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HCR Law Events

25 January 2023

Matters to consider when assessing cover

When taking out insurance, it is essential that a business carefully considers the level of cover it requires to ensure it is adequately protected.

Underinsurance

Insufficient insurance coverage, also known as “underinsurance”, can leave businesses exposed to significant risks in the event of a claim, and, in some cases, can entitle an insurer to repudiate a policy.

Whether an insurer can repudiate a policy because of an undervaluation will depend on whether the undervaluation was (a) unintentional or negligent or (b) reckless or deliberate. The duty of fair presentation requires a policyholder to disclose every material circumstance that is known, or ought to be known, when a policy is taken out or at renewal.

If it can be shown that the underinsurance by a policyholder is the consequence of a deliberate or reckless breach of this duty, the insurer can refuse to pay a claim in its entirety, or void the policy altogether, with no return of premium.

However, even if the underinsurance was unintentional or negligent, the cover provided can be reduced and you may not recover the full amount of the claim.

For example, in the event of a buildings insurance policy, the sum insured should be the present day rebuild costs, not the market value of the premises nor the price you paid for the building. Prior to taking out the policy, a professional building reinstatement valuation should be carried out to ensure the estimated value is accurate. If not, you risk underinsuring the building.

However, in the case of Berkshire Assets (West London) Limited v AXA Insurance UK plc [2021] EWHC 2689, the High Court decided that the insurer must show that, but for the breach of the duty of fair presentation, the insurer would not have entered into the contract of insurance at all, or would have done so only on different terms.

While underinsurance is one of the biggest risks to a policyholder, it is also important to ensure that the level of cover is not inflated to avoid you paying a larger premium than is necessary. Carefully assess your key risks and the potential outcomes, should one of those risks turn into a major incident.

What do the liability exposures look like? Make sure the cover provided under the applicable policy is sufficient to protect you.

Business structure

Care should also be taken to ensure any operating companies within a group of companies have cover. A holding company in a group may have taken out insurance to cover the activities of the whole group. However, unless all group companies are named policyholders, or the policy wording extends cover to subsidiary companies, the group will not automatically be covered by the policy.

Territorial limits

A business should also ensure that its insurance policies provide cover for all relevant territories within which it operates, and this is not just limited to those countries in which a business may have offices. For example, if a business provides goods or services to customers in Europe, a products and public liability policy limited to the UK is unlikely to provide sufficient cover.

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About the Author
Jonathan Edwards, Partner, Head of Insurance & Risk

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