What is Commercial Insurance? A Comprehensive Guide for Businesses

Commercial insurance is a cornerstone of sound business practice. Whether you’re launching a startup, managing a growing enterprise, or overseeing a long-established corporation, understanding and securing the right commercial insurance is a vital investment. It’s the financial safety net that protects your business from unforeseen events that could otherwise lead to significant financial losses. In the unpredictable world of commerce, commercial insurance offers crucial protection against common risks such as property damage, business interruptions, theft, liability claims, and employee injuries.

Choosing the appropriate commercial insurance coverage isn’t just about ticking off a legal requirement; it’s about safeguarding your company’s future. The right policy can be the deciding factor between weathering a severe setback and facing business closure. This guide will delve into the essentials of commercial insurance, helping you navigate the complexities and make informed decisions to protect your business.

Understanding Commercial Insurance Basics

What is Commercial Insurance?

Commercial insurance, also known as business insurance, is a type of insurance specifically designed to protect businesses and their assets from financial risks. Unlike personal insurance, which covers individuals and their personal belongings, commercial insurance addresses the unique risks and liabilities associated with operating a business.

At its core, commercial insurance is a contract between a business and an insurance company. In exchange for regular premium payments, the insurance company agrees to cover specific financial losses outlined in the insurance policy. These losses can arise from a wide range of events, from natural disasters and accidents to lawsuits and employee-related incidents.

Commercial insurance is not a one-size-fits-all solution. Policies are tailored to meet the specific needs of different types of businesses, industries, and risk profiles. A small retail store will have different insurance needs compared to a large manufacturing plant or a professional services firm. The types of coverage, policy limits, and premiums will vary depending on factors such as the nature of the business, its size, location, and perceived risks.

Why is Commercial Insurance Important?

Operating a business inherently involves risks. From everyday accidents to major unforeseen events, businesses face potential liabilities and losses that can impact their financial stability and even their survival. Commercial insurance acts as a crucial risk management tool, offering several key benefits:

• Financial Protection: Commercial insurance protects your business from potentially devastating financial losses. Unexpected events like property damage, lawsuits, or business interruptions can lead to significant expenses. Insurance helps cover these costs, preventing your business from absorbing the full financial burden.
• Legal and Contractual Requirements: Many industries and contracts require businesses to carry specific types of commercial insurance. For example, workers’ compensation insurance is legally mandated in most states to cover employee injuries. Clients or partners may also require proof of liability insurance before entering into business agreements.
• Business Continuity: Events like fires, natural disasters, or major equipment breakdowns can halt business operations. Business interruption insurance, a component of commercial property insurance, can help replace lost income and cover ongoing expenses while your business is recovering and getting back on its feet.
• Protection Against Liability Claims: Businesses are vulnerable to lawsuits from customers, employees, or third parties for bodily injury or property damage. Commercial general liability insurance protects against these claims, covering legal defense costs and potential settlements.
• Peace of Mind: Knowing that your business is adequately insured provides peace of mind. It allows you to focus on growth and operations without constantly worrying about the potential financial consequences of unexpected events.
• Enhanced Credibility and Customer Trust: Having comprehensive commercial insurance can enhance your business’s credibility and build trust with customers, partners, and stakeholders. It demonstrates that you are a responsible and reliable business that takes risk management seriously.

Types of Businesses That Need Commercial Insurance

Virtually every business, regardless of size or industry, needs some form of commercial insurance. The specific types and amounts of coverage will vary, but the fundamental need for protection remains constant. Here are some examples of businesses that particularly benefit from commercial insurance:

• Small Businesses and Startups: Small businesses often operate with limited financial reserves. A single significant loss could be financially crippling. Commercial insurance is essential for protecting their investments and ensuring longevity.
• Retail Businesses: Retail stores face risks such as property damage, theft, customer injuries on premises, and product liability. Commercial property, general liability, and business interruption insurance are crucial.
• Service Businesses: Professional service providers like consultants, accountants, and lawyers need professional liability insurance (errors and omissions insurance) to protect against claims of negligence or errors in their services.
• Construction and Contracting Businesses: These businesses face high risks of property damage, worker injuries, and liability claims due to the nature of their work. Commercial auto, general liability, workers’ compensation, and builders’ risk insurance are vital.
• Manufacturing Businesses: Manufacturers have significant investments in equipment, inventory, and facilities. They also face product liability risks. Commercial property, product liability, and equipment breakdown insurance are essential.
• Restaurants and Hospitality Businesses: Restaurants face risks such as food contamination, customer injuries, property damage, and liquor liability (if serving alcohol). General liability, commercial property, and liquor liability insurance are important.
• Online Businesses and E-commerce: Even businesses operating primarily online need insurance. Cyber liability insurance is increasingly important to protect against data breaches and cyberattacks. Professional liability and business interruption insurance can also be relevant.
• Non-profit Organizations: Non-profits are also susceptible to liabilities and property risks. They need similar commercial insurance coverage to for-profit businesses, tailored to their specific operations and exposures.

Navigating the Process of Purchasing Commercial Insurance

Working with a Broker-Agent: Your Key Resource

Purchasing commercial insurance can seem complex, given the variety of coverage options and policy details. This is where a licensed insurance broker-agent becomes an invaluable asset. Think of a broker-agent as your expert guide in the commercial insurance landscape. They act as intermediaries between you and insurance companies, simplifying the process and ensuring you get the right coverage at the best possible price.

A reliable broker-agent offers several key advantages:

• Expertise and Market Knowledge: Broker-agents specialize in commercial insurance and possess in-depth knowledge of different industries, risks, and insurance products. They understand the nuances of policy language and can navigate the complexities of the insurance market on your behalf.
• Access to Multiple Insurers: Unlike agents who typically represent a single insurance company, brokers work with multiple insurers. This allows them to shop around and compare quotes from various providers, ensuring you have access to a wider range of options and competitive pricing.
• Customized Coverage Solutions: A good broker-agent takes the time to understand your business operations, assess your specific risks, and recommend tailored coverage solutions. They don’t just sell policies; they provide consultative advice to meet your unique needs.
• Time Savings and Efficiency: Dealing with insurance applications, policy comparisons, and paperwork can be time-consuming. A broker-agent handles these tasks for you, freeing up your time to focus on running your business.
• Claims Assistance: In the unfortunate event of a claim, your broker-agent can act as your advocate, guiding you through the claims process and helping ensure a fair and efficient resolution.
• Ongoing Support and Policy Management: Your relationship with a broker-agent extends beyond the initial policy purchase. They provide ongoing support, policy reviews, and adjustments as your business evolves, ensuring your coverage remains adequate and up-to-date.

