Insurance coverage is never guaranteed. Certain conditions must be met to ensure that you get the coverage outlined in your policy. These contingencies are known as insurance subjectivities, and while they may seem like hurdles at first, they actually help safeguard your business by mitigating risk.
In this blog, we’ll explain why subjectivities are essential to business insurance, and explore five common types of subjectivities you’ll encounter during the application process.
What are insurance subjectivities?
Subjectivities are conditional requirements that companies must comply with to receive insurance coverage. Carriers may require subjectivities to verify that your business upholds certain standards and risk management protocols. They may also refuse to cover claims related to a subjectivity if you fail to comply.
For example, professional liability coverage may be “subject to” certain business information like financial records, security protocols, and operational standards. Insurance underwriters want to confirm that your company has the procedures in place to prevent certain claims—not only to reduce their risk of covering you, but also to protect your business against legal liabilities.
By making coverage subject to these qualifications and expectations, insurers establish valuable guidelines that help protect both parties.
Common insurance subjectivities
When filling out an application for professional liability coverage or errors & omissions insurance, you’ll be asked to divulge several pages of detailed information about your practice and your risk exposure. Insurance carriers use these details about your financial background, claims history, and internal controls to assess your business risk. Before binding coverage, the carrier may provide an initial quote with terms and conditions that are subject to certain criteria.
Here are some of the common insurance subjectivities you may encounter on an application or a quote.
Insurance applications collect lots of details about your practice. This is your chance to prove to underwriters that you have the technical qualifications and operational competencies to run the business they’re covering
The most common example is a statement of qualification (SOQ), which conveys an organization’s legal, administrative, and fiscal capacity to meet the carrier’s requirements. Beyond basic information like your company name and location, this may also include an explanation of your service areas, types of clients, certifications, and staff.
Underwriters carefully examine business applicants’ financial records to assess a company’s stability over time. In the event of an insurance claim, the carrier needs confirmation that you’ll be able to pay the deductible.
For example, when applying for Accountants Professional Liability Insurance through McGowanPRO, you’ll be asked to enter your firm’s reported fiscal data for the last two years, estimated revenue for the current year, and projections for next year. If your gross revenues fluctuate wildly from year to year, the underwriters may need to review your financial data more closely, amend your policy terms, or even recommend corrective action.
Risk management protocols
Beyond just looking at the numbers, insurance underwriters also want to understand the risk management protocols and internal controls surrounding your accounts. To this end, applications may include questions like:
- Do you maintain a system to ensure timely completion of financial reports and tax filings?
- Are internal audits conducted on a regular and surprise basis?
- How often are your bank accounts reconciled?
- Are your financial systems structured with segregation of duties, so that no one individual can control a transaction from beginning to end?
Certain policies, such as Commercial Crime Insurance, may even ask how your company transports money beyond the premises, and inquire about the location of safes and alarm systems on-premises. In some cases, coverage may be subject to proper security systems, alarms, or armored transport.
In this age of digital data storage and remote work, risk management doesn’t just apply to physical security systems inside your building. Cybersecurity is an increasingly vital component of business protection today. To shield against cyberattacks and data breaches, more and more carriers require insurance subjectivities related to these technological safeguards.
For example, cybersecurity subjectivities may include:
- Policies for archiving or destroying old files
- Firewall software with antivirus protection
- Formal procedures for disposing of old devices and drives
- Regularly scheduled backups of sensitive data
- Data encryption
- Employee training to identify fraudulent scams like phishing
Expiring coverage and prior claims
Looking at previous loss runs and insurance claims helps underwriters analyze a company’s potential risk profile. Prior losses aren’t necessarily a deal-breaker, though. When carriers see a significant claim on your record, they also hope to see evidence that you implemented procedural changes to prevent the same type of loss from reoccurring. In fact, one of the most common insurance subjectivities may require corrective action in response to a claim.
While evaluating your claim history, carriers will often request information about your expiring policy’s declarations, endorsements, and other previous coverage. This subjectivity helps the carrier honor any prior retroactive dates to prevent coverage gaps that could leave your business vulnerable.
Covered by contingencies
Insurance subjectivities vary widely, depending on the type of policy you’re applying for and the underwriting process that surrounds it. Although these contingencies may seem intimidating at first glance, it’s important to remember that these conditions exist to help protect your company and ensure the maximum coverage.
If you’re confused or overwhelmed by the long list of subjectivities on your policy, schedule a call with one of the knowledgeable brokers at McGowanPRO. We’ll explain the subjectivities specific to your policy so you can stay focused on your business, knowing we’ve got you covered. Contact McGowanPRO to learn more.