AN INSURANCE GUIDE: THE MINDSET OF AN UNDERWRITER IN THE PRIVATE SECURITY INDUSTRY
Blair Brownyard, Brownyard Programs
To the business world, insurance is a necessary evil. However, with insurance costs increasing each year, many security companies would go naked, if their clients didn’t insist that they carry insurance. No doubt after your latest renewal increase, this seems like a reasonable proposition. To minimize your next rate increase, here is the mindset of an insurance underwriter who is asked to underwrite and price the liability insurance of a private security company.
With most products, you know what the cost is when they are sold. Not so with insurance products; an insurance company doesn’t know how much their product costs until 5-10 years after they have sold it. And that’s why the pricing of liability insurance is so unpredictable. To give themselves an edge in predicting how much they pay in claims versus how much they received in premiums, insurance companies develop underwriting guidelines/criteria/signposts, which are supposed to help them determine the probability of losses with a specific type of insured to help them make a profit. The four basics of underwriting guidelines are:
- Prior Loss/Claim Experience
- Type of Operations
- Company Management and Sophistication
- Contract Language
- Prior Loss/Claim Experience
This is one of the most critical elements in underwriting a company. Review your current claims through your insurance broker and be aware of your current claim expenses and reserves annually. A poor claim history has a big impact on your premium costs. A poor claim history is due to a number of factors, some of which can be avoided based on the factors below.
- Types of Operations
Different clients will bring different risk to your company because many types of operations have historically brought more likelihood of claims. Your large contract with a fast food chain could be enticing for the money but may result in adverse loss experience and a higher insurance premium. Conversely, a gated community client may help reduce your underwriting factors to the carrier, thus decreasing your premiums. Here is a general list of high risk operations that create higher than average premiums. The locations of these operations are also a big factor – the higher the crime in the area, the higher the risk:
- Anywhere alcohol is served or sold
- Crowd control at stadiums, events, or concerts
- Low-income housing
- Fast food chains
- Schools
- Movie Theaters or Malls
- Company Management and Sophistication
Underwriting will typically look at a number of factors relating to how well the company is run from a management perspective. Here are three items that help decide how well the company operates.
Screening, Training, and Supervision
Insurance companies look to the business practice of a company in their requirements for education, training, and supervision of employees. This varies across states and the industry as a whole. The 2018 28-member ASIS standards and guidelines commission has decided there would only be guidelines suggested within the industry and not a set industry standard for all to achieve. With regard to underwriting, underwriters will still look for the highest required guidelines in the industry and rate the company to those suggested guidelines.
Pay Scale and Benefits Given to Employees
Offering higher pay attracts higher qualified, better trained applicants. This translates to smarter, more qualified employees who perform better. And if the company provides health, life, or pension/profit sharing plans, this makes for a more satisfied and healthier employee who is less likely to act negligently or file frivolous workers comp or employee practices claims.
What is the Education/Background of the Principals
Experience in private security, law enforcement, or military, etc. as well as involvement in security management training through organizations like ASIS International or other business programs are positive impacts on the operations of the company and show underwriters an ability of management to overcome obstacles.
- Contract Language
Insurance companies may look at your contracts to see how you are protecting yourself in the event of a claim. Unfortunately, your Clients, the Public, and sometimes even the courts think guard companies are deep pockets to cover losses in the event of personal injury. This is attempted by clients in two ways:
- Indemnification Agreements
- Additional Insured language
INDEMNIFICATION AGREEMENTS
In construction or service contracts, a hold-harmless or indemnity agreement will be included in the general contractor’s contract to the subcontractor. In order for your security company to limit claim expense and payments, the clause should not include the liability and mistakes of anyone except your own employees. The larger property managers/owners force many broad form indemnity agreements on the security companies for a deep pocket in the event of any accidents on premises. The good news in California is that an indemnity clause for your client’s sole or willful acts is void by public policy. However, be aware, many will still try to pass it through in their contracts.
Additional Insured LANGUAGE
Closely related to indemnity agreements discussed above, additional insured endorsements are used to increase the obligation of your company to defend and indemnify the owner. This indemnity is usually confirmed to them by a certificate of insurance. Your underwriter will be asked to approve additional insured endorsements for many companies by contract. But as parties requested have less and less relation to the contract, the underwriter will likely question the need for such an endorsement. Any additional insured and indemnity requests need to be scrutinized here to limit the exposure for claims. Like all contracts and RFPs, it is advised to have counsel review these clauses to ensure your client is not trying to shift a disproportionate amount of risk to your company.
All factors discussed above are the basics for all underwriting in the security industry. Many might dive deeper into data on location of operations or screening processes. And many might try to look at seemingly unrelated issues. This is all part of the investigative process to ensure the risk is being adequately evaluated for claim potential. This is not an exact science, maybe someday we will have exact predictions of claims, but we are not there yet. It is important to note that security risks are high-severity risks and not high-frequency; e.g. many companies can go decades without one liability claim and then get hit with a monster claim. That is the nature of a security risk; a very unpredictable nature. For now, the underwriting process is a moving target for all carriers, and security companies will be best served by building a trusting, open relationship with a reliable carrier who truly understands their industry.
Blair Brownyard has been the VP of Brownyard Programs, Ltd. and has worked exclusively with the security industry for the past 8 years. He has a J.D. from Touro Law in Central Islip, NY. Brownyard Programs, Ltd. has underwritten the security industry for the past 25 years and was purchased by Crum & Forster Insurance in 2015 to join forces with the other oldest name in security insurance, CoverX Specialty. Together, Brownyard Programs and the experienced team rebranded as Crum & Forster Specialty, have a suite of innovative products and services to grow with the security industry into the next generation.
This information contained herein is provided for information purposes only and is not intended to be a representation of coverage that may exist in any particular situation under a policy issued by one of the companies within Crum & Forster. All conditions of coverage, terms, and limitations are defined and provided for in the policy. This information is intended for use as a guideline and is not intended as, nor does it constitute, legal or professional advice. In no event will Crum & Forster or any of its affiliates be liable in any manner to anyone who has access to or uses this information.