified as a “BREWERY”, and that is what is shown in your General Liability hazard class schedule, and this is the determination of the premium you are paying for, do you think that could potentially result in a “Material Change of Risk”?  OF COURSE IT CAN!!!!!

     As we all know, in simplistic terms, beer could be used to dowse a fire if need be.  What happens though if that same fire comes in contact with Vodka for instance?  Yuppers, big ol’ fire and things that go boom.  As well, breweries typically are not prone to the ill effects of fire, whereas distilleries have a much higher risk and concern of fire.  I dare say that if you have been erroneously classified as a brewery and suffer a loss as a distillery, that very well could constitute a “Material Change of Risk” and the carrier may deny the claim on the basis of this provision, leaving you in quite the lurch.

     Many times, this classification identity issue is not done intentionally, rather it is simply due to the fact that the agent handling the policy may not be familiar with working with distillery clients.  They very well may figure, “Booze is booze, what’s the difference?”  Maybe they really have no clue that there even is a difference and they really think they have classed this correctly.  Either way, the policy is written for what it is written for, and there is no, “Hey, if this was a mistake, don’t worry about it” clause!  The policy is the policy and the coverage is the coverage.

     I will say, I have also seen the seedy underbelly of the insurance beast as well, where an agent knowingly improperly classified an account to either beat the prior premium, or to make it fit a carriers underwriting guidelines in order to “make a sale”.  FOR SHAME!!!!!  Tsk on those evil-doers!!!!!!  Regardless of how or why it was done, at the end of the day it is you and your business that could suffer the wrath of this policy condition and we don’t want that!

     Keep in mind that there are many insurance providers in the country that will write coverage for breweries all the live long day.  Those same carriers that love breweries however have no tolerance to knowingly write coverage for a distillery.  So, if you were placed with a carrier such as this, and you were improperly classified, chances are that they could cite this “Material Change of Risk” provision that is placed in the policy for just this type of circumstance.  That could mean that you have to pay through the nose once it is figured out, or you could be cancelled or denied coverage.  All rather bad situations!

     How are you classified?  What classifications are on your policy?  Do you know?  Have you looked?  What would happen in the case of a claim?  As I always say, the worst time to find out what you are and are not covered for is after a loss has already occurred.  You need to know, NOW!  You need to be confident that the insurance company will be there for you should you ever need them.  If you don’t know, if you are not certain, maybe it is time to call in an expert.  Perhaps someone that knows these policies and carriers inside and out.  Someone who has “Insurancevision X-Ray Powers”, that can see deep into the inner workings of your policy’s soul.  Someone like … InsuranceMan 2.0!!!

 

Until Next Time My Friends …  Stay Vigilant!

 

Aaron Linden

a.k.a. InsuranceMan 2.0!!!

(307) 752-5961

insuranceman2.0@yahoo.com