How reinsurance triggers multi-layer insurance policies
To put things into perspective, a large insurance company may not have to take the reinsurance route because they alone can cover the total risk on a large property or group of properties. Companies that might not be able to cover the risk on their own may offer layered policies to commercial property owners. Some insurance companies will get reinsured themselves to lower risk. Reinsurance is reinforcement for insurance companies. Multi-layer insurance policies are the byproduct of the insurance company’s participation in reinsurance.
COMMERCIAL PROPERTY OWNERS
Many hoteliers and multi-family property investors don’t have just one policy in their insurance policies. If one company assumed the risk on its own and some type of catastrophic event occurred, the damages could bankrupt the insurance company and possibly not cover the loss for the insured.
With reinsurance, a broker puts together an insurance plan. Insurers can buy into the policy by offering, say, 20% of the coverage and sharing the premium. In the case of a claim, each insurance partner is responsible for its portion of the policy.
For a hotelier, having a multi-layered policy can mean adequate coverage that may come with a better rate. On the claim side, it takes longer because an adjuster from every insurance company must come out to assess damage. Once the primary adjuster decides on the scope of the damage, they must hand it over to the second adjuster and so on. Each insurer must write a check, which makes payments slower.
After Hurricane Sally in 2020, large insurance companies didn’t want to insure condos on the water. Condos were required to have secondhand carriers and, in many cases, had four, five, or six layers in their policy. Claims were taking more than 90 days to solve.
A public adjuster is needed in cases such as these, so you don’t wind up trying to convince several people on the scope of damages repeatedly.
RISK IN LAYERED POLICIES
If an insurance company has 20% of a $10 million policy and the loss is $5 million, once you get past the first $2 million, the insured must go through the same process of adjustment with carriers 2, 3, and so on. Things can get complicated at this point because once $2 million in damages has been surpassed, carrier 1 may not want to pay a consulting firm to prove $5 million in damages. After $2 million, they pay their portion and move on.
This may work out fine for carrier 1, but they did not do what was needed for the next carrier to take over. Carrier 2 must assign its own adjuster and restart the process since carrier 1 didn’t prepare a proper estimate as they knew the claim exceeded $2 million.
When dealing with a multi-layer policy, the first question to ask is, “Which insurance adjuster is going to take the lead?”
Then, pick one company, usually the one with most risk, to run the claim. All the other insurance adjusters are then copied on developments via email. That way, you can prevent arguments coming out of left field. All bases are covered early on, and everything is properly documented to avoid the inevitable comments of “Where was this documented?” or “We’re not paying for that!”