Finding the Right Broker-Agent

Selecting the right broker-agent is as crucial as choosing the right insurance coverage. A strong broker-agent relationship can be a long-term partnership that significantly benefits your business. Here are some effective ways to find a reputable and competent commercial lines broker-agent:

• Seek Referrals from Business Contacts: Tap into your professional network. Business contacts, especially those in your industry or related fields, are excellent referral sources. Ask for recommendations from trusted colleagues, mentors, or business advisors who have had positive experiences with their broker-agents.
• Utilize Professional Broker-Agent Associations: Professional associations like the Independent Insurance Agents and Brokers of America (IIABA) or the National African American Insurance Association (NAAIA) can help you find licensed commercial insurance broker-agents in your local area. These associations often have online directories or referral services to connect you with qualified professionals.
• Online Directories and Reviews: Online platforms like Google Maps, Yelp, or industry-specific directories can help you locate broker-agents in your vicinity. Pay attention to online reviews and ratings to gauge the reputation and service quality of different brokerages.
• Local Yellow Pages (though less common now): While less frequently used in the digital age, the local yellow pages or online directories can still provide listings of insurance broker-agents specializing in commercial insurance in your area.
• Verify Licensing: Once you have a shortlist of potential broker-agents, it’s essential to verify their licenses with your state’s Department of Insurance. This ensures they are authorized to sell commercial insurance in your state and are in good standing.

What to Expect from Your Broker-Agent

Once you’ve initiated contact with a broker-agent, you should expect a professional and consultative approach. Here’s what you can typically anticipate:

• License Verification: Reputable broker-agents will readily provide their license information. You can also independently verify their license status through your state’s Department of Insurance website. In California, for example, you can use the California Department of Insurance (CDI) website to verify licenses.
• Initial Consultation and Business Assessment: The broker-agent will schedule a meeting to discuss your business operations in detail. They will ask questions to understand your industry, size, location, assets, employees, and potential risks. This thorough assessment is crucial for tailoring appropriate coverage.
• Policy Review (if applicable): If you currently have business insurance, the broker-agent will ask to review your existing policy. This is a standard practice to identify any coverage gaps, overlaps, or areas for improvement in your current protection. They will analyze your policy limits, exclusions, endorsements, and coverage terms.
• Information Gathering and Application Process: The broker-agent will guide you through the application process, explaining the necessary information and documentation required by insurance companies. They will help you complete applications accurately and efficiently.
• Obtaining Quotes and Policy Options: Based on your business assessment and coverage needs, the broker-agent will obtain quotes from multiple insurance companies. They will present you with a range of policy options, explaining the coverage details, premiums, deductibles, and policy terms for each.
• Recommendations and Guidance: Your broker-agent will provide expert recommendations based on their analysis of your needs and the available policy options. They will help you understand the pros and cons of different coverages and guide you in making informed decisions.
• Transparency and Communication: A good broker-agent maintains open and transparent communication throughout the process. They should be responsive to your questions, clearly explain complex insurance concepts, and keep you informed about policy details and any changes.
• Ongoing Relationship: Remember that your broker-agent relationship is meant to be ongoing. Expect them to be a resource for policy renewals, coverage adjustments, claims assistance, and any insurance-related questions you may have in the future.

Types of Commercial Insurance Coverage

Commercial insurance is broadly categorized into two main types: Property Insurance and Casualty Insurance. Each category encompasses various lines of coverage designed to address specific risks businesses face.

Property Insurance

Property insurance protects your business’s physical assets from loss or damage due to covered perils. This includes buildings, equipment, inventory, and other business personal property. Common types of commercial property insurance include:

Commercial Property Insurance

This is a fundamental coverage that protects your business’s physical property. It typically covers:

• Buildings: Coverage for owned or leased buildings and structures, including permanently installed fixtures and equipment. The policy limit should reflect the cost to rebuild or replace the building in case of total loss, subject to coinsurance clauses.
• Business Personal Property: Covers furniture, equipment not permanently installed, inventory, and other personal property owned and used in your business.
• Personal Property of Others: Protects property in your business’s care, custody, and control that belongs to others, such as customer property or leased equipment.

Coverage Sections, Limits of Insurance, and Coinsurance: Commercial property insurance policies have specific coverage sections, limits of insurance, and often include coinsurance clauses.

• Coverage Sections: As mentioned above, coverage is typically divided into building coverage, business personal property coverage, and personal property of others coverage.
• Limits of Insurance: This is the maximum amount the insurance company will pay for a covered loss. It’s crucial to set adequate limits based on the value of your insured property.
• Coinsurance: This clause requires you to insure your property up to a certain percentage of its value (e.g., 80% or 90%). If you underinsure and don’t meet the coinsurance requirement, you may face a penalty at the time of a loss, where you may not receive full claim payment even if the loss is less than the policy limit.

Covered Causes of Loss: Commercial property policies specify the “causes of loss” (perils) they cover. You can typically choose between:

• Specified Perils Coverage: This covers losses only from perils specifically listed in the policy, such as fire, lightning, windstorm, hail, explosion, vandalism, and theft. You can choose basic or broad specified perils coverage, with broad coverage adding more perils to the list.
• Open Perils Coverage (also known as “All Risks”): This provides more comprehensive protection, covering all causes of loss unless specifically excluded in the policy. Common exclusions include earthquake and flood. Open perils coverage is generally more expensive but offers broader protection.

Valuation Types: Policies also specify how losses will be valued and paid. Common valuation methods include:

• Actual Cash Value (ACV): This method pays the fair market value of the damaged property at the time of the loss, which is typically the replacement cost minus depreciation. In California, ACV is generally considered Fair Market Value unless defined otherwise in the policy.
• Replacement Cost Value (RCV): This pays the cost to replace damaged property with new property of like kind and quality, without deduction for depreciation. RCV coverage may also be subject to coinsurance requirements.
• Agreed Value: This method is used for unique or hard-to-value items, such as artwork or antiques. The insurer and insured agree on a specific value for the property beforehand, and in the event of a covered loss, the agreed-upon amount is paid. Agreed value coverage typically waives coinsurance.

Coverage Forms and Endorsements: Commercial property policies can be customized with various coverage forms and endorsements to address specific needs. Common examples include:

• Builder’s Risk Insurance: Covers buildings under construction, alterations, or repairs.
• Legal Liability or Fire Legal Liability Insurance: Protects tenants from liability for damage they cause to rented property due to covered perils.
• Building Ordinance or Law Coverage: Covers increased costs due to enforcement of building codes during repair or reconstruction after a covered loss.
• Improvements and Betterments Coverage: Protects permanently installed improvements made by tenants that cannot be removed.
• Glass Coverage: Covers damage to glass, often with options for basic specified perils or broader coverage, and specialized glass forms for significant glass exposures.
• Peak Season Endorsement: Increases coverage limits for business personal property inventory during peak seasons when inventory values are higher.
• Inflation Guard Endorsement: Automatically adjusts coverage limits to account for inflation, helping maintain adequate coverage over time.
• Time Element Coverage (Business Interruption and Extra Expense): Covers indirect losses stemming from direct property damage.
  • Business Interruption Insurance: Replaces lost business income due to a covered property loss that disrupts operations.
  • Extra Expense Insurance: Covers necessary extra expenses incurred to keep the business operating or minimize business interruption after a covered loss.
  • Loss of Rents and Rental Value Insurance: Protects property owners from lost rental income if a covered loss makes a property uninhabitable.

