Higher education institutions are some of the world’s largest landowners, with campuses and buildings sprawling across state and even national borders. Transferring the risk of loss or damage to portfolios that often include hundreds of buildings, thousands (if not millions) of acres of land, and facilities of every imaginable kind and use is, to put it lightly, complex. This is especially so in a risk landscape where natural disasters are increasing in frequency and intensity, and the costs of construction, clean-up, and remediation have never been higher.
Transferring Risk through Property Insurance
Traditionally, colleges and universities have transferred facilities and landholding-related risks through commercial property insurance programs. Evaluating which insurer or set of insurers is right for a specific institution is an iterative process that often involves intensive information exchange. Most significantly, insurers want to know the institution values of each piece of property to be insured. Institutions typically convey their valuations through a Statement of Values, which is then filed with the insurance company as part of issuing the policy.
There are several ways to calculate how a property is “valued” for insurance purposes, but that is a story for another day. What is important to know is that, amid a changing insurance market, the value of each property listed on the Statement of Values has become critically important.
Insurers historically used the stated value of a property solely to calculate the premium charged for a specified policy and then issued policies providing “blanket” coverage across the institution’s entire portfolio.
“Blanket” coverage provides a single (often very large) aggregate limit of insurance coverage under a single insurance program that insures multiple properties.
The alternative to “blanket” coverage is “stated value” or “valued” policies, which provide a specified limit of insurance for each individual property in a single program.
PHigher education institutions are best served by keeping Margin Clauses and OLLEs off their property insurance program, as these provisions are confusing and could expose your institution to unnecessary risk.
Blanket vs. Stated Value: Why This Matters
The benefit of a “blanket” program is that catastrophic losses can often exceed the stated value of a single piece of property within an extensive portfolio. It is also common for insureds to understate the value of property due to not appropriately valuing rising construction and materials costs, uncertainty over whether the insured would actually rebuild the lost property, and—to be frank—to keep premiums lower. “Blanket” limits provide some peace of mind by making the individual-stated values less critical.
The New Hidden Coverage Limitation: Margin Clauses and OLLEs
In recent years, insurers have responded to the influx of large property losses by adding new provisions that effectively seek to transform large “blanket” property programs into “stated value” insurance. These provisions are often called a “Margin Clause” or an “Occurrence Limit of Liability Endorsement (OLLE).” OLLEs, in particular, are typically drafted in confusing ways—if not outright incomprehensible—such that the average higher ed leader, or even the average risk manager, is unlikely to understand its potentially devastating effect. For example:
Margin Clauses will often state that, in the event of loss or damage at an insured location, the insurer will not pay more than a specified percentage of that location’s stated value listed on the Statement of Values on file with the insurer. Percentages often range from 100% to 125%.
OLLEs often look something like this:
It is understood and agreed that the following terms and conditions apply to this policy:
[Language amending the definition of “occurrence”]
In the event of loss hereunder, liability of the Company shall be limited to the least of the following in any one “occurrence”:
The actual adjusted amount of the loss, less applicable deductibles;
100% of the individually stated value for each scheduled item of property insured at the location which had the loss as shown on the latest Statement of Values on file with this Company, less applicable deductibles. If no value is shown for a scheduled item, then there is no coverage for that item; or
The Limit of Liability or Sublimit of Insurance as shown on the Declarations page of this policy or as endorsed to this policy to apply to any particular insured loss or coverage or location.
Margin Clauses and OLLEs May Not Be Enforceable, but Avoid Them Anyway
While insurers have claimed the effect of these provisions is obvious to the average person, courts have not agreed. For example, the Napa County Superior Court in Calistoga Ranch Owner, LLC, et al. v. AIG Specialty Insurance Company, et al., Case No. 21CV001530, ruled in 2023 that OLLEs issued by five excess insurance companies participating in a $100 million “blanket” insurance program were unenforceable. The court determined that the OLLEs violated California law—which requires that policy provisions that limit coverage must be “conspicuous, plain, and clear”—because it was neither “plain” nor “clear” to the average person that these endorsements were intended to amend the “blanket” limits stated on the face of the program.
BOTTOM LINE
Though the Calistoga Ranch ruling is encouraging, higher education institutions are best served by keeping Margin Clauses and OLLEs off their property insurance program, as these provisions are confusing and could expose your institution to unnecessary risk.