A Commercial Insurance Guide: Underwriting Security CompaniesWhat's the mindset of an underwriter who is pricing a security company's liability?
By Blair Brownyard
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 ·m crease, this seems like a reasonable proposition. Why all the increases? The simple fact is that liability claims involving the Private Security Industry are increasing at an alarming rate. 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.
How Do Insurance Companies Underwrite Security Companies?
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.
- Prior Loss/Claim Experience
- Type of Operations
- Company Management and Sophistication
- Contract Language
1. 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, all discussed below.
2. Types of Operations
Different clients will bring different risk to your company. 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 gate 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
- Movie Theaters or Malls
3. 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 ASIS International standards are still in development. Underwriters look for the highest required standards.
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.
4. Contract Language
Insurance companies will look at your contracts to see how you are protecting yourself in the event of a claim. Your Clients, the Public, and sometimes even the courts think of a security guard service as the protector and the insurer of life and property! Unfortunately, many 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
The reasonable Hold- Harmless (indemnification) Agreements:
"[XYZ Security ] agrees to defend indemnify, and hold harmless [your client] against any claim, loss, damage, expense, or liability (including attorney’s fees) arising out of the negligence or willful misconduct of [XYZ Security], its officers, employees, subcontractors, or agents, regardless of whether [your client] is negligent, in whole or in part.” This is reasonable because only your guard’s negligence is the basis of liability, no more.
The unreasonable Hold- Harmless (indemnification) Agreement:
"[XYZ Security] agrees to defend, indemnify, and hold harmless [your client] against any claim, loss, damage, expense or liability (including attorney’s fees) arising out of the negligence or willful misconduct of [XYZ Security], negligence or willful misconduct of [XYZ Security], its officers, employees, subcontractors or agents, regardless of whether [your client] is negligent, in whole or in part.” This is unreasonable because the contributory negligence defense is removed; the guard company takes all risk of liability.
Additional Insured Requirements
This is usually confirmed to them by a CERTIFICATE OF INSURANCE.
- The Reasonable Additional Insured Request: "[Your Client] and its affiliates are included as an additional insured on the general liability policy, but only with respect to the negligent acts, errors or omissions of the named insured."
- The Unreasonable Additional Insured Request: "... but only as respects the negligent acts, errors or omissions of the Named Insured" be REMOVED.
With this language removed, the guard company [Named Insured] is responsible to defend and indemnify ALL losses incurred by the certificate holder/additional insured.
Because of the contract between the guard company and the client, the guard service is required to defend their client.
Blair Brownyard has been the VP of Brownyard Programs, Ltd. and has worked exclusively with the security industry for the past 7 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.