Inland Marine Insurance

Despite its name, inland marine insurance doesn’t cover ocean-going vessels. Instead, it’s a specialized type of property insurance that primarily covers:

• Property in Transit: Damage to or loss of business property while it’s being transported, whether by truck, train, or other means.
• Mobile Equipment and Property: Items that are frequently moved from one location to another, such as contractors’ equipment, tools, and mobile medical equipment.
• Unique or Specialized Property: Items that don’t fit neatly into standard commercial property coverage, like fine art, jewelry, or electronic data processing equipment.
• Liability for Property in Your Care, Custody, or Control during Transport: If you’re responsible for transporting someone else’s property, inland marine can cover your liability for damage to that property during transit.

Covered Causes of Loss: Standard perils covered in inland marine policies may include fire, lightning, windstorm, flood, earthquake, landslide, theft, collision, derailment, overturn of a vehicle, and bridge collapse.

Coverage Forms and/or Specialty Coverages: Inland marine offers flexible coverage through various forms and specialty coverages, including:

• Accounts Receivable Insurance: Protects against losses due to uncollectible accounts receivable if records are damaged or destroyed.
• Consignment Insurance: Covers goods held on consignment.
• Equipment Floaters (e.g., Contractors Equipment Coverage): Covers mobile equipment and tools used by contractors.
• Installation Floaters: Covers equipment and materials during installation at a job site.
• Motor Truck Cargo Insurance: Specifically designed for businesses that transport goods for hire, covering their liability for damage to cargo.
• Trip Transit Insurance: Covers specific, one-time shipments.
• Valuable Papers and Records Insurance: Covers the cost to reconstruct or replace valuable documents and records.

Boiler and Machinery Insurance (Equipment Breakdown Insurance)

This coverage, also known as equipment breakdown insurance or systems breakdown insurance, is crucial because standard commercial property policies often exclude losses caused by boiler and machinery malfunctions. It covers:

• Physical Damage to Business Property: Damage to boilers, machinery, and equipment due to covered breakdown events.
• Other Property Losses: Consequential losses resulting from equipment breakdown, such as spoilage of goods due to refrigeration failure or business interruption.
• Legal Fees: May cover legal expenses if a breakdown leads to liability claims.
• Inspection and Maintenance Costs: Some policies include coverage for inspections and even maintenance of boilers and machinery, helping prevent breakdowns.

Types of Equipment Covered: Boiler and machinery insurance can cover a wide range of equipment, including:

• Boilers and Pressure Vessels:
• Heating, Ventilation, and Air Conditioning (HVAC) Systems:
• Electrical Systems:
• Refrigeration Systems:
• Manufacturing Machinery:
• Computer Systems and Technology Equipment:

Crime Insurance

Crime insurance protects your business from financial losses resulting from various criminal acts. It’s considered a property insurance line and can cover losses due to:

• Robbery: Taking property by force or threat of force.
• Burglary: Unlawful entry into premises with the intent to steal property.
• Larceny: Theft of property.
• Forgery: Falsifying documents or signatures for fraudulent purposes.
• Embezzlement: Theft of funds or property by an employee.
• Computer Fraud and Funds Transfer Fraud: Losses resulting from cybercrime.

Specialty Crime Coverages: Depending on your business’s specific needs and exposures, you can add specialty crime coverage parts, such as:

• Mercantile Open-Stock Burglary Insurance: Covers burglary of merchandise displayed or stored outside a safe.
• Mercantile Robbery Insurance: Covers robbery of merchandise, money, and securities.
• Mercantile Safe Burglary Insurance: Covers burglary of safes and vaults.
• Money and Securities Broad Form Policy: Provides comprehensive coverage for loss of money and securities.
• Office Burglary and Robbery Insurance: Tailored for office environments.
• Storekeepers Burglary and Robbery Insurance: Designed for retail store owners.

Casualty Insurance

Casualty insurance primarily focuses on protecting your business from liability exposures – the legal responsibility for injuries or damages caused to others due to your business operations. Common types of commercial casualty insurance include:

Commercial Automobile Insurance

Commercial auto insurance is similar to personal auto insurance but tailored for vehicles used for business purposes. It protects your business from:

• Liability for Bodily Injury and Property Damage: If you or your employees cause an accident while driving a company vehicle, commercial auto insurance covers the costs of injuries and damages to third parties.
• Damage to Covered Autos: Coverage for physical damage to your company-owned or leased vehicles due to accidents, theft, vandalism, or other covered perils.
• Medical Payments: Covers medical expenses for you and your passengers if injured in a covered accident, regardless of fault.
• Uninsured/Underinsured Motorist Coverage: Protects you if you’re involved in an accident caused by a driver with no insurance or insufficient insurance.

Coverage, Classification, and Limits of Insurance:

• Coverage Options: Commercial auto policies (Business Auto Policy – BAP) offer flexibility to cover various types of vehicles (owned, leased, hired, non-owned) and usage scenarios (business, personal use). Coverage is assigned using “covered auto symbols” to designate which coverages apply to specific vehicles listed on the policy.
• Classification: Vehicles are classified by weight (light, medium, heavy, extra heavy) and use (private passenger, service, commercial) to determine premiums.
• Limits of Insurance: Unlike personal auto policies with split limits (separate limits for bodily injury and property damage), commercial auto policies often use a Combined Single Limit (CSL). CSL provides a single, higher limit that can be applied to either bodily injury or property damage claims, or a combination of both, per occurrence. Common CSLs are $500,000 or $1,000,000.

Commercial General Liability (CGL) Insurance

CGL insurance is a cornerstone of liability protection for most businesses. It’s designed to be comprehensive, covering a wide range of liability exposures unless specifically excluded. CGL policies typically include three primary coverage sections:

• Premises Liability: Protects against claims arising from accidents and injuries that occur on your business premises (e.g., slip-and-fall accidents) or due to your business operations, whether on or off your premises.
• Products Liability: Covers liability for bodily injury or property damage caused by your company’s products, whether manufactured, sold, handled, or distributed.
• Completed Operations Liability: Protects against claims arising from your completed work or services, even after the job is finished. For example, if faulty installation work leads to injury later on.

Major Exclusions: While comprehensive, CGL policies have standard exclusions, including:

• Intentional Injury: Damage intentionally caused by the insured.
• Contractual Liability: Liability assumed under certain contracts (unless specifically insured).
• Liquor Liability: Liability related to serving alcohol (requires separate liquor liability coverage).
• Workers Compensation and Employers Liability: Employee injuries (covered by workers’ compensation insurance).
• Pollution Liability: Pollution-related damages (often requires specialized pollution liability coverage).
• Aircraft, Automobile, Watercraft, Mobile Equipment Liability: These are generally covered under specific auto, aviation, or marine policies.
• War and Military Action:
• Care, Custody, and Control: Damage to property in your care, custody, or control (may require bailee’s coverage).
• Damage to Your Work: Covers damage to your own work arising from your work (often excluded or limited).
• Impaired Property: Loss of use of property due to a defect in your product or work, but not physical damage to the property itself (often excluded or limited).
• Sistership Liability: Costs associated with recalling products due to a known defect (typically excluded).
• Failure to Perform: Breach of contract or failure to fulfill obligations (not typically covered by liability insurance).

