Understanding EML and PML: The Dilemma Facing Policyholders in Property Insurance

Understanding EML and PML: The Dilemma Facing Policyholders in Property Insurance

Insurance is a cornerstone of risk management, especially when it comes to safeguarding valuable assets like property. However, the concepts of Estimated Maximum Loss (EML) and Probable/Possible Maximum Loss (PML) have been causing ripples of discontent among policyholders. Let's delve into what these terms mean and why they are becoming a concern, especially for commercial clients such as hotels and apartment complexes. 

What are EML and PML? 

Estimated Maximum Loss (EML): This refers to the highest potential loss that might be expected from a single perilous event. It’s a calculated risk estimate that insurers utilize to determine how much they might have to pay out in a worst-case scenario. 

Probable/Possible Maximum Loss (PML): PML can be seen as a more realistic assessment of the maximum loss an insurer might face. Unlike EML, which predicts the worst-case scenario, PML considers factors like existing risk mitigation measures and the statistical likelihood of a maximum loss event occurring. 

Why are they causing problems for policyholders? 

  • Limited Coverage: When insurers heavily rely on EML and PML calculations, it can limit the amount they are willing to cover. If an insurer believes the EML for a property is particularly high, they might be reluctant to provide full coverage, leaving policyholders potentially underinsured. 
  • Higher Premiums: A high EML or PML can result in elevated insurance premiums. If a property is deemed to have a high potential loss, insurers might charge more to offset this risk, making insurance less affordable for policyholders. 
  • Complex Valuation: Calculating EML and PML is not an exact science and can often be subject to interpretation. Policyholders may find themselves questioning the accuracy of these evaluations, especially if they result in higher premiums or reduced coverage. 
  • Inhibits Full Indemnification: Insurance is meant to put the policyholder back in the same position they were in before a loss. However, if a policy is based on restrictive EML or PML estimates, policyholders might not receive full compensation for their claims, leading to out-of-pocket expenses. 
  • Disputes and Delays: Disagreements over EML and PML calculations can lead to disputes between policyholders and insurers. This not only strains the relationship but can also lead to delays in settlements. 

As an example, this is a big issue for hotel and other commercial real estate clients who may be offered limited coverage. Banks are having a difficult time finding affordable insurance (if at all) to cover the insurance gap required to protect their interest. Properties with insufficient have even decided to sell. And you can imagine the dilemma with insurance claims when a major catastrophe like a fire or storm require a major rebuilding project.

In Conclusion 

While EML and PML are tools to help insurers manage their risk portfolios, an over-reliance, manupulation or misinterpretation of these concepts can be detrimental to policyholders. It is essential for policyholders to understand these terms and their implications, and to actively engage with their insurers to ensure they receive adequate coverage and fair treatment. On the flip side, insurers need to ensure transparency and fairness in their application of EML and PML, always putting the best interests of the policyholder at the forefront of decision-making.

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