Contractors should be interested in the financial ratings and solvency measures of their insurance companies. In most cases, contract owners require a specific rating as a minimum standard. To meet such requirements, contractors must maintain good insurance. Ample coverage helps these professionals protect themselves and their business assets from lawsuits. Coverage also serves to meet requirements set by state laws.
Bonding and insurance industries are regulated by individual states, and an insurance commissioner usually makes sure that companies are financially sound and properly licensed. The evaluation process is ongoing. It is in place for the protection of claimants and policyholders. Insurance companies are usually classified as admitted or non-admitted. Each company has a choice whether they will conduct business on one classification or the other in a specific state.
The main difference between admitted or non-admitted companies is the amount of scrutiny of policy terms and the rating plans that determine premium amounts. In some states, admitted companies offer a state guaranty fund for insureds’ claim payments. Non-admitted companies do not extend these funds. Consumers must also pay extra taxes when working with non-admitted companies. It is standard practice for insurers to tell consumers what classification their company holds, which helps consumers know what to expect.
Insurance companies’ financial failures can devastate policyholders. A fall from an A rating to a C rating may result in a breach of contract. However, insolvency can be far worse than a falling rating. In such a case, claimants and attorneys for the plaintiffs may target the company’s assets. Financial information about insurance carriers can be obtained from six credit companies.
These organizations are not owned by the government. Their job is to analyze insurers’ financial statements that are filed with state regulators. They also review loss reserve reports, state examination reports, SEC financial reports and any reports filed regarding policyholders or stockholders. After careful analysis of the data, these companies assess credit ratings. The ratings are available by subscription. However, an agent will also be able to provide these ratings.
With this valuable knowledge in mind, it is also important to implement some best practice initiatives. Look at the contract’s insurance clause. There may be problematic issues in this section. Although many contracts allow for a downgrade and cancellation, policyholders should request the option to reject an insurer that shows unacceptable actions. This option gives the policyholder some control in the event of an insurer’s declining financial situation.
Another option is to make the clause state that specifications must be met only on the applicable policy’s inception date. This would prevent a mid-term cancellation resulting from a financial downgrade. For those who may wonder about the frequency of downgrades, research conducted in 2002 showed almost 650 companies received lower ratings than the previous year. In 2005, more upgrades were issued than downgrades. The point is that downgrades can happen, so it is important to be prepared.
Contractors should also know that their bonding companies are subject to evaluation at the federal level and the state level. For government projects, companies must limit single project bond capacity to a specific amount, which is determined by the U.S. Treasury’s Circular 570 publication. Surety companies’ financial situations are monitored by the FMS. Important financial information can be found on their official Web site.
Those who have contracts funded by federal sources should perform an annual verification of a bonding company’s ability to meet government requirements. This item of discussion should be on the agenda during a meeting with a bonding agent and surety company. Monitoring financial trends of insurers and bonding companies should become a habit. More information is better, but the minimum amount of research should include financial ratings.