The Specialty Lines Insurance Business

The Specialty Lines Market - What is It?

The specialty lines insurance market is the segment of the insurance industry where the more difficult and unusual risks are written. Because specialty lines insureds tend to be more unusual or higher risk, much of the specialty lines market is characterized by a high degree of specialization. Insurers (“markets”) participating in this market have specialized expertise and experience in underwriting and rating insurance for a wide range of risks. These insurers usually work with brokers who are experienced in specialty lines insurance. Much of the new product development comes from the broker community in their quest to protect insureds with new and different coverage needs.

The specialty lines insurance market focuses on two types of products: unusual or difficult insurance and higher risk accounts. An example of an unusual or difficult product is professional liability for a trustee, and an example of a higher risk account would be a manufacturer of explosives. The professional liability line is included in the specialty lines market because the underwriting, rating and claims functions require a high degree of expertise and experience. The explosives manufacturer would be included because of the unique products liability exposures presented and the potential claim severity.

Insurance in the specialty lines market is provided on an admitted (licensed) basis or a surplus lines (non-admitted) basis. The market size is difficult to accurately estimate, but we believe it is somewhere in excess of $50.0 billion in total premium volume.

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General Liability vs Professional Liability Insurance

The two main types of liability insurance for professionals are General liability insurance and Professional Liability insurance. Both coverages are important to properly protect a professional organization from financial loss.

General Liability insurance will protect an organization in the event the insured causes bodily injury or property damage to others and becomes legally obligated to pay damages. Liability for Bodily Injury can occur when a physical injury to a person is caused by third party. Liability for Property Damage can occur when a third party causes direct or indirect damage (such as loss of use of property) to another person's property.

General liability insurance is standardized and relatively easy to obtain. It is often provided in a package policy with other coverages, sometimes called a business office package policy. Most general liability policies issued to professional organizations contain exclusions for professional liability claims.

Professional liability insurance is designed to provide coverage to professionals for claims arising out of their professional activities or services provided to clients. It is also called errors and omissions insurance or E&O (or medical malpractice for doctors). Coverage is typically provided by stand-alone professional liability policies and includes coverage for the defense costs associated with a claim. Coverage is not usually provided for intentional or dishonest acts.

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Claims Made vs Occurrence Policies

There are two forms of liability insurance policies - claims-made and occurrence policies. Most professional liability insurance, including directors and officers and employment practices liability insurance, is written on a claims-made basis.

Most standard general liability policies are written on an occurrence basis.  An occurrence policy obligates the insurance company to pay for claims arising out of occurrences during the policy period regardless of when the claim is reported. The policyholder is covered for any incident that occurs during the term of the policy regardless of when the claim arising from the incident is reported to the company. In some situations the claim might be made many years after the incident occurred. This leads to uncertainty for both the insured and the insurer.

A claims-made policy protects an insured against claims or incidents that are made while the policy is in force. With continuous coverage, a claims made policy normally provides coverage for events prior to the inception of the policy period, called "prior acts coverage."  The period prior to the policy period for which claims are covered is called the prior acts period (also called retroactive coverage). Prior acts coverage is usually only provided when a claims-made policy has been in force immediately prior to the current claims-made policy on a basis consistent with the prior policy (referred to as “continuous coverage”). Prior acts coverage described as "full prior acts" will normally cover acts occurring at any time prior to the current policy period.  When a retroactive date is used in a policy, prior acts coverage is provided from the retroactive date through the current policy period.

"Tail coverage," also called an "extended reporting period," provides protection for claims that arise from events prior to the expiration of the policy and are made after a claims-made policy has expired, and may or may not be provided.  In many cases, tail coverage is automatically provided for a limited period in the event an underwriter non-renews or cancels coverage. This coverage is optional, and the need can arise if the professional organization is acquired or goes out of business, or a decision is made not to purchase insurance going forward. The terms and pricing for tail coverage vary greatly and may or may not be defined in the policy.  

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Lloyds of London

Lloyd's of London is a unique specialty lines insurance provider. It is not an individual insurance company, but a brokered market in which approximately 100 underwriting syndicates both compete and co-operate to provide specialty insurance. This combination enables Lloyd's to offer a wealth of choice, knowledge, experience and expertise under one roof.

Underwriters are the insurance professionals upon whose expertise and judgment the market depends. Lloyd's underwriters cover many specialty areas of risk, including marine, aviation, catastrophe cover and professional indemnity. Only accredited Lloyd´s brokers can place risks in the Lloyd´s market.

Lloyd's began in Edward Lloyd's Thames-side coffee house in Tower Street in the City of London. Although the exact date of its establishment is unknown, evidence exists that Lloyd's coffee house was well-known in London business circles by 1688. Lloyd himself was not involved in insurance but provided premises, reliable shipping news and a variety of services to enable his clientele of ships' captains, merchants and rich men to carry on their business of insuring ships and their cargoes. The wealthy individuals in the coffee house would each take a share of a risk, signing their names one beneath the other on the policy together, with the amount they agreed to cover. For this reason they were known as "underwriters."

Lloyd died in 1713 but the coffee house continued to prosper as a centre for marine insurance. By the end of the 18th century the underwriters had elected a committee and moved to their own premises in the Royal Exchange. Only members of Lloyd's were allowed to accept insurance business.

The Society of Lloyd's was incorporated by the Lloyd's Act 1871 which provided the business with a sound legal basis and laid the foundations for today's market. By the turn of the century the traditional club of marine underwriters had become an international market for insurance risks of almost every type. Lloyd's pre-eminence as a world center for insurance had been established.

Lloyd's is the world's leading insurance market, transacting business worth billions of pounds in premiums each year.  It is a global market, providing insurance coverage across the range of commercial and domestic insurance needs. Lloyds is one of the largest providers of surplus lines and specialty lines insurance and reinsurance in the US.

Lloyd's has also long been known as the market where anything can be insured. While this is not strictly true, Lloyd's underwriters' willingness to introduce new types of insurance cover amply justifies the market's reputation for innovation. Some examples of unusual risks insured at Lloyds are:

Rogue trader cover

Lloyd's underwriters provided cover for a loss sustained by a bank as a result of unauthorized trading which had been concealed by a trader and falsely recorded in the institution's records. The so-called 'rogue trader' cover extends to commitments in excess of permitted limits, trading in unauthorized instruments and trading with unapproved counter-parties.

Veteran aircraft

Lloyd's underwriters insured a Second World War German Heinkel bomber which was airlifted from Spain to Duxford in Cambridgeshire slung beneath a German Army Sikorsky helicopter. The bomber belongs to The Old Flying Machine Company, which provides vintage aircraft for air displays and film work.

Chinese vintage

For a French exhibition of Chinese artifacts, underwriters insured a 2000-year-old wine jar complete with contents which had turned blue with age.

White Christmas

A car dealership in the US state of Nebraska took out a $1.5million insurance policy at Lloyd's after offering $10,000 to anyone who bought a car from it during December, provided it snowed on Christmas Day. More than 65 customers would have qualified for the offer if the town where dealership was based had experienced a snowfall of at least four inches on Christmas day.  

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Tennant Risk Services
124 LaSalle Road
West Hartford, CT 06107
Phone: (860) 519-1301
Fax: (860) 216-5845
E-Mail: info@tennant.com

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