How do contingent liability and nonassessment provisions affect my insurance?
While looking through the declaration pages of my homeowner and automobile policy one of the very last things highlighted regarding the coverages and provisions of my policy was this sentence, “No contingent liability. The policy is without contingent liability and is nonassessable.”
Being curious as to why the insurance company would include that verbiage in their policy, I went looking for an answer. Here is what I discovered.
Contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. One of the main issues insurance companies are dealing with now is the courts interpreting wording of insurance policies not necessarily as written but as to what the court thinks should have been the intent. Situations may dictate different interpretation taking away some of the certainty found in the contract. Case in point. Insurance payment agreement states premium is due by 12:01 am on a certain date. At 10:00 am on the next day, the insured was driving to town with the intent of stopping by the insurance office to make the payment. While on his way he hit a deer, doing significant damage to his vehicle. He drove on in to the office, made his payment and then advised secretary he had been involved in the accident on his way in. When the secretary took the report, she noted the time and date of accident. Upon his review, the adjuster denied the claim stating policy was out of force at the time of the accident. The insured sued the company for lack of good faith. The judge ruled in favor of the insured because his “intent” was to have made his payment but it hadn’t been convenient for him to have done so the final day it was due. This kind of judicial interpretation adds an extra burden on actuaries to accurately project future monetary requirements.
Another example which is easier to prepare for is when an adjuster starts to settle a claim and he or she sets a reserve from which future claims payments will be made.This reserve is from the general reserve set aside at the beginning of the year for anticipated claims. As the repairs are being made, those reserves are used to make the payments. However, after repairs are completed and the reserve account is closed, the customer gets home only to discover the transmission was damaged in the accident and now needs to be paid for. No reserves are left, but it doesn’t create a big dilemma since the general reserves can absorb the shortfall.
The major problem is created if the actuaries undershot anticipated claims for the full year which would entail the company’s having to find resources to cover the deficit.This is where having that statement on the declaration page of the policy relieves the policyholder from paying any more than the premium being charged at inception.
The sentence also refers to being nonassessable. A brief comment is appropriate here.
A mutual insurance company is owned by its policyholders not stockholders and therefore has no incentive to having any more funds available than is required to pay for expenses, claims incurred, and reserves required by the Department of Insurance. Once those obligations have been met, excess earnings of the insurance company can be added to its reserves or paid back in the form of a dividend to the policyholders.
In the event of a company being an assessment company (assessment association or a stipulated premium company), it charges a premium to policyholders but reserves the right to charge additional premiums if losses resulting from claims exceeds the original amount of premium paid by the policyholder based on each policyholder’s percent of initial premiums. This could be a real financial shock to the policyholders if a company were to have an unfortunate actuarial miscalculation or a year of extreme losses which could not be anticipated. Someone has to pay for those claims; and since at inception of the policy each policyholder agreed to the terms of the contract, each is required to pay their percentage share. This is probably the major reason most if not all the major property and casualty companies market nonassessable policies. Grange Mutual was formerly an assessment company, but I could not find any information to verify that is still the case. (https://en.wikipedia.org/wiki/Grange_insurance)
In today’s crazy weather patterns, wildfires, increasing losses due to civil unrest, thievery, etc., it’s not difficult to see why assessment policies are going the way of the dodo bird. No one wants to take the chance of major financial hit if an insurance company can’t meet its obligations. So, if your policy has the statement of being nonassessable, you have no worry of being billed unexpectedly if claims exceed premiums charged.