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Property insurers impose policy restrictions, hike rates

tornado damage

Strike, riot and civil commotion exclusions, restricted availability of nonphysical business interruption coverages, and bulletproof communicable disease exclusions are some of the changes commercial property insurance buyers are seeing at the mid-year July 1, 2020, renewals.

Average property rate increases of around 20% are the norm, but for certain occupancy types and larger, more complex risks – especially those with losses or catastrophe exposure – increases start at 30% or higher, brokers say.

Difficult occupancy types include residential real estate, molten metal and food companies, they say.

Through the second quarter of 2020, the insurance market has seen 11 consecutive quarters of rate increases. Buyers are also experiencing higher deductibles and reduced limits, according to industry experts.

Recent civil unrest in cities across the United States has caught insurers “a little bit by surprise,” said Rick Miller, Boston-based U.S. property practice leader at Aon PLC’s commercial risk solutions business.

As a result, there’s been a push by some insurers to “restrict or even remove coverage” for strikes, riots and civil commotion, which are perils long considered “property insurance 101,” he said.

“We are pushing back extremely hard on that. It’s been more of a London phenomenon. We’ve generally been able to work around it,” Mr. Miller said.

The push to limit strike, riot and civil commotion coverage started among some international insurers, following civil unrest that began last year in Hong Kong and Chile, and is now spreading to the U.S. market, brokers say.

Some insurers are looking to exclude the cover, but there’s not a “broad-brush approach,” said Michael Rouse, New York-based U.S. property leader at Marsh LLC. It depends on a client’s exposure and what it may be doing to mitigate the risk, he said.

“Certainly, exposures in major cities are a bigger concern versus rural areas from an underwriting perspective,” Mr. Rouse said.

Axa XL is using deductibles and additional premium as options for providing cover on risks more heavily exposed to strikes, riots and civil commotion, said Michele Sansone, president of the North America property insurance business for the insurer, a New York-based unit of Axa SA.

“We have seen many losses, but on average they are attritional type claims,” Ms. Sansone said.

Retail, real estate and municipal properties are among the most affected, she said, adding: “It depends on the occupancy, but it’s definitely impacting our book.”

Insurers also are tightening terms and conditions, brokers say.

Business interruption wordings are “unquestionably” tightening due to the COVID-19 pandemic, said Gary Marchitello, chairperson of Willis Towers Watson PLC’s North American property team in New York.

Most property insurers are moving away from manuscript policy forms and insisting on company forms, he said.

The controversy over whether COVID-19 constitutes physical damage has led to a tightening of wording mainly in terms of insurers inserting, at least in their eyes, “a bulletproof infectious disease exclusion,” Mr. Marchitello said.

Numerous businesses have sued their insurers over the past three months arguing that the business interruption clauses in their property policies should cover revenue lost due to COVID-19 lockdowns. Insurers argue that the policies require physical damage to occur for coverage to be triggered.

Prior to July 2019, Young Life, a religious organization based in Colorado Springs, Colorado, that runs summer camps in the U.S. and Canada, had business interruption coverage for communicable disease, said Gary Nesbit, senior director of risk management at Young Life and a board director of the Risk & Insurance Management Society Inc.

That was removed last year when its insurers at Lloyd’s of London introduced an “extremely broad exclusion for any type of communicable disease regardless of the source,” Mr. Nesbit said.

As a result, the organization, which together with five other ministries purchases its property insurance through the London market, has incurred a “substantial business interruption loss” due to COVID-19.

“We’ve all lost that revenue and we don’t have any insurance to cover that, so it’s a self-insured loss,” Mr. Nesbit said.

Young Life has $500 million in property but has a captive insurance program with seven other ministries, which totals around $1 billion in insured property values.

Going forward, they are discussing whether to cover the business interruption communicable disease exposure through a deductible buyback policy or within the captive, he said.

Some insurers are attempting to remove nonphysical damage exposures from their property policies, too, said Peter Fallon, senior vice president, at brokerage Risk Strategies Co. Inc. in Boston.

“Nonphysical damage was one of those coverage extensions that cropped up 10 years ago when the market was soft and insurers were offering broader coverage,” he said.

Now underwriters are going “back to basics” and “scaling back” policies to only provide first-party property coverage, Mr. Fallon said.

Insurers also are scrutinizing catastrophe exposures, including Florida windstorm, California earthquake and other perils such as convective storm, flood or wildfire, brokers say.

“We have seen some markets that want to pull back,” Mr. Rouse said. He cited the example of convective storm and hail perils, where some insurers have limited capacity following events in the first half of the year, such as the Nashville, Tennessee, storms.

Flood is another catastrophe exposure that insurers are examining closely, Mr. Fallon said. “We’re struggling with a client now in the Midwest. When people talk about flood, they think it’s just the overflow of natural boundaries, something happening to a dam or a dike or maybe tidal surge. But flood also includes surface water,” he said.

Heavy rainstorms, such as those seen in the spring in certain parts of the country, where water accumulates and flows into buildings, are considered flood under the flood definition and therefore subject to flood rates, premiums and deductibles, Mr. Fallon said.

Amid hard market conditions and with underwriters, brokers and clients working from home during the pandemic, it’s been tougher to put deals together, but deals are still being completed, brokers said.

“Everything comes down to the wire. Underwriters have been deluged with submissions. … Until you get ink on the paper, you’re never sure you’re done with the placements,” Mr. Marchitello said.