Crab Legs and Extensions of Coverage
In 2003 the Red Lobster seafood restaurant advertised “all you can eat” snow crab Legs. For about $20, diners were able to treat themselves to endless portions of snow crab legs. The promotion was an overwhelming success with patrons, and by the time the promotion ended seven weeks later, the chain had lost $3.3 million. The restaurant never anticipated diners consuming more than two servings, and the promotion occurred at a time when the price of snow crab legs was at a market high.
In the insurance industry, we often seek to differentiate ourselves from our competitors by the products that we offer but, as with the snow crab leg promotion, unexpected financial consequences can arise.
Homeowners and nearly all commercial property policies offer building, contents and some form of time element coverage: additional living expenses on Homeowners policies and business interruption on Commercial policies. What remains are the various extensions of coverage found in these basic policy forms. The ISO forms are good at defining coverage under these extensions in both scope and limits; however, companies might seek to broaden the coverage under these extensions or develop their own unique product to fit the business requirements of their policyholders.
Increased limits and ambiguously worded extensions of coverage can drive claim costs. Often, increased limits on building code coverage are exhausted, particularly on claims involving older buildings where electrical, plumbing and fire protection systems need to be brought up to code. Another example involves business interruption coverage under Businessowners (BOP) policies. Providing an extended period of restoration beyond the basic 12 months almost always increases the business interruption claim.
Cutting and pasting wording from one policy form to another creates its own set of issues. The new wording must be carefully examined to determine if and how it affects coverage elsewhere within the policy. Whether a company is revising existing language or developing its own forms, it can benefit by finding ways of refining and clarifying some of the exposure. When thinking about expanding coverage, consider defining terms, e.g., “occurrence,” or sub-limiting exposure to a specific dollar amount or a policy year aggregate. This could allow a company to offer the new coverage while still managing the exposure.
A Lesson Learned From the Oakridge Firestorm of 1991: This event occurred at a time when homeowners carriers were offering guaranteed replacement cost coverage at a nominal premium, often for an additional $1. In many cases the dwelling coverage under these policies was not updated for several years and did not reflect the current replacement cost. After the firestorm, a few insurers found themselves paying multiples of the policy’s dwelling limit to honor their commitments under the guaranteed replacement cost coverage. Following this event, companies placed a cap on replacement cost coverage to a percentage of the dwelling limit.
Competition benefits everyone; however, care must be taken to “look before we leap” and thoroughly evaluate how changes in the policy will alter exposure and possibly coverage elsewhere in the policy.