Legal Definitions - assessable insurance

Assessable insurance refers to a type of insurance coverage where the policyholder may be required to pay additional funds beyond their initial premium if the insurance company experiences financial shortfalls. This obligation, known as an assessment, typically arises when the insurer's reserves are insufficient to cover claims and operating expenses. This structure is often found in mutual insurance companies, where policyholders are also members or owners and share in the company's financial risks and responsibilities.

Here are some examples to illustrate assessable insurance:

• Example 1: Mutual Fire Insurance for Farmers

  A group of farmers in a rural community forms a mutual fire insurance company to protect their barns and equipment. Each farmer pays an annual premium. However, the policy terms state that if a year brings an unusually high number of large fire claims that deplete the company's financial reserves, the board of directors can levy an additional assessment on all policyholders. This means each farmer might have to pay an extra percentage of their original premium to cover the shortfall.

  This illustrates assessable insurance because the farmers' policies carry the potential for an additional payment (an assessment) beyond their initial premium if the mutual company faces severe financial strain due to unexpected claims.

• Example 2: Professional Liability Coverage for Medical Practitioners

  A cooperative of specialized surgeons establishes a mutual insurance entity to provide professional liability (malpractice) coverage for its members. While the surgeons pay regular annual premiums, their insurance agreement includes a clause allowing for assessments. If the mutual insurer faces an extraordinary year with several large malpractice judgments that exceed its projected payouts and reserves, the member-surgeons can be required to contribute additional funds to ensure all claims are paid and the company remains solvent.

  This is an example of assessable insurance because the surgeons, as policyholders, are not only paying their standard premiums but also agreeing to potentially contribute more funds if the mutual insurer encounters significant financial difficulties from unforeseen claims.

• Example 3: State-Mandated Workers' Compensation Fund

  In a particular state, businesses in certain high-risk industries are required to obtain workers' compensation insurance through a state-chartered mutual fund. Due to a series of severe industrial accidents and a downturn in investment returns, the fund's reserves fall below the legally mandated level. The fund's governing body then issues an assessment to all participating businesses, requiring them to pay an additional 10% of their annual premium to replenish the fund and ensure future claims can be covered.

  This demonstrates assessable insurance because the businesses, despite paying their regular workers' compensation premiums, are legally obligated to pay an additional assessment to maintain the solvency of the mutual fund that covers their employees' claims.