Brokers say tariffs are affecting co-insurance terms in business policies

Brokers are warning the imposition of tariffs — and the sudden escalation of insured values — is putting some clients offside of the co-insurance clauses in their policies.

Brokers are therefore asking insurers to be ‘flexible’ when enforcing the co-insurance terms of client’s policies. But insurers, while acknowledging the unpredictable impact of tariffs on their business clients, say they’d rather explore other options for dealing with higher insured values due to tariffs.

“I think that you try to be as dynamic and as flexible as you possibly can,” Darren Godfrey, senior vice president of Western Canada at Intact Insurance, said at the Insurance Brokers Association of B.C.’s AGM and Leaders’ Conference, held June 10 and 11 in Whistler, B.C. Godfrey was responding to a question from a broker who had just cited an example of how the impact of tariffs affected the co-insurance terms of her client’s business policy.

“But you know, when you sold that policy what those terms were, what the pricing conditions were — that’s a tough one,” Godfrey said. “If we start to see more of that, and this is the first example I’ve heard myself, I think that’s something that we take back and we look at. What is our response?”

The exchange happened during the Q&A portion of the June 11 Executive Insurer Panel discussion.

In business insurance, a co-insurance clause is akin to a deductible in a personal home insurance policy. It’s a way for insurance companies to share risk with their commercial insureds. Essentially, the policyholder agrees to maintain a certain level of insurance coverage of the property’s value, as BrokerLink explains on its website. Usually, the percentage is fixed at 80%, 90% or 100% of the commercial property’s value.

If the policyholder insures for less than this agreed-upon percentage, they may face a penalty, and their claim payout will be reduced accordingly.

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But, in a world in which insured values can dramatically change from one moment to the next, one broker in the panel audience asked if insurance companies would give any flex when enforcing their co-insurance terms, drawing on a personal experience.

“We had a claim scenario in our office — but I think it’s emblematic of a lot of things that are to come — where we had a large piece of equipment that had been partially damaged,” the broker said. “Thanks to tariffs…the cost to replace this item had gone astronomically higher than what it had been insured for.

“We were very fortunate in this situation, because although the insurer initially applied a fairly hefty co-insurance penalty, we were able to sit across the table talk about it, and the settlement for our client was reasonable.

“But…this is going to become more and more prevalent…If I’ve got a huge John Deere [commercial vehicle, for example], and that thing is damaged, and now we’ve got to get parts, or we’ve got to get a new piece of equipment, in the current environment, it’s just going to keep getting messier and messier….

“So, my question to this group is: To what extent do you see yourselves becoming perhaps more flexible — I think that’s the best word I can come up with when it comes to co-insurance — in situations where we have done our very best to insure something for replacement cost, but thanks to what’s going on with the global trade wars, it no longer meets the criteria for 90% of replacement costs?”

Beyond the flex

Randy Dhillon, senior vice president and chief distribution and regional operations officer at Wawanesa, said he would prefer to revisit policy fundamentals than to be flexible on co-insurance terms. For example, he said insurers are constantly trying to identify problems, assess them and then do ongoing, iterative reviews of their products in response.

“I think we’d rather identify, adjust and stabilize [the product] than constantly be flexible,” Dhillon said. “I think flexibility often gets you in trouble, and it has gotten us into trouble in certain parts of the country. It’s not a sustainable, long-term solution just to keep doing things the same way but be ‘flexible.’”

Graham Doerr, vice president of Definity Financial Corp. and chief operating officer of Definity’s Family Insurance, agreed, but said he would be willing to look into an example raised by a broker

“We actually were having a conversation internally about co-insurance waiver, and making sure that our underwriters understood where and when that can be used, and encouraging those conversations,” Doerr said. “There are mechanisms within the suite of products available among various insurers that can address some of it, maybe not all of it.

“But I think those are important conversations to have at the client level, in certain sectors where we’re talking about an ongoing or emerging issue. What are the levers we have today that we can put on the policy for the next 12 months?

“Brokers have a tremendous voice around starting to tell these stories about prevalent issues that we can help tackle together.”