How EML and PML Work for Commercial Property Insurance Claims

Estimated maximum loss (EML) refers to the highest potential loss possible from a single event. Probable/possible maximum loss (PML), meanwhile, refers to the most likely loss from that same event.

Keep reading to find out how EML and PML work – and how they could impact your commercial property insurance claim.

How EML and PML Work

Estimated maximum loss (EML) and probable/possible maximum loss (PML) are two different ways to calculate risk.

While EML is the worst-case scenario, PML is the most likely scenario:

Estimated Maximum Loss (EML): The highest potential loss resulting from a single covered event. This is the amount the insurer may need to pay in the worst-case scenario.

Probable / Possible Maximum Loss (PML): The most likely potential loss resulting from a single covered event. It’s a more realistic estimation of what the average loss could cost the insurer, based on statistics.

Insurers use EML and PML calculations to determine coverage.

Insurance is all about risk. If the insurer believes the risk of covering a property is too high – say, if the EML or PML are excessive – then the insurer could restrict coverage, reduce limits, or raise premiums.

EML and PML Can Be Wildly Inaccurate

EML and PML aren’t an exact science. There’s no specific “right” or “wrong” way to calculate EML / PML, and two experts could calculate wildly different numbers for EML and PML.

Because EML / PML calculations aren’t an exact science, there can be inaccuracies, and those inaccuracies could affect future insurance claims.

There are entire companies dedicated to calculating accurate EML and PML. Here’s how risk engineering firm CEERISK explains it:

EML/PML studies cannot be accurately developed based on theoretical knowledge of the risk and the exposure. Instead, these studies require a comprehensive understanding of real-life conditions that impact the size of the loss.

It’s difficult to understand every real-life condition affecting a business. Even if your business is straightforward, your EML and PML calculations could be wildly inaccurate.

EML and PML inaccuracies could lead to insurance disputes, impacting policyholders and weakening your claim.

How EML and PML Affect Policyholders

As a policyholder, why should you care about EML and PML?

Insurers use EML and PML to calculate the risk of insuring your business or property. Your PML and EML impact premiums – and they could affect future insurance claims.

Here are some of the ways in which estimated maximum loss and probable/possible maximum loss could impact policyholders:

• Reduced Coverage Because of High EML / PML: Many insurers reduce coverage because of high EML and PML. They may feel the risk of insuring a certain aspect of your business is too high, for example. If a covered event affects your business in the future, then your business may not be made whole because of this reduced coverage.
• Higher Premiums: An insurer may offer you a competitively-priced policy upfront, only to calculate high EML and PML, leading to higher premiums. Insurers use higher premiums to calculate higher risk. If you have a higher potential loss, you’ll pay higher premiums to cover this higher risk.
• Accuracy Concerns: Calculating maximum and probable losses isn’t an exact science. It’s educated guesswork. Sometimes, EML and PML are inaccurate. Policyholders could be paying excessively high premiums – or lacking adequate coverage – because of inaccurate EML and PML calculations, for example. As one risk engineering firm explains, EML/PML “cannot be accurately developed based on theoretical knowledge of the risk and the exposure.” Instead, you need a comprehensive understanding of real-world conditions affecting the business. That’s not always possible.
• Inability to Receive Full Compensation: The goal of insurance is to restore your business to pre-loss condition after a covered event. Inaccurate EML or PML calculations, however, could restrict your business’s ability to receive full indemnification after a loss.
• Insurance Claim Disputes & Delays: Overall, EML and PML issues can lead to insurance claim disputes. Policyholders could argue the EML and PML weren’t accurate, for example, while the insurer could attempt to justify their EML and PML calculations. Overall, EML and PML calculations are one leading cause of insurance disputes.

How Insurers Calculate EML and PML

Calculating EML and PML isn’t an exact science. However, insurance spends billions of dollars per year attempting to accurately calculate EML and PML.

Here are some of the strategies insurers use to accurately calculate EML and PML:

• Use a combination of theoretical knowledge and real-world, hands-on experience to calculate the risk of loss to a business.
• Determine the total value of a business – say, if all of the business’s property were destroyed in a catastrophic loss.
• Determine risk factors linked to the business’s property. The insurer could analyze the risk of severe weather or natural disasters, for example, along with the type of material used to create the property (a wood building, for example, is more susceptible to fire).
• Consider risk mitigation factors – like proximity to a fire station, the installation of a security system, or an effective fire suppression system.
• Multiply the value of the property by the expected loss percentage. The calculation involves considering the risk of losses, the value of risk mitigation factors, and the overall value of the property to create a specific number.

Let’s say your business has a $1 million property near the woods in Colorado. There’s a risk of losing the entire building to a forest fire. However, your business has cut trees 100 yards, dug ditches, and installed fire suppression systems on the roof to reduce the risk of catastrophe by around 25%. In this case, your probable maximum loss could be $1,000,000 * (100%-25%) = $750,000.

Understandably, EML and PML calculations can get complicated. There are lots of risk factors – and risk-mitigating factors – to consider.

Some Businesses Conduct PML Studies Outside of Insurance

Probable/possible maximum loss plays an important role in commercial insurance. However, some businesses undergo a PML study outside of insurance.

Some of the reasons a business could undertake a PML study include:

• Get a comprehensive evaluation of the financial impact of your risk, including the specific losses your business could incur linked to various risks – from flooding to fires to cybersecurity breaches.
• Obtain an overview of the risks and benefits of a specific project. Some businesses conduct a PML study at a project level, for example, to calculate risk.
• Close the knowledge gap between stakeholders. A PML study at a project or company level could help relevant stakeholders understand risk. It’s a simple, concise way for stakeholders – particularly high-level stakeholders – to determine the risk and value of a project.

Final Word

EML and PML could influence your commercial insurance claim.

If an insurer calculates high EML and PML, it could raise premiums for your business – or even reduce coverage when you need it most.

Our commercial insurance claims specialists have extensive experience in EML and PML calculations, and they could use their expertise to speed up or increase the value of your insurance claim.

Contact ClaimsMate today for a no-cost consultation.

Stephanie Corona

Stephanie is a property insurance claim expert with over 20 years of experience working as an insurance adjuster, expert witness, appraiser and umpire. She is passionate about sharing her expertise, knowledge, tips and training to help both property owners and Public Adjusters in their pursuit of effectively managing claims and recovering the claim settlement they deserve after a loss.