Avoiding pitfalls and maximising protection with your business insurance

19th June 2024

Two business people discussing

Business insurance is a financial safety net that can shield your company from unexpected events which could otherwise lead to significant losses.

Now, more than ever, it is important to make sure your business is protected against the relevant risks – be it supply chain disruption or product liability claims – to ensure you can focus on the day-to-day.

In this month’s Q&A for in-house lawyers, Insurance, Risk and Regulatory Associate Rose Burbery and Solicitor Rhiannon Willimont explain the common pitfalls for businesses when insuring their company – what to look out for, what to consider before taking out insurance and how to know if your policy limits are suitable.

What do we do if we fail to comply with a condition for extension? Can businesses still claim under their policy?

This will depend whether or not the condition is a general condition of the policy or a condition precedent.

If it is a general condition, the insurer will have to establish prejudice to decline cover.

However, if it is a condition precedent and you have failed to comply, the insurer is entitled to decline cover.

Having said that, if the reason you did not comply was because you were not aware of the existence of the condition precedent and your policy was arranged by a broker, you may be able to claim against your broker.

Our group often acquires new businesses which sit as subsidiaries under the parent company. Is there a way to ensure new acquisitions will be covered under our policies without notifying our insurer each time?

It can be really onerous to notify insurers each time a new subsidiary is required, especially as when subsidiaries are specifically named, insurers often require a lot of detail about the newly acquired business. This creates a lot of work behind the scenes for both your business and your brokers.

One option for acquisitive groups is to agree a ‘subsidiary clause’ with your insurer within their policy. This means that cover extends to all subsidiaries of the insured party, normally the parent company, without a notification having to be made each time.

These clauses may have exclusions, so even if you have a subsidiary clause in place you should carefully check the wording. For example, acquisitions of subsidiaries outside the UK or subsidiaries that carry out activities in different sectors than the parent company may be excluded.

What should I do if I am not satisfied with the policy quotations my broker has provided?

In the first instance, you should approach your broker to have a discussion about your business’ risks and the type of cover you require. It could be that they don’t understand what it is you need, and this could be easily rectified.

If the premiums you have been quoted are higher than you expected, your broker will be able to explain why. This varies based on the sector you operate in, the location of your business, and your claims experience. If you have made a recent claim against your policy, for example, it is likely your premium will increase on renewal.

You could find that your premiums have increased because of something happening in the wider market – for example if there have been recent tech or data breaches.

Brokers should be able to negotiate the best premiums for clients, however they do increase year-to-year; which is something to factor into your budgeting and business modelling.

How can I know whether the policy limits suggested by insurers are reasonable?

A good place to start is your claims experience, look at the value of claims over the last five years and whether the annual limit suggested by your insurer is reasonable in this context. The policy limit needs to take into account any previous claims and whether it’s appropriate for that level of coverage.

It is also important to look at whether your policy limit is ‘per claim’ or ‘in the aggregate’. ‘In the aggregate’ means that the policy limit is the most the insurer will pay out during the period of insurance and each claim under the policy chips away at that amount. Once it is reached, the insurer will not pay any further claims. Aggregate policy limits will therefore be higher than ‘per claim’ policy limits.

If your policy limit is ‘per claim’, you should look carefully at the types of claim which could arise and your claims experience, as you may not need such a high limit for each potential claim.

How can businesses ensure conditions in policies are complied with?

The first step is to understand exactly what conditions are imposed under your policy – you can’t comply with conditions you are not aware of.

Once you have identified the conditions, you need to identify who would be responsible for complying with them within your business. This could vary depending on the condition. Often, compliance with conditions will be the responsibility of senior management or at board level. However, there may be instances where employees’ conduct will affect whether or not a condition precedent is complied with.

An example we have seen is where a motor trade policy contained a condition precedent that all hot works were carried out in accordance with a Heat Precaution Procedure set out in the policy. Here, it was the employees’ conduct that would determine whether or not a claim was covered under the policy, as the employees would be the ones actually carrying out the hot works.

In these circumstances, it is really important that any condition precedents which could be affected by employee conduct are relayed to people within the business. It is equally important to read the policy and all the conditions so that tasks can be delegated down and communicated across the company and employees.

If we provide incorrect information in our statement of fact, is our policy automatically void?

Not necessarily, this will depend on the importance of the incorrect information. The insurer may seek to vary the terms of the policy or charge an additional premium rather than avoid the policy all together. It’s important to review the statement of facts and ensure all information given is as accurate as possible.

What are the main challenges for businesses when claiming under an insurance policy?

Largely, not complying with conditions appropriately – which can create coverage issues. Often we don’t become involved until a business has a problem – this often arises from a lack of indemnity cover or failure to comply with conditions.

Identifying the risks and making sure they’re appropriate for your business is another challenge. There is no ‘one-size-fits-all’ for business insurance as it needs to specifically fit to your business’ needs. Ideally a new or existing broker should be invited on-site so that they can see what it is your business does in order for them to get a better understanding of what insurance coverage is required.

Maximising business insurance protection involves a strategic approach, tailored to the unique risks and needs of a business.

By understanding the risks, implementing appropriate coverage and complying with policy conditions, businesses can safeguard themselves against potential financial setbacks or out-of-pocket claims.

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