What the Form Is
The MP 03 01 Co-Insurance endorsement is an Insurance Services Office (ISO) form used to modify Management Protection insurance policies. Its primary function is to introduce a coinsurance clause, requiring the insured to share in a percentage of covered losses. A specific coinsurance percentage must be declared in the endorsement. When a covered loss occurs, the amount of the loss, after the policy's retention amount is satisfied, is multiplied by this coinsurance percentage to determine the portion of the loss that the insured entity or individual(s) must bear.
Classes of Business It Applies To
This endorsement applies to various entities that purchase Management Protection policies. These policies typically cover risks such as Directors and Officers (D&O) liability, Employment Practices Liability (EPL), Fiduciary Liability, and other management-related exposures. Examples of entities include:
- Publicly traded companies
- Private companies
- Not-for-profit organizations
- Financial institutions
For instance, a private company with an Executive Liability Coverage Form (e.g., MP 00 01) might have the MP 03 01 endorsement attached, meaning the company would pay a specified percentage of any covered D&O claim after their retention is met.
Special Considerations
- Mandatory Percentage: A coinsurance percentage must be explicitly stated on the endorsement for it to be effective.
- Interaction with Retention: The coinsurance applies to the amount of loss after the insured has paid the retention amount.
- Policy Applicability: Initially, this endorsement was specified for use with most Management Protection primary coverage forms, with exceptions such as MP 00 07 (Fiduciary Liability Coverage Form), MP 00 08, and MP 00 09. However, the 05 09 edition of the endorsement expanded its use, allowing it to be attached to MP 00 08 and MP 00 09.
- Impact on Recovery: The insured must understand that this endorsement means they will not be indemnified for the full amount of the loss above the retention; their recovery will be reduced by the agreed-upon coinsurance percentage.
For example, if a policy has a $50,000 retention and an MP 03 01 endorsement with a 10% coinsurance, and a covered loss of $500,000 occurs: the insured pays the first $50,000 (retention). Of the remaining $450,000, the insured would bear an additional 10% ($45,000) due to the coinsurance provision, and the insurer would pay $405,000.
Key Information for Agents and Underwriters
- Risk Sharing: For underwriters, the MP 03 01 endorsement is a tool to ensure the insured retains a portion of the risk beyond the deductible/retention. This can encourage better risk management practices by the insured.
- Pricing Consideration: The level of coinsurance accepted by the insured can be a significant rating factor. A higher coinsurance percentage assumed by the insured may lead to a lower premium, as the insurer's potential payout is reduced.
- Clarity in Explanation: Agents must clearly explain the financial implications of the coinsurance percentage to their clients. Misunderstanding how coinsurance works can lead to dissatisfaction at the time of a claim.
- Suitability: Underwriters and agents should assess the financial capacity of the insured to absorb their share of losses under a coinsurance provision, especially for larger or more complex risks.
- Negotiation Point: The coinsurance percentage can be a point of negotiation, reflecting the insured's risk appetite and the underwriter's assessment of the risk.