What is a Margin Clause? Can understanding it help win an account?
When blankets are used, they often go hand-in-hand with waiving the coinsurance requirement. In such a case, worries about limits in case of a claim are greatly reduced or even eliminated altogether.
But there is an endorsement which throws a monkey wrench into the situation. It is ISO form CP 12 32, Limitation on Loss Settlement – Blanket Insurance (Margin Clause). Many carriers use a proprietary version of the Margin Clause form. Coinsurance is used with margin clauses.
When this form is on a policy, the limit available in a claim is no longer the total Blanket Limit. Instead, the limit is capped at the amount on file in the Statement of Values for a particular property item, plus a stated percentage of that value. The stated percentage is scheduled on the Margin Clause form, typically 10% to 25%, and may go as high as 50%.
For example:
Building amount at one blanketed location is $1M on the SOV.
Blanket Building limit is $5M.
The Margin Clause uses 20%.
Coinsurance is 90%.
The maximum limit available is $1.2M for this Building. Here is the kicker: coinsurance applies, which may reduce the amount payable in a claim.
Underwriters use margin clauses as a tool similar to coinsurance – to promote accuracy of limits provided to underwriting. The same way coinsurance uses
- a carrot (better rate for higher coinsurance)
- and a stick (potential for penalty);
a margin clause also uses
- a carrot (up to 50% higher limit)
- and a stick (potential for coinsurance penalty).
From an insured’s standpoint, having a margin clause instead of a full blanket with Agreed Amount endorsement presents a possible reduction in coverage. The solution is to avoid the margin clause (when possible) and to encourage clients to use accurate limits.
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