Classification: CGL policy classification is based on the type of business you operate, using specific industry codes to categorize risks and determine premiums.

Limits of Insurance: CGL policies have various limits of insurance:

• General Aggregate Limit: The maximum amount the insurer will pay for all covered claims under Coverage A (Bodily Injury and Property Damage Liability), Coverage B (Personal and Advertising Injury Liability), and Coverage C (Medical Payments) during the policy period.
• Products-Completed Operations Aggregate Limit: A separate aggregate limit specifically for claims arising from products liability and completed operations hazards.
• Per Occurrence Limit: The maximum amount the insurer will pay for any single occurrence (accident or event).
• Personal and Advertising Injury Limit: A per-person or per-organization limit for claims related to personal and advertising injury (e.g., libel, slander, copyright infringement).
• Damage to Premises Rented to You Limit (Fire Legal Liability): Covers damage to premises you rent, specifically for fire damage caused by your negligence.
• Medical Payments Limit: Covers medical expenses for injuries to third parties on your premises or due to your operations, regardless of fault.

Commercial Umbrella Insurance (Excess Liability Insurance)

Commercial umbrella insurance provides an extra layer of liability protection above the limits of your primary liability policies, such as commercial auto, CGL, and employer’s liability (part of workers’ compensation). It’s also known as excess liability insurance.

• Excess Coverage: When a liability claim exceeds the limits of your primary policies, the umbrella policy kicks in to cover the excess amount, up to its own policy limit. This can protect your business from catastrophic financial losses in the event of a large lawsuit.
• Broader Coverage: In some cases, a commercial umbrella policy may provide coverage for certain risks or situations not covered by your primary policies, filling in potential coverage gaps.
• Self-Insured Retention (SIR): Umbrella policies typically have a Self-Insured Retention (SIR), similar to a deductible. If a claim is covered by the umbrella policy but not by an underlying primary policy, you must pay the SIR amount before the umbrella coverage applies. A common SIR is $10,000.

Workers Compensation Insurance

Workers’ compensation insurance is legally required in most states for employers. It provides benefits to employees who suffer work-related injuries or illnesses, regardless of fault. It’s a “no-fault” system, meaning employees don’t need to prove negligence to receive benefits.

Coverage Sections: Workers’ compensation policies have two main parts:

• Workers Compensation (Part One): Covers statutory benefits mandated by state workers’ compensation laws. This includes medical expenses, lost wages (partial wage replacement), rehabilitation costs, and death benefits for work-related injuries or illnesses.
• Employers Liability (Part Two): Protects employers against lawsuits from employees or their families for work-related injuries in situations not covered under workers’ compensation statutes. This can include claims for consequential bodily injury, loss of consortium, dual capacity claims, or third-party over actions.

Classification and Rating:

• Classification: Workers’ compensation classification is based on the specific job duties performed by employees. Classifications are developed and assigned by organizations like the Workers Compensation Insurance Rating Bureau (WCIRB).
• Rating: Each classification code has an associated rate, and premiums are calculated based on payroll and these rates.
• Experience Modification: The WCIRB also calculates an experience modification factor based on a company’s past claims history. A better claims history results in a lower experience modification, reducing premiums, and vice versa.

Claims: Workers’ compensation claims are handled through state-specific workers’ compensation systems, not through the Department of Insurance. In California, the Department of Industrial Relations, Division of Workers’ Compensation, handles claim-related issues.

What Is a Business Owners Policy (BOP)?

A Business Owners Policy (BOP) is a pre-packaged insurance policy specifically designed for small businesses. It combines several essential coverages into one convenient policy, often at a more competitive premium than purchasing each coverage separately. BOPs typically include:

• Commercial Property Insurance: Coverage for your business’s building and business personal property.
• Commercial General Liability Insurance: Coverage for premises liability, operations liability, products and completed operations liability, and advertising and personal injury liability.
• Business Interruption Insurance: Coverage for lost income and continuing expenses if your business operations are disrupted due to a covered property loss.

Eligibility for BOPs: BOPs are best suited for small, low-risk businesses that meet specific underwriting guidelines, such as:

• Size Limitations: Often limited by square footage for office, retail, or apartment risks.
• Industry Restrictions: Typically designed for “main street” businesses like retail stores, service businesses (barbershops, accountants), and low-density apartments.
• Risk Profile: Businesses with higher-risk operations or significant liability exposures may not qualify for a BOP.

Advantages of BOPs:

• Convenience and Simplicity: Combines essential coverages into one policy, simplifying insurance management.
• Cost-Effectiveness: Often more affordable than purchasing individual policies separately.
• Tailored for Small Businesses: Designed to meet the common insurance needs of smaller enterprises.

How Are Commercial Policies Rated, Deductibles Selected, and Premiums Developed?

Understanding how commercial insurance policies are rated and premiums are calculated can help you make informed decisions about your coverage and costs.

Policy Rating: Rating is the process of determining the premium for an insurance policy. Rating factors vary depending on the line of insurance:

• Commercial Property Insurance Rating: Factors often include:
  • Square Footage of Building:
  • Type of Construction: (e.g., frame, masonry, fire-resistive).
  • Sprinkler System: (sprinklered vs. non-sprinklered).
  • Fire Protection Class: Based on the fire department’s rating for the area.
• Commercial General Liability Insurance Rating: Rating exposures can be based on:
  • Square Footage: For premises liability.
  • Payroll: For certain service-based businesses.
  • Gross Sales: For retail or product-based businesses.
• Workers Compensation Insurance Rating: Based on employee classification codes and payroll.
• Commercial Auto Insurance Rating: Factors include vehicle type, usage, garaging location, and driver characteristics.

Deductible Selection: A deductible is the amount you pay out-of-pocket for a covered loss before your insurance coverage kicks in.

• Impact on Premium: Generally, higher deductibles result in lower premiums, as you’re assuming more of the risk yourself. Conversely, lower deductibles mean higher premiums.
• Risk Tolerance: Choose a deductible amount that aligns with your business’s financial capacity and risk tolerance. Select a deductible you can comfortably afford to pay in the event of a claim.

Premium Development: The basic premium calculation formula is:

Rate x Exposure = Premium

• Rate: A price per unit of exposure (e.g., rate per $1,000 of property value, rate per $100 of payroll). Rates are determined by insurance companies based on risk assessments, claims data, and other factors.
• Exposure: The measure of risk being insured (e.g., building square footage, payroll amount, gross sales).

