Taking on One-Offs
Q: I operate a marine terminal, and I have an insurance policy with a $1-million limit to cover loading and discharge operations. A customer wanted me to discharge a heavy piece of machinery valued at $75 million. When I asked my insurance company to increase its limit just for this one operation, it refused to provide the cover. Why would it refuse? What can I do?
A: Your situation is an example of what is typically referred to as a "one-off" transaction. One-off transactions can take many different forms.
A typical one-off transaction might involve a customer's request for insurance on a single shipment of items with a high risk of pilferage, such as electronics. It may involve a shipment that requires temporary warehousing. Or it may involve a request for a very high insurance limit to cover a single location for an isolated service or shipment, such as in your case.
More often than not, one-off transactions such as these are difficult to insure.
In one recent case, an operator with a warehouse in the Dominican Republic entered into an agreement with a computer manufacturer to store computers and computer parts at his facility. Under the terms of the agreement, the operator would be responsible for all losses to the goods - no matter what the cause - while they were in his possession.
The manufacturer required the warehouseman to insure the goods to a limit of $25 million. The operator had a hard time obtaining insurance for this single contract.
Spreading the Risk
One-off transactions are difficult to insure. When an insurer takes any risk, it tries to make sure that it has a sufficient "spread" of risk in its portfolio - it does not want to concentrate its exposure on one transaction.
A good example of this is hurricane risk. In one case, a terminal operator purchased $20 million of hurricane insurance before Hurricanes Katrina and Wilma struck. He paid $80,000 for his insurance, but recovered $10 million in hurricane losses.
To avoid a concentration of risk, the insurer either spreads it over many transactions, or transfers a part of it to another insurer by obtaining reinsurance. The insurer does this because the premium it receives on an isolated transaction will never be sufficient to cover a payout on a large claim. This might be the reason why your insurer refused your request.
If you need to insure a one-off risk, you can approach insurers in the market that specialize in unique and hard-to-place cover. Because they are specialists in this area, these insurers have the capacity to address most problematic risks.
But the cost for this cover can be significant, and the insurer might impose special conditions before agreeing to take the risk.
Perhaps the best way to address one-off transactions is to anticipate them. If you believe that you might receive a request for a high limit of insurance during the year, purchase excess or umbrella insurance.
Although you will pay more for continuous cover, the insurance will be available if you need it. Also, if a particular transaction requires even higher limits, it will be easier for you to purchase additional limits when you already have an excess cover in place.
No matter what type of insurance you may be required to obtain, try to avoid having to seek it at the last minute. This puts you in a better position to satisfy your requirements, and helps you avoid disappointments.
Have a liability question or concern? I will try to help. Please send your questions to me via e-mail at: email@example.com.