Key insurance issues
Businesses buy insurance to provide themselves with valuable protection at times of loss or threat.
However, all too often, a lack of care or awareness when entering the policy or making the claim can leave the business without the critical cover it expected.
This briefing highlights some of the key points to look out for in a policy and provides a few simple tips to help maximise insurance recoveries in times of need.
Insurance contracts
Insurance policies are a type of business contract. However, they have their own specific quirks and specialist law which mean it is unsafe to treat them like just another commercial agreement.
Failure to respect these differences can and does lead to rejection of claims, substantial financial exposure to the business and, in some cases, insolvency.
Key issues to watch out for
Entering the Policy
Just answer the questions the broker gives you and the policy they send you will be fine. Right?
No. Firstly - policies are contracts, they can be negotiated.
Exclusions and extensions can be brought in. Understand the policy scope including those extensions and exclusions - they are often in insurance market language. Do you know what they mean? If not, ask the broker to explain and keep a record of what you're told.
Secondly - answering the questions is not enough.
Businesses must disclose all facts which the insurer would want to know to assess the risk. That means you have to volunteer additional information even if (especially if) it might result in an increased premium or the addition of specific exclusions.
The consequences of non-disclosure can be extreme: the insurer may simply be able to repay the premium and walk away instead of paying out for the claim. Or worse – claw back payments it has already made in respect of other claims.
Minimise the risk:
- carefully document what the insurer is told/what documents it is provided with.
- if in doubt about whether a fact is relevant discuss with your broker and keep a record of the broker's advice.
- Try to expressly limit whose knowledge within the business counts for the purposes of disclosure.
- watch out for 'basis of contract' clauses and get rid of them. They convert representations into warranties allowing insurers to decline claims for nonmaterial matters unconnected to the claim.
Terms of the insurance contract
Be aware of warranties and conditions precedent in policies. Familiarity with these clauses in your policies and strict compliance with them is crucial to safeguard coverage:
- Warranties
Warranties are terms which must be strictly complied with.
Any breach allows the insurer to refuse to pay, even if the claim is totally unconnected to the loss or remedied before the loss e.g. if a warranty confirms the presence of a sprinkler system but the loss results from theft, the insurer can still decline the claim.
- Conditions precedent
Conditions precedent are steps which must be complied with before the insurer has to pay out, e.g. approval of a proposed settlement or notification of claims within a certain time period.
Always consult your policy as soon as a possible claim arises. Time limits can be short, approval by the insurer of otherwise commercial decisions can be required and the consequences for failure to comply are extreme.
Whether terms are warranties or conditions precedent (or not) can often be negotiated when entering the policy (see above).
Duty to Mitigate
When there is a potential or actual insured loss, businesses should take reasonable steps to avert or mitigate it. The extent of this obligation is not always clear even where the policy does contain an express obligation to mitigate:
- Always involve insurers as early in the process as possible to avoid later arguments about what you should have been doing to minimise loss.
- Subject to that, businesses should act as they would if they were a 'prudent uninsured'.
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Some policies cover certain mitigation costs.
Conclusions
Policies can sometimes (but not always) be negotiated. They can and should, however, always be fully considered and understood when placed and monitored when in force.
Once in place, being clear on what needs to be done to preserve cover and doing it, will reduce the chances of nasty surprises when the cover is called on.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.