When providing an insurer with details of your business, it may seem like they are asking too many probing questions, or it may be that some don’t seem relevant. You may also think that getting the odd detail wrong here and there won’t matter… but, when it comes to insurance, this is the one time you need to reveal all.
Insurance relies on ‘utmost good faith’ – an ancient principle that lies at the heart of any policy. Building on this principle, the law on disclosure has now been carefully rebalanced to favour policyholders, which is positive. However, it is crucial that companies play their part, or they will not be able to access the intended legal benefits. Instead, they risk becoming one of a growing number of businesses that had their insurance claims repudiated for this reason.
This duty means both parties – customer and insurer – must act honestly and customers must properly investigate their risk and cannot withhold information on ‘material facts’ they are aware of – i.e. something that could influence the judgement of an insurer when deciding whether to insure the risk and on what terms.
Failure to do this could result in a large claim being legitimately rejected – and for any business, that could be exceptionally serious and happens far too often based on the limited information currently used to place most insurance policies. At Mactavish, we work with clients to ensure their insurance provides the right cover and is as watertight as possible – and this requires disclosure that is as full and accurate as possible.
Understanding the Insurance Act 2015
The Act enshrines a Duty of Fair Presentation (of its risks) and this was a new concept, defining much more prescriptively what the company must do to investigate and disclose relevant information to the insurer.
These requirements will vary for any given business, but include matters that could be expected to be revealed by a ‘reasonable search’ of business operations, all information known to relevant people within the company – and this information needs to be “clear and accessible”.
No board wants to be accused of failing to properly investigate the risks its business faces. Yet this is exactly what the increasing number of repudiated insurance claims alleging failure to make a fair presentation under the Insurance Act means.
It is not possible to hide behind the limited questions asked in a standard form. Instead, the duty is on you to determine what is required. It also means that documenting this process is essential to be able to defend what was done if challenged by insurers.
The Insurance Act does create more work for brokers and their clients to disclose, but there is a major payoff: it makes it far harder for an insurer to challenge a claim and this was a clear aim of the legislation.
The stated objective of the Act was to avoid “claims stage underwriting” and stop insurers accepting premiums without adequate information, but then alleging non-disclosure if a claim occurs. Insurers can no longer get away with being passive in this way, but to gain the intended benefit companies must play their part.
Providing you do this – and we are there to provide all the guidance you need – then the buyer is in a strong position. This has never been so important given a rocketing rate of disputes on major claims during the current hard market. It’s been shown that UK commercial court cases dealing with disputed insurance claims have risen by some 280% in recent years and non-disclosure is the most common recurring theme cited by insurers.
Ticking boxes is not enough
Some brokers may complete proposal forms swiftly or even place business based on assumed “statements of fact”, but this can be short-sighted.
Such standardised forms serve a purpose but do not define your duty of fair presentation.
They often contain inappropriate questions and almost certainly do not get at every material circumstance. They also often direct you to ‘yes’ or ‘no’ answers when the reality is more nuanced. In many cases, if a risk management policy exists but may be subject to occasional exception – answering ‘no’ may lead to insurers refusing to quote, while answering ‘yes’ is over-promising and could invalidate the entire policy.
Proposal forms are crucial when you apply for cover in allowing insurers to populate pricing models. But by themselves they are almost never a fair presentation of a company’s risk. We work with our clients to provide a manageable level of supplementary information to such forms. This is to make sure you are offered the right cover in the first place and that you have disclosed enough to make the policy reliable.
Risks change as a business changes, especially in today’s ‘polycrisis’ environment.
Valuations – a growing problem
Accurate valuations are essential in reliable insurance, for property, equipment and the financial value of interruption. Values fluctuate considerably and have been impacted hugely in recent years by factors such as drastic inflation, the scarcity of particular commodities and supply chain problems.
Your valuations need to be fit for purpose and up to date. However, in this climate and with post Covid restrictions, many clients are reporting delays and valuers often have backlogs. We may be able to help you find an independent valuer and will do all we can to help ensure that delays do not undermine your cover.
Avoid the peril of under-insurance
Insurance at its simplest is about putting a company back to the same position it was in before a loss. But, if values are below what they should be in a high inflation environment, then claims will be affected. This could be whether a claim is being made for property loss, the value of business interruption or even liabilities alleged by third parties.
Almost every commercial insurance policy will have a condition of applying ‘average’ to settlement. This is bad news, since if values were underestimated, any payout (even for small claims) will only be a proportionate amount of what is being claimed for, depending on the level of under-insurance.
Is your broker working with you?
Disclosure is a complex issue and is a delicate balance between meeting your duties whilst staying efficient. It may also create more demands on your broker, but it is our role to help interpret these statutory requirements in a way that is effective but manageable. Brokers should not be looking to shift the onus back onto the customer without providing professional advice, which is explicitly the case in some brokers’ Terms of Business Agreements.
Good insurance disclosure works in your favour and goes alongside all the other risk management strategies that companies invest in – from health & safety to quality control, continuity planning or cyber security. For their part, insurers are more likely to offer favourable terms to companies that are committed to identifying and managing risks in the business and explain how they do it. They will also know more about you and the cover you’re likely to need, and their ability to reject a claim will be vastly reduced. Disclosure effort is justified by these multiple financial benefits.
The information provided to an insurer may not always be perfect, but it should provide as full a picture as possible, involving clear explanations and reasoning should there be any limitations in the information available. This protects your rights under the Insurance Act 2015 and safeguards your policy.
At Mactavish we worked tirelessly to design and support the Insurance Act 2015 and are passionate about ensuring our clients get its full benefit. Our commitment is to put you in the strongest disclosure position, to obtain the best cover and for the most competitive cost. If you want to know about meeting the disclosure challenge and on how we can help, then please get in touch to find out more.
Five Steps to Improve Disclosure
Being properly insured requires that you fully understand, quantify and articulate your business’s risk and take appropriate steps in disclosing them.
Download this quick and simple guide to help you improve your disclosure and protect your business from unfair claim disputes.
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