When it comes to commercial property insurance, understanding certain insurance terms and structures can help businesses make better-informed decisions regarding their coverage. These include but are not limited to probable maximum loss (PML), loss limits, and different policy formats such as primary, excess and quota-share.

Probable Maximum Loss (PML)

PML represents the worst-case scenario for an insurer, calculating the maximum loss expected on a policy at any given time. Each insurer defines and calculates PML differently, but it generally refers to the highest percentage of risk that could result in a loss. Understanding PML helps both businesses and insurers evaluate potential exposures.

Loss Limits

A loss limit is a cap placed on coverage, typically lower than the total property value, but sufficient to cover the exposed value in the event of a loss. This approach is used when full coverage is either not affordable or impossible due to reinsurance constraints. In high-risk situations, insureds might only be able to purchase a policy with a loss limit. It’s essential to check if there are any specific lender requirements regarding coverage limits.

Primary, Excess & Quota-Share Policies

• Primary Policies cover the initial layer of risk, with set limits and deductibles. Primary policies pay out first when a covered claim occurs, regardless of whether additional excess policies are in place.
• Excess Policies cover additional layers of risk after the primary policy is exhausted. The primary carrier assumes 100% of the initial risk, while the excess carrier covers the next layer of risk once the primary policy limit is reached.
• Quota-Share Policies involve multiple insurers sharing coverage limits on a given layer. Each insurer contributes a percentage of the total layer (e.g., 50%), reducing individual exposure.
  • Cost Efficiency: Quota-share arrangements can result in rate savings since the coverage is spread across multiple insurers, typically resulting in a lower average price per million dollars of coverage.
  • Simplified Claims Process: With quota-share policies, the insured works with a single lead insurer throughout the claims process, streamlining communication and claims handling.

These policy structures help balance cost and coverage, offering flexible options for businesses to manage risk efficiently.

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