By Timothy H. Delaney and Steven O’Shea
The second half of 2021 is looking very positive for many businesses in the travel and hospitality sector as recreational and corporate travelers return to vacations and meetings. If you are like most luxury transportation operators, you’re emerging from the COVID crisis with a different mix of business and drivers than you had pre-pandemic. In the search to restore lost revenue, you may be reaching out to old clients while exploring new business opportunities. It’s important, however, to ensure that you are properly protected against these risks, and understand what you can do to get the very best outcome from the current insurance landscape.
First Things First
Before heading back on the road, you need to first contact your insurance broker to make sure that all of your vehicles are properly covered. Many of you suspended or modified your policies during the pandemic, so be sure you reinstated your insurance coverage before you put those vehicles back in service. It’s also imperative that you communicate to your insurance broker the specific nature and details of the work you intend to perform for your clients, both old and new. These details will help your broker to paint the clearest picture of your business and allow insurers to appropriately assess your risk. It should be noted, however, that an insurer’s assessment of risk is only part of what can drive pricing in the insurance market. Depending upon your operation, your insurance coverage may be affected by a reinsurance or excess policy. Let’s discuss how and why.
Reinsurance Explained
Some insurance carriers buy reinsurance, and its cost is one factor that most people do not consider. Think of reinsurance as insurance for insurance companies. Reinsurance may be purchased for an insurer’s entire book of business or just for a single risk. Either way, pricing for reinsurance on transportation risks has been on the rise for a decade, and has continued to climb throughout the pandemic.
What’s more, years of nuclear verdicts—in which juries award sums of money to claimants that far exceed what would be expected given the economic damages in the case—and escalating loss costs have led some reinsurers to leave the transportation sector altogether. Those that remain committed to passenger transportation have been forced to cut capacity, or the maximum amount of liability they are willing to assume, and raise prices significantly. Reinsurers often view the experience of insurance carriers, and follow trends in capacity and pricing closely as an indicator of the market’s rate adequacy (whether insurance rates are appropriate for the risk).
“Excess” Explained
Typically, most luxury transportation companies carry the legally required insurance limit of the state in which they are operating, or they comply with federal guidelines if their business crosses state lines. These insurance policies generally range in coverage from $500,000 to $5 million, known as the primary insurance policy, and acts as a first line of defense against claims. However, many theme parks, casinos, or schools will require operators to maintain insurance limits “in excess” of their primary insurance policy. Let’s say an operator with a $5 million primary insurance policy secures a contract to transport passengers to and from a nearby casino. A stipulation of the contract requires the operator to carry $10 million of insurance coverage. To secure this business and meet the insurance limit requirements, this operator will have to obtain an excess insurance policy to close the coverage gap—in this example, $5 million—between the primary insurance policy and the coverage required in excess of that primary policy.
“This rise in nuclear verdicts, along with litigation funding, specialist attorneys, and increasing health care costs have all significantly influenced the way insurance companies evaluate risk.”Excess insurance does not broaden the stated coverage of the primary policy; it only adds a layer of protection in case the underlying limit of the primary policy is not sufficient. Consequently, purchasing an excess policy on top of your primary policy to meet a contractual coverage limit requirement (or gap) will increase annual insurance costs. Historically, the cost of excess limits was nominal. However, with the outbreak of nuclear verdicts and unprecedented loss costs inflation over the last ten years, the price of excess limits has skyrocketed. In the simplest terms, as the likelihood of a serious claim exhausting all available limits has increased exponentially, the cost of buying those limits has as well.
Impact to Your Insurance Policy
At a time when we’re all watching every penny, you’re likely wondering how the cost of your insurance premiums factors into your bottom line. The commercial auto market, including the luxury passenger transportation sector, has experienced the worst underwriting results within the insurance industry for the past ten years. These poor operating results have not only left primary insurance carriers in the red for most of the past decade, but has hit reinsurance and excess markets hard as well. According to the American Property & Casualty Insurance Association, claims for injuries incurred in crashes involving commercial vehicles that have resulted in awards in excess of $10 million grew from $300 million in 2011 to nearly $1 billion in 2018/19. This rise in nuclear verdicts, along with litigation funding, specialist attorneys, and increasing health care costs have all significantly influenced the way insurance companies evaluate risk. Fewer carriers are willing—or simply unable—to ignore the daunting claims data. In order to stem the losses, primary insurers can cut the coverage limits they offer and raise premium rates. Clearly, luxury transportation companies have felt the consequences of those decisions with their policy renewals over the past several years.
Limiting the Impact of Increased Costs The best defense strategy you can employ to limit the impact of increased insurance costs is to make sure your business is taking all of the necessary steps to operate in the safest way possible. In today’s volatile claims environment, it’s more important than ever to be ultra-selective in hiring drivers (we understand that hiring is a challenge for many operators right now), to establish companywide policies and procedures addressing every facet of your operation, and to ensure that those policies and procedures are clearly communicated to your staff AND your customers. Also, a financial investment in dashboard cameras now can help fight fraud, protect your company and your drivers, provide better customer service, maximize efficiency, and save you money in the long run.
While the cheapest claim to defend is one that doesn’t happen, a culture of safety and compliance, dashboard cameras, and prompt and detailed claims reporting is going to put an operator in the best position should one occur. Besides, passenger transportation companies that embrace these concepts with vigor will likely find insurance more affordable and readily available. [CD0621]
Timothy H. Delaney is the Senior Vice President of Lancer Insurance. He can be reached at thdelaney@lancerinsurance.com and Steven O’Shea is Assistant Vice President and can be reached at soshea@lancerinsurance.com