Sharing the Risk: Is One Policy Enough?

Sometimes it’s difficult to get enough insurance coverage from a single insurer for your company’s needs. Perhaps you have an outsized risk or your industry is facing higher claims payouts than the insurers can cover.

You might want to have more than one insurer cover your property or liability risk for numerous reasons. In these cases, your agent or broker will layer excess insurance on top of your base policy to provide extra monetary protection. This is known as a tower of insurance.

If your business requires layered insurance, your agent will coordinate and negotiate with the insurance carriers that are in the market to offer portions of the coverage you need. Typically, these insurers will follow the terms outlined in the baseline, or primary, insurance policy.

If you have a claim exceeding the amount covered in the baseline policy, the next layer of insurance will provide more money but will follow the rules stipulated by the first policy. If your claim exhausts that second layer, the third will step in, and so forth.

For example, say you have a directors and officers (D&O) liability policy as your primary policy. Only those named in the primary policy would be covered by the other insurance policies in the tower.

Is insurance layering new?

Layered insurance isn’t new. But it is expanding into industry segments and types of insurance policies it hasn’t used before.

Insurance towers have been common for a long time in D&O insurance and for very large accounts, where companies’ need for insurance reaches far beyond what one insurer will cover. But now, industry segments such as hospitality, multifamily housing in coastal areas, truckers, health care organizations and energy producers are finding it hard to get enough insurance from a single company.

Even small and midsize companies are experiencing the effects of restricted coverage. For those in need of cyber insurance, D&O or commercial auto insurance, constraints on coverage are common.

Coverage limits can leave businesses with millions of dollars of exposure, so it’s important to find a set of insurers that will provide complementary excess coverage to close the gaps in financial protection.

Are there alternatives to towers of insurance?

Layered insurance is not the only way to get the amount of coverage you need. There are three other common ways businesses secure higher insurance limits.

Quota shares

In a quota share, multiple insurers participate in the primary layer of coverage. Each insurer that participates in the primary layer of insurance takes up a percentage of the loss (and a percentage of the premium).

For example, consider two insurers in a quota share, each carrying 50% of a primary $5 million policy. If there was a $5 million loss, each of the insurers would pay $2.5 million (minus the deductible, which they would also likely split 50/50). Terms of the share of loss, deductible and premium are all worked out by the insurance broker.

Self-insured retentions

In a self-insured retention (SIR), the business itself takes on a portion of the claim, whether a percentage or a dollar amount. The business acts as the primary insurer, paying the first amount of a claim up to a specified amount. Once that is paid, the insurance company steps in and pays its share.

This may sound like a deductible, but there are differences. They mostly have to do with collateral requirements, defense costs and certificates of insurance. Your broker can explain these differences further.

Not all lines of insurance coverage are eligible for SIRs, but if this option interests you, discuss it with your insurance advisor.

Managing general underwriters and program managers

Some managing general underwriters and program managers provide adequate limits for small to midsize firms. They can often cater to industry niches without involving other insurers.

Layering and quota sharing are becoming more popular, especially in areas where high losses are common. This gives businesses of all sizes more options than ever to get the level of coverage they need. So if your insurer wants to renew your policy with lower limits, ask your insurance professional about the possibility of using a tower, a quota share arrangement or some other method of increasing your insurance limits.

Remember to discuss the costs as well as the benefits, because in some cases your premiums could be affected. Also, work with your agent or broker to make sure that the terms in the excess policies match the primary policy. Sometimes wording is ambiguous, which can result in disputes and even litigation.

You will also want to check on sublimits, which constrain the amount of insurance available for one element of a claim, such as pollution liability or sexual molestation.

Done right, layered insurance can give you solid protection against large financial losses.