Premium Savings Now, Can Cost You Later

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In these difficult economic times, many companies have acted to reduce their insurance costs by participating in trade association programs or self-insuring in ways intended to achieve premium savings. These savings, however, can sometimes be difficult to verify. Moreover, the insurance arrangements are not always free from risk, and premium savings can rapidly dissipate if litigation or other problems ensue.

Trade groups often form relationships with insurers and brokers in an effort to provide a benefit to their members. These relationships are very common, and they can be a valuable asset to the group’s members. For instance, the trade group’s members might receive a discount if they participate in, and purchase insurance through, the group’s program. The concept is straightforward, but the reality can become quite complex.

A business should take a close look at the premium savings that will realistically be achieved from participating in such programs. In many instances, the complexity of the programs obscure whether premium savings will occur. For instance, insurers commonly market programs based on the dividends that will be paid to participants. These dividends are paid at the discretion of the insurer, and the savings are therefore subject to debate. It is also common for insurers to impose restrictions on the dividends that may be paid, and the restrictions may be “buried” beneath several layers of documentation. A business should carefully examine the program documentation and consider whether the potential savings justify participation.

Risk retention groups (“RRGs”) are another mechanism for achieving premium savings and other benefits. Essentially, an RRG is a form of self-insurance in which a group of companies provide their own insurance by establishing their own premiums and reserves. RRGs work well, and they are certainly an option for many companies. They are not, however, a cure-all. In the event of a serious claim, an RRG member will likely pay more than a business insured through a traditional insurer. RRG members need to closely monitor who they admit to the group and carefully scrutinize the members’ claims histories. It is important for a company to be actively involved. If a business cannot (or will not) be actively involved, then an RRG may not be a good option.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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