Modification Factors: The basic premium can be further adjusted by various modification factors:

• Experience Modification (Workers Compensation): As discussed earlier, this adjusts premiums based on past claims experience.
• Schedule Rating: Uses debits and credits based on specific risk characteristics of your business that are not already reflected in the base rate (e.g., safety programs, loss control measures).
• Judgment Rating: Underwriters may use their judgment to adjust premiums based on unique or unusual risk factors not captured by standard rating formulas.

It’s crucial to discuss policy rating and premium calculation with your broker-agent to fully understand how your premium is determined and explore options for managing costs, such as adjusting deductibles or implementing loss control measures.

What Do I Need to Know About Commercial Claims?

Understanding the commercial claims process and your responsibilities is essential for smooth and efficient claim handling.

Reporting Claims:

• Timely Reporting is Crucial: Your insurance policy requires you to report claims “promptly” or “as soon as practicable.” Delaying claim reporting can hinder the investigation process and potentially jeopardize coverage.
• Contact Your Broker-Agent or Insurer: When a loss occurs that may lead to a claim, immediately contact your broker-agent or the insurance company directly. Your broker-agent can be a valuable first point of contact and guide you through the initial steps.
• Provide Detailed Information: When reporting a claim, be prepared to provide as much detail as possible, including:
  • Date, time, and location of the incident.
  • Description of what happened.
  • Details of any injuries or property damage.
  • Contact information for any witnesses or involved parties.
  • Policy number and relevant policy information.

The Claims Process:

1. Claim Reporting: You report the claim to your broker-agent or insurance company.
2. Claim Acknowledgement and Assignment: The insurance company acknowledges receipt of the claim and assigns a claim adjuster to handle the case.
3. Investigation: The claim adjuster investigates the claim to determine coverage, assess damages, and gather information. This may involve:
   • Reviewing policy documents.
   • Interviewing you, employees, witnesses, and other involved parties.
   • Inspecting damaged property.
   • Obtaining police reports, medical records, and other relevant documentation.
4. Coverage Determination: Based on the investigation, the adjuster determines if the loss is covered under your policy.
5. Damage Assessment and Valuation: The adjuster assesses the extent of damage and determines the value of the loss, considering policy valuation methods (ACV, RCV, Agreed Value).
6. Claim Settlement: If the claim is covered, the insurance company will offer a settlement based on the assessed damages and policy terms.
7. Payment: Once you agree to the settlement, the insurance company will issue payment, typically after you’ve paid your deductible (if applicable).

Your Responsibilities During a Claim:

• Cooperate with the Insurer: You are required to cooperate with the insurance company’s investigation and provide all requested information truthfully and promptly.
• Protect Property from Further Damage: Take reasonable steps to prevent further damage to your property after a loss, such as mitigating water damage or securing damaged premises.
• Document the Loss: Document the damage with photos, videos, and detailed descriptions. Keep records of all expenses related to the loss.
• Review Policy Duties: Familiarize yourself with your duties and responsibilities outlined in your insurance policy regarding claims.
• Seek Broker-Agent Assistance: Your broker-agent can be a valuable resource throughout the claims process. They can help you understand policy language, navigate claim procedures, and advocate on your behalf if needed.

Deductibles in Claims:

• Absolute Dollar Amount Deductibles: Commercial policies typically use “absolute dollar amount” deductibles. This means you pay a fixed dollar amount per claim.
• Deductible Payment: You are responsible for paying the deductible amount upfront or it will be deducted from the claim payment.
• Deductible Impact on Premium: As mentioned earlier, choosing a higher deductible generally lowers your premium.

Loss Control and Prevention:

• Importance of Loss Control: Implementing effective loss control and prevention measures is crucial for minimizing claims frequency and severity. This not only reduces potential losses but can also improve your claims history, potentially leading to lower premiums in the long run.
• Broker-Agent and Insurer Resources: Insurance companies and broker-agents often provide loss control resources and guidance. They can help you identify potential hazards in your business operations and recommend strategies to mitigate risks and improve safety.
• Employee Involvement: Engaging employees in safety programs and loss control efforts is essential for creating a safer work environment and reducing accidents and claims.

What If I Have Trouble Locating Insurance for My Business?

Most businesses can obtain commercial insurance in the standard insurance market with the help of a broker-agent. However, some businesses may face challenges due to:

• Significant Loss History: Businesses with a history of frequent or severe claims may be considered higher risk by standard insurers.
• High-Risk Operations: Businesses in inherently risky industries or with high-hazard operations (e.g., certain types of manufacturing, construction, or hazardous materials handling) may find it harder to secure standard insurance.
• New Businesses or Startups: New businesses with limited operating history may be seen as riskier than established businesses.

If you encounter difficulty finding insurance in the standard market, your broker-agent can explore alternative options:

Surplus Line Insurance (Non-Admitted Market)

The surplus lines market, also known as the non-admitted market, provides insurance for businesses that cannot obtain coverage in the standard or “admitted” market. Surplus lines insurers are not licensed by the state in the same way as admitted insurers, but they are still regulated and must meet certain financial solvency requirements.

Key Features of Surplus Lines Insurance:

• For Hard-to-Place Risks: Surplus lines insurers specialize in insuring risks that standard insurers are unwilling to cover due to high risk, unusual exposures, or loss history.
• Accessed Through Surplus Lines Brokers: You can only access surplus lines insurance through a specially licensed surplus lines broker. Your regular broker-agent can typically connect you with a surplus lines broker if needed.
• Disclosure Required: Surplus lines brokers are legally required to disclose to you that the insurance is being placed with a surplus lines insurer and that these insurers are not backed by state guaranty funds like the California Insurance Guarantee Association (CIGA).
• Limited CDI Jurisdiction: While surplus lines insurers must comply with Fair Claims Settlement Practices Regulations, the state Department of Insurance has more limited regulatory authority over them compared to admitted insurers.
• Financial Solvency: The CDI maintains a List of Approved Surplus Line Insurers (LASLI), ensuring that approved surplus lines companies meet minimum capital and surplus requirements. It’s advisable to verify that a surplus lines insurer is on the LASLI list and to check their financial ratings from independent rating agencies like A.M. Best or Standard & Poor’s.
• No CIGA Protection: Claims against insolvent admitted insurers are typically protected by state guaranty associations like CIGA. However, surplus lines insurers are not covered by these guaranty funds. If a surplus lines insurer becomes insolvent, your recourse is primarily through the courts.

California FAIR Plan

The California FAIR Plan (Fair Access to Insurance Requirements Plan) is a state-mandated association of all property insurers in California. It was established to provide basic property insurance coverage to property owners who are unable to obtain insurance in the standard market, particularly in high-risk areas like urban, inner-city, and wildfire-prone regions.

Key Features of the California FAIR Plan:

• Basic Property Insurance: The FAIR Plan primarily offers basic fire and extended coverage insurance. Coverage is often more limited compared to standard policies.
• For High-Risk Properties: Designed for properties that are considered too high-risk for standard insurers due to location, condition, or other factors.
• Not a State Agency: While established by the legislature, the FAIR Plan is not a state agency but an association of private insurers.
• Commercial Property Coverage: While primarily focused on personal property (homeowners) insurance, the FAIR Plan does write a small percentage of policies for commercial property owners.
• Accessed Through Any Broker-Agent: Any licensed broker-agent can help you place a commercial property policy with the California FAIR Plan.

