Holes in the safety net? Why Insurance Claims Go Wrong

Monday, July 24th, 2017

You really are very busy. Running a business involves plenty of demands on your time: growth, strategy, staff issues, recruitment, keeping up with changes in legislation. Nevertheless, I want you to indulge me briefly. Imagine the worst disaster that could hit your business. Imagine how you would deal with this? I want you to sense what it is like to live through this catastrophe. It is possible that you have heard apocryphal tales of insurers avoiding valid claims–how would that impact your life, your business and your customers?

I understand why some business owners and managers treat their insurance renewal as a chore to be ground-out each year or as some form of tax, but it is not a healthy approach. Insurers do pay valid claims, but insurances are contracts. Just like any other form of contract the terms need to be understood and, if necessary, negotiated to ensure that there are no misunderstandings. I strongly recommend that a business owner, manager or financial controller takes stock of the insurance arrangements and treat it, not as a chore, but as the maintenance of the safety net to protect the livelihoods, security and reputation of everyone involved. Surely it is worth checking a safety net for holes?

In my experience, claims are generally paid. Sometimes, however, there are problems and they generally result from the following:

Complacency

Too often, cover is renewed ‘on the nod’. Sums insured are reviewed and an odd 5% added here or a couple of thousand taken from there. In the event of a claim, the insurer’s appointed Loss Adjuster is going to want to know how you calculated your figures. Take time to check the accounts and sales forecasts. Look at the peak stock levels. I would urge every firm to add a column on their asset register to note new replacement value of plant and general contents. Totalling that column can be a real surprise. Keep a copy of your calculations off-site and consider writing a Business Continuity Plan.

Gross Profit vs Insurable Gross Profit

A topic in itself – make sure you understand how Business Interruption cover works. The calculations can be complex or conflict with your understanding of the terminology. Businesses that do not survive a major incident often are in this position because their Business Interruption cover was inadequate or on the wrong basis, or simply did not indemnify for a long enough period to allow for recovery of the business to pre-incident levels. Consider planning permission implications, for example or loss of market share.

Warranties

Most policies contain warranties which state things that must be done for cover to apply. It may be to do with locking doors, precautions when applying heat or where you position your bins. If you do not know what your warranties are, you may not be complying. If you do not feel you can comply with a warranty, negotiate a change.

Survey Conditions

Has your insurer surveyed your premises? Did they require you to improve anything? Have you done it?

Business Description

Your insurer needs to know what you do to understand how much to charge and what to offer. Most policies detail the business description on the policy schedule. Is it up to date and complete?

Disclosure of Material Circumstances

There is a duty on you to ensure that the insurer is aware of all relevant circumstances, such as motoring convictions or an unoccupied building. If you are in any doubt about whether something is material–disclose it. It is always better to do so, even if you incur an additional cost.

Delay in Reporting Claims

Report claims straight away, even if you are unsure whether you will progress the claim. This is especially important for motor and liability claims where strict time limits apply

Are You Covering the Wrong Things?

Instead of thinking about what insurance is traditionally bought, consider the biggest threats to your business. This may be a breach of your intellectual property rights or confiscation of your assets overseas. It may the loss of a key technical person or the financial viability of your customer. Consider if the business could manage these exposures out of capital or current funds. If not, re-priorite your insurance needs to put these first.

A good insurance broker should be able to guide you on all of the points raised in this article and help you to identify the risks that really matter. Insurance should not be just a checklist –  it is dynamic, changing requirement unique to each business and needs careful thought and good advice.

Author: John Goodson ACII, Director of Insurance Services (Surrey) Ltd. Contact: 01483 532921 john@insurancesurrey.co.uk

Insurance Service (Surrey) Ltd has been providing advice to businesses on risk identification and insurance provision for over fifty years.