The worldwide insurance market has taken a big hit from Covid-19 related claims.
Earlier this year Lloyds of London reported that it expects 2020 pay-outs for claims related to the pandemic to reach £6.2bn, making it the mosy costly insurance event in history. Business interruption insurance (BII) related losses have been well publicised, but the event cancelation, travel insurance and personal protection lines have also taken big hits.
The net effect of this has been a hardening insurance market where premiums are increasing (especially for liability insurances). But also, insurers are looking much harder than ever before at claims and asking whether some – or all – of the claim should be covered by the policy. So, we are seeing an uptick in the number of insurance disputes between policyholders and insurers over whether the claim should be covered by the policy in question.
And policy coverage disputes with insurers can be devasting for businesses. They can be costly and protracted at the very time when the business has lost a key asset, or suffered a disaster, but does not have the benefit of an indemnity from insurers. It is no exaggeration to say that these disputes can push some businesses over the edge and into insolvency.
So, what practical steps can businesses take to minimise the risk of a coverage dispute with their insurers?
Fundamentally, insurances must be regarded and treated as key assets of the business. You pay a lot of money for them each year. But if they don’t pay out when a claim is made, they are not worth the paper they are written on. The policies should not be stuck in a filing cabinet and forgotten about until next year’s renewal.
With this in mind, here are our top five tips for avoiding policy coverage disputes with insurers.
Make sure you fully disclose all relevant facts and matters about the risk to be insured
When you go out with your broker to buy insurance, remember that there is now a duty (under the Insurance Act 2015) on an insured to make a fair presentation of the risk to be insured to the insurer.
If an insured fails to comply with that duty, that may jeopardise the payment of a claim. We have recently seen cases where insurers have rejected claims on the basis that a risk was not fairly presented to them when they agreed to insure it.
So, you must ask your broker for advice about what is relevant and how to comply with the duty when proposing for the insurance. Do not data dump on insurers, do not be too brief or cryptic when presenting the risk and respond fully to any questions raised by insurers. Also, make sure that you properly document the proposal and renewal process, so that you have an audit trail in case you are ever challenged by insurers.
Overall, be transparent with your insurer about the risk to be insured.
Before you buy your insurance, read and understand the policy
You need to look carefully at key issues such as what risks are covered by the policy (and what are excluded), who is the insured, what are the triggers to policy coverage and what is the level of the excess. You should think about whether the policy is suitable for the risks facing your business. If you don’t understand any part of it, ask questions – and keep asking until you do understand.
None of the contents of your policy should come as a surprise when it comes to making a claim. Many coverage disputes that we have seen could have been avoided by people simply knowing what risks were covered by their insurance. They were later surprised to discover that the insurance that they did have did not respond, but by then it was too late. This was certainly the case with some BII claims made in the wake of the first lockdown in March 2020 when the policy-holders were dismayed to learn that their policies did not in fact contain the non-damage extensions (so called “denial of access” and “notifiable disease” clauses) that may have covered the losses caused by government-enforced closures or reduced working.
Think about new areas of your business where you might need insurance
No business stays the same. So, you need to think about any recent developments with your business when you come to buying insurance. Have you acquired a new property or a key asset? Have you expanded into new territories or started up a new trade? Have you leased a part of your property to a new tenant?
Your business’ risk profile will also change over time. And that may mean that you need to look at new, or more comprehensive, insurance so that you are not inadvertently uninsured and without protection if things go wrong.
At the same time, things like your asset valuations and business profitability may change. So, you need to review with your broker whether the various insured limits of indemnity in your policies remain adequate or you may face being underinsured, which could reduce the value of your claim.
This is especially important when it comes to things like declared property valuations in damage policies and estimated gross profit or revenues for the purposes of BII.
Understand and comply with policy warranties and conditions
A warranty is a term by which the insured:
- undertakes to do, or not to do, a particular thing
- undertakes that a condition will be fulfilled
- confirms that a fact is true or not.
A condition precedent requires compliance for an insurer to be liable to provide cover under the policy in question.
For example, in relation to property insurances, an insured may be obliged to maintain certain minimum levels of security (such as alarms or security guards) or fire protection (such as fire extinguishers or sprinklers) at a factory or office. In relation to cyber insurance, policyholders may be required to have virus protection installed, a fire wall in place and force regular password changes on users.
But the message is that if you do not comply with these provisions, that will jeopardise payment of a claim further down the road. So, make sure you know what you are promising to do and think about how you will fulfil that promise.
Notify a claim strictly in accordance with the policy terms and conditions
Many liability policies operate on a “claims made” basis, i.e. they cover claims made against the insured during that policy year, irrespective of when the alleged wrongful act happened. But you must provide timely notice of claim to insurers in accordance with policy – if you don’t, that can jeopardise payment of the claim.
So, you need to be careful attention as to whom, when and how you need to notify a claim to insurers. The policy may stipulate that you need to give notice to insurers immediately, as soon as practicable after the insured becomes aware of it or within a given period.
Some policies also require an insured to notify circumstances which might give rise to a later claim. Circumstances that might give rise to a future claim can sometimes be difficult to define but are generally regarded as a fact, event, happening or situation that could in due course lead to a claim against the insured.
Once a claim has been notified to a policy, the insurer will wish to closely control how matters progress and how the insured conducts itself in relation to the claim. So, an insured must generally obtain the insurer’s consent to incurring defence costs, they must not admit liability or enter a settlement without the insurer’s consent and must co-operate with their investigation of claim.
The message here is that there are many things you can do well before a problem ever develops to minimise the risk of a coverage dispute with your insurers and ensure that your claim gets paid quickly and in full. If you have any doubt about any of these issues, take advice from your lawyers or brokers as soon as possible.