Are There Specific Rules on Commercial Insurance Cancellation and Nonrenewal?

Yes, commercial insurance companies must adhere to specific rules and regulations regarding policy cancellation and nonrenewal, which are often outlined in state insurance codes. These rules vary depending on the type of commercial insurance (e.g., workers’ compensation, auto, general liability) and the specific state.

Cancellation:

• Reasons for Cancellation: Insurers can typically cancel a commercial policy during the policy term only for specific reasons, such as:
  • Nonpayment of premium.
  • Material misrepresentation or fraud by the insured.
  • Substantial change or increase in risk.
  • Violation of policy terms.
• Notice Requirements: Insurers must provide advance written notice of cancellation, typically with a specific timeframe (e.g., 10, 30, or 60 days notice, depending on the reason and state regulations). The notice must state the reason for cancellation and the effective date.
• Pro Rata vs. Short Rate Cancellation: If the insurer cancels the policy, they must typically return unearned premium on a pro-rata basis (for the unused portion of the policy term). If the policyholder cancels, the return premium may be subject to a short-rate penalty (less than pro-rata return).

Nonrenewal:

• Nonrenewal at Expiration: Insurers have the right to nonrenew a commercial policy at the end of its policy term.
• Notice Requirements: Insurers are generally required to provide advance written notice of nonrenewal within a specified timeframe before the policy expiration date (e.g., 30, 45, or 60 days, depending on state regulations).
• Reasons for Nonrenewal: Insurers may nonrenew for various business reasons, such as:
  • Changes in risk appetite or underwriting guidelines.
  • Adverse claims experience.
  • Withdrawal from a particular market or line of business.

Seeking Clarification and Assistance: If you receive a cancellation or nonrenewal notice and are unclear about your rights or the reasons provided, you should:

• Contact Your Broker-Agent: Discuss the notice with your broker-agent, who can explain the reasons and explore alternative coverage options.
• Contact the Department of Insurance: Reach out to your state’s Department of Insurance for clarification on cancellation and nonrenewal rules and to file a complaint if you believe the cancellation or nonrenewal is unwarranted or violates regulations. In California, you can contact the CDI for assistance.

In Summary

Commercial insurance is a complex yet essential aspect of business management. It’s a critical investment that protects your business from a wide range of financial risks and liabilities. By understanding the basics of commercial insurance, working with a knowledgeable broker-agent, and carefully assessing your coverage needs, you can secure the right protection for your business’s long-term success and stability. This guide provides a starting point for navigating the world of commercial insurance. For more detailed information or specific guidance, always consult with a licensed insurance professional and refer to resources like your state’s Department of Insurance.

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Resumen en Español

Este folleto proporciona información valiosa sobre los siguientes temas:

Introducción a los seguros comerciales

¿Cómo puedo comprar seguro commercial?

¿Qué debo esperar de un corredor-agente

¿Quien se especializa en el seguro commercial?

¿Qué tipo de seguro necesito comprar para mi empresa?

Seguro de propiedad

• Propiedad comercial″
• Marítimo dentro del país
• Calderas y Maquinarias
• Crimen

Seguro contra terceros

• Vehículos comerciales″
• Responsabilidad comercial general″
• Responsabilidad comercial extendida″
• Compensación del trabajador

¿Qué es una póliza de propietario de empresa?

¿Cómo se califican las pólizas comerciales, cómo se seleccionan los deducibles y cómo se determinan las primas?

¿Qué necesito saber sobre los reclamos comerciales?

¿Qué pasa si tengo problemas para conseguir seguro para mi empresa?

Seguros de líneas excedentes

Plan FAIR de California

¿Hay reglas específicas para la cancelación y no renovación de seguros comerciales?

Este folleto está disponible en español en nuestro sitio web en insurance.ca.gov. Seleccione traduce español a la derecha de la pantalla. Seleccione la ficha al consumidor elegir los tipos de seguros, Seleccione guías de información, luego seleccione serie commercial.

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Insurance Diversity Initiative

Overview

The Insurance Diversity Initiative (IDI) was established by Insurance Commissioner Dave Jones in 2011 in an effort to focus on diversity issues within California’s $259 billion insurance industry. Specifically, these efforts – both by Department staff and the Commissioner-appointed Insurance Diversity Task Force – are meant to encourage increased procurement from California’s diverse suppliers and diversity amongst insurer governing boards. This Initiative represents an open door to increased business opportunities for California’s minority, women, disabled veteran, and LGBT owned businesses. The Department accomplishes these goals by conducting surveys to collect and make public information about the diversity efforts of insurers, as well as through outreach, partnerships, and Department-hosted events. The first action of the Commissioner was a 2011 Voluntary Survey sent to the state’s top insurers to understand the state of supplier diversity and governing board diversity in the industry. Since then, the Initiative has administered annual surveys to ensure transparency around these important issues of diversity.

In May 2016, Commissioner Jones announced a new multistate initiative, the Multistate Insurance Diversity Survey. The MIDS Initiative was established by insurance commissioners across six states – California, District of Columbia, Minnesota, New York, Oregon, and Washington – in an effort to focus on diversity issues within the nation’s $1.78 trillion insurance industry. Between 2012 and 2015, insurers increased their procurement with California diverse businesses by $586.6 million. MIDS will now build on California’s success by taking a look at diversity issues across the nation’s insurance industry.

Supplier Diversity

Supplier diversity, as seen in other industries, is a win-win for both diverse businesses and insurers. For California’s diverse businesses, this Initiative represents an open door to a once seemingly impenetrable market and thus increased business opportunities. For insurers, increased partnerships with diverse suppliers can result in decreased costs and more competition for bids, in addition to enhanced quality, creativity, and innovation from those suppliers – giving insurers the edge they need in a competitive market with rapidly changing demographics.

The Insurer Supplier Diversity (ISD) Survey is a biennial survey which requires all insurance companies with written premiums of $100 million or more in California to report their procurement efforts with diverse businesses in California. For the first time ever, information about insurer procurement practices is being collected and made available to the public.

Governing Board Diverisity

Recent reports demonstrate a strong correlation between the diversity of an organization’s leadership and the level of its success in supplier diversity.

The Governing Board Diversity (GBD) Survey examines the state of diversity among insurer governing boards and requires all companies with written premiums of $100 million or more in California to report on: 1) the demographic composition of the board; 2) the leadership of the board’s diverse members; and 3) the company’s outreach efforts and strategies to diversifying its board membership.

The GBD Survey is also the first survey of its kind in the nation and is meant to encourage insurance companies to seek diverse leadership and governing boards that are reflective of California and the nation’s changing demographics.

