Amid the coronavirus pandemic, many drivers have received refunds from their automobile insurers because they have spent less time on the road. Many small businesses might be surprised to find they are entitled to receive refunds on insurance premiums paid before and during the COVID-19 outbreak for other lines of insurance.
Insurance policy premiums are primarily determined by exposure. Governor Murphy closed non-essential business, reducing exposure. Small businesses that have paid insurance premiums for March, April, May, and June have likely paid the normal rates based on pre-coronavirus levels of risk. These business and property owners should call their insurance carriers to see how they can be refunded for overstated payments.
The New Jersey Department of Banking and Insurance issued Bulletin No. 20-22 to notify insurance companies of a new mandate to provide premium refunds or similar forms of relief to policyholders. The bulletin applies to premiums paid since March 9, 2020. Insurance companies are permitted to “provide premium relief to individual policyholders without prior approval by the Department by reassessing the classification and exposure based of affect risks on a case-by-case basis for recent, current, and upcoming policy periods” in accordance with existing rating plans. However, the Bulletin also allows insurers to apply uniform premium reductions for particular lines of insurance as well. The Bulletin mandates that policyholders must be notified no later than June 15, 2020 without regard to how insurance companies are fixing the problem.
Although some insurance companies like Allstate began to issue refunds voluntarily, it is advised that business owners stay vigilant and verify with their insurers that they will be receiving paybacks due to the mass of claims.
There are three particular lines of insurance for which small businesses might seek reimbursement at this time. Small businesses with workers’ compensation insurance based on payroll, receipt or payroll based commercial general liability policies, and policies with vacancy clauses should all be proactive and start a dialogue with insurers about being refunded for these types of payments if their insurers have not already issued refunds.
Below is a brief explanation of each of these types of policies and policy provisions to aid business owners in their discussions with insurers and ensure they are receiving all the refunds to which they are entitled during COVID-19.
Workers’ Compensation Insurance
Workers’ compensation protects both employees and employers when an illness or accident occurs on the job. The cost of workers’ compensation insurance is determined by grouping similar businesses into classes and analyzing the likely cost of losses in previous years according to the class of business. The pandemic has forced people to work from home or eliminated their chance to work altogether. As a result, the calculation of risk is significantly less and employers that continue to pay their premiums on time have likely overpaid due to lack of a risk that employees will become injured or ill in the workplace.
Employers with workers’ compensation insurance should consider a “pay-as-you-go” option. Rather than paying a premium based on monthly estimates at the start of the year, the employer pays monthly based on exact payroll figures. Pay-as-you-go employers log onto a web-based reporting platform managed by the insurance company to report payroll each month. The employer enters the classes and rates of employees on the payroll and pay their premiums monthly based on that amount. This option eliminates the end-of-year audit because the employer has reported real figures and paid smaller premiums consistently throughout the year. The pay-as-you-go option allows employers to decrease uncertainty and only pay for the employees who are working for them at this time.
Again, although the insurers may already be making such calculations following the Bulletin, it is important for employers to speak their insurers and remain candid about business operations to ensure appropriate premiums are charged.
Receipt or Pay Roll-Based Commercial Liability
Commercial general liability insurance is subject to an end-of-year audit. Liability insurance is usually determined by estimating the rating basis for the current policy year. A business’s rating basis is a “best guess” the business calculates at the beginning of the year and is usually based on either payroll or receipt/sales. The premium payments are calculated based on how well a business thinks it will perform in the upcoming year. If a business estimates $1 million in revenue, the premiums will be calculated to cover the calculated amount of risk a $1 million dollar business would likely incur.
In January 2020, or when the business’s policy began, it is unlikely the business foresaw a complete shut down or that the nature of their business would be fundamentally altered. For this reason, it is advised that small business owners speak with their agent about adjusting their premium payments based on payroll or receipts at this time. Not only will this reduction save business owners money now, it will also make the end of the year audit less of a surprise to insurance agents. It is in insurer’s interest to make this change to better reflect actual risk in the market and make all premiums more accurate in the future. Business Owners Policies (BOP) are generally not subject to audits but are still entitled to refunds for overstated premiums.
A vacancy clause generally restricts coverage by excluding losses caused by perils after 60 days of vacancy. Usually, this is a common sense exclusion that allows insurance companies to deny payment to repair buildings that the owners did not use or did not keep secure due to vacancy. However, in these uncertain times of COVID-19, many buildings which owners want to use are vacant due to the virus. A building is generally considered vacant under normal policy language when 70% or more of its square footage is not rented or is not used to conduct the customary operations of the insured.
In general, most insurance policy provisions and even entire policies are similar. Vacancy clauses are one area of insurance in which the provisions can vary significantly from policy to policy. Business owners during the COVID-19 emergency are advised to contact their insurance agent and carefully review their vacancy policies. Owners should primarily let their agents know the buildings are vacant so the agent can make necessary adjustments to the policy which could afford the policyholder coverage in the event of damage due to vacancy during the pandemic where there would otherwise be no coverage.
Overall, it is important for business owners to speak to insurance agents about these issues rather than waiting until the end of the year or continuing to pay overstated premiums. Although there is a mandate in place in New Jersey to require insurance companies to handle these issues, it is advised that property owners and small businesses be proactive in obtaining relief for themselves during these uncertain times. Owners and operators outside of New Jersey should contact agents as well. The entitlement to refunds based on overstated premiums is a right as a policyholder and not specific to businesses in New Jersey.
If you require assistance in obtaining a premium refund from your insurance carrier or if you have other business-related inquiries, please contact Jennifer Barr, Esq. via e-mail at firstname.lastname@example.org or direct dial at (609)572-7410.
*Samantha Edgell is a Summer Associate in Cooper Levenson’s Atlantic City, New Jersey office.