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InsuranceMan 2.0

Tuesday Morning Insurance Tidbit - E&S, FEP, MEP, PFA

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What a Glorious Tuesday Morning in ADI-ville!!!!!!


     A glorious day just in time to coincide with a glorious installment of the Tuesday Morning Insurance Tidbit.  Yes, I know … YOU’RE WELCOME!  As you see from the title, we will be delving into quite a few TLA's today.  What is a "TLA" you may ask?  Why, it is the Three Letter Acronym for a Three Letter Acronym (TLA)!  In today’s installment of the TMIT we are going to be discussing something that is becoming more and more prevalent in today’s insurance marketplace.  As you know from my posts like “The Times They Are a-Changin’” and “Standard vs. E&S”, there has been a tightening of underwriting guidelines as well as several carriers that simply are leaving the distillery insurance space which in turn is forcing several distillers to head into and Excess & Surplus (E&S) lines market.  With that comes some positive aspects, but also a few negative, which brings us to today’s topic. 

     When you deal with and E&S carrier a few things happen.  First is you get a hold of an insurance agent (but not just any insurance Shmoe, no … do yourself a huge favor and get a hold of an expert, someone like, oh, I don’t know ….. Hummmmm ……… let’s see here now …..  ME!!!!  Yes, InsuranceMan 2.0!!!).  Second, that agent assists you in finding out what kind of carrier is going to be interested in insuring your distillery.  Third, if it is either decided that you do not fit a standard carrier (maybe because the standard carriers have rejected to offer a proposal, or simply due to the insurance agent knowing that you will not fit due to location, exposures, etc.) the agent will employ an insurance broker to go out to the E&S markets in order to obtain a proposal for you.  Fourth, the agent provides you with the proposals and you make a decision based on coverage and premium.  Fifth, you sign all the paperwork and bind the coverage.  Last …  And this is where our topic for the day comes in, the last step is the insurance premium payment … Dun – Dun – DAAAAAHHHHHHHHH!!!!!!!!!!!!!!!!

     If you have been used to working with Standard carriers in the past, it is like running through a summery meadow full of flowers, fawns prancing about, the sound of a stream trickling in the distance.  Standard carriers don’t want any money down or up front, they will send you a direct bill invoice, maybe in 30 to 45 days from the issuance of the policy, and then you have several weeks after that to make sure you get your first payment in, and then, just when you thought it couldn’t get any better, IT DOES!!!!  They will break up the rest of the payments over the course of up to 9 installments and they may not even charge you a fee to do it!!!!!!!!!!!!!  W H A T ?!??!?!?!!  Is this insurance Heaven?!?!?!?!  Who does this?!??!?!?  Well, they do.

     However, as that one pretty smart dude stated a couple of years back in his Third Law of Motion, for ever action there is an equal and opposite reaction.  I am pretty sure he was talking about insurance and this topic.  E&S carriers are the complete opposite of Standard carriers.  Not only do they want 100% of the money up front (a.k.a. Fully Earned Premium or FEP / all the premium / cash on the barrel head / the whole enchilada), they also will hit you with things like “broker fees”, “inspection fees”, and “taxes”.  These items are also “fully earned”.  Just when you though it couldn’t get any tougher, they also subject you to a 25% Minimum Earned Premium (or MEP).  That means that even if you were to cancel the policy a few months in, they are going to retain 25% of the total amount of the premium plus all of the taxes and fees, no matter what!  WOWZA!  You ain’t in that Heavenly insurance field or in Kansas anymore, Dorothy!

     So, you have to come up with a huge wad of cash upon binding the policy and if you cancel you will lose 25% of the premium and all of the taxes and fees?!?!?!?  Yup, sorry Charlie.  The horror!!!!!  So, what can be done?!???!?!?!  Well, have no fear, InsuranceMan 2.0!!! is here!!!!!  I always am keeping a vigilant and weathered eye out for your best interest, dear reader, and I have your back … and your solutions.  There is a wonderful tool called a “Premium Finance Agreement” (PFA) and with that agreement it will allow you to make a down payment (although it still has to be the 25% of the premium plus all the taxes, fees, etc., ‘cause they are going to keep that no matter what) but then it allows you to break up the rest of the premium, potentially into 9 other installments.  Well, THAT’S BETTER than having to pay it all in full.  Although it is true that the premium finance companies are not just going to do this out of the goodness of their hearts, in fact, they are going to charge you an Annual Percentage Rate (APR) in order to provide you with this option.  But again, I have your back.  Because I work with so many distilleries and have such a good relationship with my premium finance company, I can often times get them to an APR of 7%-11% depending on the overall size of the account.  Sometimes even less!  Most agents and premium finance companies will hit you with a standard 12%-15% to start and I have even seen them as high as 24%.  Heck, you may as well pay your insurance on a credit card at that point!

     A few other things to be wary of in your insurance dealings with E&S carriers would be the cancellation provisos.  Some will offer a “Pro-Rata” cancellation term.  This means that once your 25% (plus taxes and fees) money is used up, if you cancel (for example 9 months in), they will refund you any unused portion of your premium payment back in full.  That is what you want!  The one to watch out for is the “Short-Rate Cancellation”.  In this method the carrier would retain a percentage of the unused premium that has been paid if you request a cancellation, and only refund a portion of your money back to you.  No Bueno!

     As it is with most things, there are a lot of moving parts when it comes to your distillery insurance as a whole, but if you get into a situation where you are dealing with an E&S carrier, those moving parts increase exponentially.  This is not something that you want the aforementioned Shmoe dealing with for you, is it?!?!??!  NO!  So get in contact with me, InsuranceMan 2.0!!! and let me put my expertise to work for you!  Until next time, dear reader …


Stay Vigilant,


Aaron Linden

a.k.a. InsuranceMan 2.0!!!



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