Contact Us

For more information about the Insurance Diversity Initiative, visit: www.insurance.ca.gov/[email protected] | (916) 492-3382

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Resources

A.M. Best Company

Ambest Road Oldwick, NJ 08858

Phone: 908-439-2200

Website: www.ambest.com

California Department of Industrial Relations

Division of Workers Compensation (DWC)

PO Box 420603 San Francisco, CA 94142

Phone: 800-736-7401

Website: www.dir.ca.gov

California Department of Industrial Relations

Office of Self Insurance Plans (OSIP)

11050 Olson Drive, Suite 230, Rancho Cardova, CA 95670

Phone: 916-464-7000

Website: www.dir.ca.gov

California FAIR Plan

PO Box 76924 Los Angeles, CA 90076-0924

Phone: 213-487-0111 or 800-339-4099

Website: www.cfpnet.com

Fitch Ratings

33 Whitehall Street, New York, NY 10004

Phone: 212-908-0500 or 800-753-4824

Website: www.fitchratings.com

Independent Insurance Agents and Brokers of California (IIABCal)

7041 Koll Center Parkway, Suite 290

Pleasanton, CA 94566-4041

Phone: 800-772-8998

Website: http://member.iiabcal.org/

Moody’s Investors Service

7 World Trade Center,

250 Greenwich Street, New York, NY 10007

Phone: 212-553-1653

Website: www.moodys.com

Standard & Poor’s

1 California Street, 31st floor

San Francisco, CA 94111

Phone: 415-371-5000

Website: www.standardandpoors.com

State Compensation Insurance Fund

P.O. Box 8192 Pleasanton, CA 94588

Phone: 888-782-8338

Website: www.statefundca.com

Weiss Ratings

4400 Northcorp Pkwy

Palm Beach Gardens, FL 33410-9998

Phone: 877-934-7778

Website: www.weissratings.com

Western Insurance Agents Association (WIAA Group)

11190 Sun Center Drive, #100, Rancho Cordova, CA 95670

Phone: 800-553-4221

Website: www.wiaagroup.org

Workers Compensation Insurance Rating Bureau (WCIRB)

1221 Broadway, Suite 900, Oakland, CA 94612

Phone: 888-229-2472 Ombudsman 415-778-7159

Website: www.wcirb.com

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Glossary

Actual Cash Value
Unless otherwise defined in the policy, Actual Cash Value in California means Fair Market Value. The Fair Market Value of an item is the dollar amount that a knowledgeable buyer (under no unusual pressure) is willing to pay and a knowledgeable seller (under no unusual pressure) is willing to accept.

Agent
A licensed individual or organization authorized to sell and service insurance policies for an insurance company.

Aggregate Limit
The maximum dollar amount of coverage in force for a property damage policy or liability policy. This maximum amount can be figured on a per occurrence basis or as a general aggregate for the complete policy term.

Agreed Value
A method of loss valuation where the insured and the insurer list an agreed upon amount to be paid in case of loss. This valuation method is most common in property insurance when insuring valuable artwork, antiques, or classic autos. A professional appraisal is usually required.

Arbitration Clause
A clause in an insurance policy that allows the insured and the insurer to each appoint an arbitrator if they cannot agree upon an appropriate claim settlement. Once the arbitrators have been selected, they in turn appoint an independent umpire. If the arbitrators disagree, then the umpire decides which claims settlement to support. The final decision is binding.

Betterment
A situation that occurs in a loss when an old piece of property is replaced by a brand new item. The insured is put in a better financial position than they were before the loss occurred, and consequentially may have to pay the difference in price for the betterment.

Binder
A short-term agreement that provides temporary insurance coverage until the policy can be issued or delivered.

Broker
A licensed individual or organization who sells and services insurance polices on your behalf.

Broker-agent
A licensed individual who can act as an agent representing one or more insurers, and also as a broker dealing with one or more insurers representing your interests.

Cancellation
The termination of an in-force insurance contract by either the insured or the insurer before its normal expiration date.

Claim
Notice to an insurance company that a loss has occurred that may be covered under the terms and conditions of the policy.

Claim Adjuster
The person who evaluates the damage caused by a covered loss and determines the amount to be paid under the policy terms.

Claims Made
A liability insurance policy where coverage applies to claims filed during the policy period no matter when the loss occurred subject to a retroactive inception date.

Coinsurance
An insurance clause that defines the amount of each loss that the company pays according to the amount of insurance carried, divided by the amount of insurance required. This basic formula relates to a contracted percentage of coverage that must be required to prevent a coinsurance penalty.

Combined Single Limit
When bodily injury liability and property damage liability is expressed as a single sum (limit) of coverage.

Commercial Lines
Insurance coverages for businesses, commercial institutions, and professional organizations, as contrasted with personal insurance.

Commission
A portion of the policy premium that is paid to an agent by the insurance company as compensation for the agent’s work.

Concurrent Causation
Occurs when two or more perils cause a loss. When only one of these perils is covered by the insurance policy, the court generally rules that the entire loss is covered. Many insurance companies have reworded their policies to clarify that only a loss attributed to a covered peril is indeed covered.

Conditions
The portion of an insurance contract that sets forth the rights and duties of the insured and the insurer.

Consequential Bodily Injury
In Workers Compensation, special circumstances can arise when a work-related injury causes some sort of non-work related injury. (Please see Loss of Consortium, Dual Capacity, and Third Party Over glossary definitions.)

Coverage
Protection that is provided under an insurance policy.

Declarations (DEC) Page
Usually the first page of an insurance policy that contains the full legal name of the insurance company, the policy number, effective and expiration dates, premium payable, the amount and types of coverage, and the deductibles.

Deductible
The amount of the loss that the insured is responsible to pay before benefits from the insurance policy are payable.

Depreciation
The actual or accounting recognition of the decrease in value of property over a period of time according to a predetermined schedule.

Dual Capacity
In Workers Compensation, an employer may be liable two ways to an employee who incurs bodily injury on the job as a result of using a product or service produced by that employer. The employee is eligible for Workers Compensation benefits and may also sue the employer because of the defectiveness of the injuring product or service.

Earned Premium
The portion of the policy premium paid by an insured that has been allocated to the insurance company’s loss experience, expenses, and profit year to date.

Endorsement
A written agreement that changes the terms of an insurance policy by adding or subtracting coverage.

Effective Date
The starting date of an insurance policy: the date the policy goes in to force.

Exclusion
A contractual provision in an insurance policy that denies or restricts coverage for certain perils, persons, property, or locations.

Experience Modification
The adjustment of premium resulting from the use of experience rating. Experience rating plans reflect an insured’s past loss experience (usually from the past three years) and uses this experience to modify and determine the prem

The termination date of coverage as indicated on an insurance policy.

First Party
The policyholder (insured) in an insurance contract.

Flat Cancellation
Cancellation that takes place on the policy effective date. No premium charge is made; however, other charges (i.e., service) may apply.

Fraud
An intentionally deceptive act committed to obtain an unfair or unlawful advantage. Fraud usually involves monetary gain.

Frequency
The number of times a loss occurs.

Hazard
A circumstance that increases the likelihood or potential severity of a loss.

