Insurance premiums are often based on established rates applied to an exposure basis, such as payroll for workers compensation or sales for commercial general liability insurance. The insurance premiums may be adjusted after policy expiration to reflect the actual exposure during the policy term.
For instance, a contractor has a commercial general liability policy for the period 12-1-08/09. The premium is $159,500, which is based on estimated sales of $110,000,00
0 and a $1.45 rate applied to each $1,000 of sales. This is reflected in the policy via a Premium Endorsement (PDF).
As it turns out, the contractor’s sales plummeted in 2009 due to the general economic downturn and a lack of construction work. The actual sales amounted to $30,000,000. The contractor thinks the adjusted premium will be $43,500 ($1.45 rate applied to $30,000,000 sales).
However, this is where the surprise comes in. The premium endorsement contains a “Minimum Premium” provision. This endorsement specifies that regardless of the actual sales, the minimum premium will not be less than 90% of $159,500 or $143,910. In essence, the contractor will be penalized $100,410 (the difference between the minimum premium and the adjusted premium, had no minimum premium provision applied).
In this case the contractor and the insurer have a long-term relationship. The contractor appealed to the insurer for some relief on the minimum premium penalty. While it was not obligated to do so, the insurer agreed to reduce the penalty by half.
The moral of the story for insurance buyers is to understand the ramifications of minimum premiums and to instruct their agent/broker to reduce minimum premiums where possible. Also, insurance buyers should be aware that some states, such as New York (PDF), have rules regarding the applicability of minimum premiums.