Indemnity
In a property and casualty contract, the objective is to restore an insured to the same financial position after the loss that the insured had prior to the loss. In the most basic sense, indemnity is compensation for a loss.

Independent Adjuster
A person or organization that provides claim adjusting services to different insurers on a contract basis.

Insurable Interest
Any interest (most commonly ownership) that a person, company, or corporation has in a subject of insurance such as a business, building, or auto, which can be damaged and may cause the person, company, or corporation financial loss or other tangible deprivation. Generally, an insurable interest must be demonstrated when a policy is issued and must exist at the time of loss.

Insurance
A method of shifting risk from a person, business, or organization to an insurance company in exchange for the payment of premium. The insurance company commits to be responsible for covered losses.

Insured
The policyholder(s) entitled to coverage under an insurance policy.

Insurer
The insurance company who issues insurance and agrees to pay for losses and provide covered benefits.

Insuring Agreement
The portion of an insurance contract that describes what is covered. The insuring agreement usually states the perils insured against, the person(s) and/or property covered, the property locations, and the period of the contract..

Judgment Rating
A rating modification (either decrease or increase) that is based on the underwriters experience, best judgment, and analysis in classifying and underwriting a particular type of risk

Lapse
In property and casualty insurance a lapse in the termination of a policy because of a failure to pay premium when due.

Liability Insurance
Coverage for a policyholder’s legal liability resulting from injuries to other persons or damage to their property.

License
A certificate of authority issued by the CDI to an insurer, agent, broker, or broker-agent to transact insurance business. The maximum amount of benefits the insurance company agrees to pay in the event of a loss.

Loss of Consortium
A potential situation in any bodily injury claim (including Workers Compensation claims) where a spouse contends that the bodily injury of their partner deprives them of the natural affection (spousal duties), help, and companionship of said spouse.

Loss Payable Clause
A provision that authorizes the insurer to make a loss payment to a person, company, or organization (loss payee) other than the insured. The loss payee must have an insurable interest (such as a lienholder for business personal property or a mortgagee on real property).

Managing General Agent (MGA)
An agent contractually authorized by an insurance company to manage all or part of the insurer’s business activities. An MGA can manage the marketing, underwriting, policy issuance, premium collection, appointing and supervision of other agents, claims payments, and reinsurance negotiations of an insurance company.

Material Misrepresentation
A factual falsification made in such a manner that the insurance company would have refused to insure the risk if the truth had been known at policy issuance. A material misrepresentation gives an insurance company grounds to rescind a contract.

Misquote
An incorrect estimate of an insurance premium.

Nonpayment of Premium
Failure by the policyholder to pay the premium on a policy or pay the installment premium payments due on a policy.

Nonrenewal
The termination of an insurance policy on its normal expiration date.

Occurrence
A liability insurance policy that covers claims arising out of occurrences that take place during the policy period, regardless of when the claim is filed.

Peril
Cause of loss.

Personal Lines
Insurance written on the personal and real property of an individual (or individuals) to include such policies as homeowners insurance and personal auto insurance, as contrasted with commercial lines.

Policy
A contract that states the rights and duties of the insurance company and the insured.

Premium
The monetary payment that an insured makes to an insurance company in exchange for the contract indemnifying the insured against potential loss. Simply put this is the payment made by the insured to keep an insurance policy in effect.

Producer
A term used by the insurance industry to refer to agent, brokers, broker-agents, and solicitors.

Pro Rata Cancellation
A cancellation of a policy by an insurance company that returns the unearned premium to the policyholder (the portion of the premium for the remaining time period that the policy will not be in force).

Provisions
The statement of policy conditions in an insurance policy.

Public Adjuster
A licensed person or organization that represents the policyholder by contract in property damage claims negotiations with an insurance company.

Quotation
An estimate of the cost of insurance based on the information supplied to the agent, broker, broker-agent, or the insurance company.

Recision
The cancellation of an insurance policy back to its effective date resulting in a return of all premium charged.

Regulations
Requirements developed by the CDI that implement laws passed by the legislature. Regulations go through a public comment process and must be approved by the state Office of Administrative Law.

Reinstatement
The restoration of a lapsed or canceled policy.

Renewal
The continuation of an insurance policy (offer of renewal) into a new term from the same insurance company that issued the existing policy.

Replacement Cost
The amount that it costs to replace lost or damaged property with new property of like kind or quality in the local market.

Schedule Rating
A method of pricing property and liability insurance. Schedule Rating uses debits and credits to modify a base rate figured by the special characteristics of the risk exposure. Insurers develop Schedule Rating because actuarial experience shows a direct relationship between certain physical characteristics and the possibility of loss. Most schedule rating plans must be filed and approved by the CDI.

Second Party
The insurance company in an insurance contract.

Self-Insured Retention (SIR)
The portion of a property or liability loss retained by a policyholder.

Severity
The size of a loss. Loss severity is used as a factor in establishing premium rates.

Short Rate Cancellation
A cancellation initiated by policyholder request in which the premium returned is subject to an administrative penalty.

Sistership Liability
Exists when a manufacturer refuses to withdraw a product as ordered by a government agency or company management. Once a defective product has been identified and recalled, an insurance company excludes all other claims arising from the defective product due to the negligent failure of the company to take the product off the market.

Split Limits
The technique for expressing limits of liability coverage under a particular insurance policy by stating separate limits for different types of claims growing out of a single event or combination of events. Coverage can be split (limited) per person, per occurrence, between bodily and property damage, or in other ways.

Subrogation
The process of recovering the amount of claim damages paid out to a policyholder from the legally liable party. When a company pursues the legally liable third party, they are required to include the policyholder’s deductible in the recovery process.

Third Party
An individual other than the policyholder or the insurance company who has suffered a loss and may be able to collect compensation under the policy due to the negligent acts or omissions of the policyholder.

Third Party Over
The legal doctrine that involves an injured employee bringing suit against a third party who (for one reason or another) is able to bring an action against the employer.

Underwrite
The process to evaluate the insurance application and independent sources in order to verify the information provided and to determine the acceptability of the risk.

Underwriter
The person who performs the underwriting process to accept, reject, or modify risks on behalf of the insurer.

Unearned Premium
The portion of the written premium applicable to the unexpired or unused part of the policy period for which the premium has been paid. For example, in an annual premium policy 11/12 of the premium is unearned at the end of the first month of the policy.

Waiver
The relinquishment of a known right, which may be expressed or implied.

Written Premium
The total premium on all policies written by an insurer during a specified period of time, regardless of what portion has been earned.

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Talk to Us

Do you have a question, comment or concern? There are several ways to talk to us:

• Call our Consumer Hotline at (800) 927-4357
• Telecommunication Device for the Deaf dial TTY (800) 482-4833
• Write: California Department of Insurance 300 South Spring St., South Tower Los Angeles, CA 90013
• Visit us in person on the 9th Floor at the address above. Office Hours: Monday through Friday 8:00 AM to 5:00 PM Pacific Standard Time, excluding holidays

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