The Insurance industry has reacted to this price sensitivity by gradually tightening their policy terms and conditions resulting in “small print” that allows the insurer to escape serious claims. Several national Brokers are now themselves acting as insurers operating their own capacity or ‘MGA’, meaning they are reliant on underwriting profit for their earnings.
The 2011 Mactavish report confirms most firms don’t know what insurance they have purchased or how it will perform when needed. This is Castlemead’s summary of the most common property & business interruption pitfalls.
Issues that mean you can get no payment at all
- Failure to disclose
- You or one of your Director’s was a Director of a company that was made bankrupt or went into administration
- You or one of your Director’s have a Criminal conviction that is unspent
- A previous loss either claimed for or paid for by the business
- Breaching a Policy Warranty
- Policies are now full of terms and conditions the most significant are “Warranties” or “Conditions Precedent to Liability”
- Failure to comply renders the contract void at the insurers discretion
This is the case even if the breach is non material to the loss - Common warranties are many and varied - the policy assumes:-
Electrical – Inspection of fixed wiring and a certificate can be produced that is in date
Waste – Bins lids and locations are satisfactory
Construction –Brick / Block built concrete floor pitched roof
Security Alarm on response maintained BS7621 locks and window locks
Stock Storage – inside on pallets – not outside not on the floor
Heating – fixed – no fan heaters – definitely no gas powered space heaters - Terrorism - previously expensive now worth considering and usually a requirement in any mortgage. Terrorism exclusions are wide ranging and include organisations such as the Animal Liberation Front – in the event a fire or explosion on an adjacent site you don’t want to be debating the cause with your insurer for 3 months.
- Issues that result in payments of less than you may need :-
Always ensure you use the correct sum insured. Property insurance is comparatively cheap.
- Example:-
Claim for £100,000 £500,000 = 50% x £100,000 = £50,000 payment
£1,000,000
- Buildings – Insure for reinstatement cost including fees and debris removal
Usual mistakes Insuring for market value, or cost price from the asset register - Machinery Plant and Contents – Insure for replacement cost as new
Usual mistakes Second hand value, written down value failing to make an allowance for items which are not capitalised and simply expensed – in the event of a fire it all needs replacing - Business Interruption – Typically Insure for Gross Profit basis (normal for manufacturing risks) should represent gross margin – Turnover less purchases with a stock adjustment. Loss of Revenue or rent need similar attention
Usual mistake – gross profit in accountancy terms includes labour that is production related – you need to insure for wages as in the event of a loss you need to keep paying your staff or pay redundancy. If buying 2 years gross profit the sum insured must show as double on the documents. Send an Accountants declaration in at year end and you should get a ‘free’ 30% allowance for growth –rarely done. - Additional Increased cost of Working & Indemnity periods (How long business Interruption cover lasts)
Usual mistake – Additional increased costs not purchased or only to a low limit (suggest 10%). 12 month gross profit purchased. Consider how long it would take to rebuild or relocate what you have and get back into your market
- Use a Broker who understands your process, is financially literate, and can explain the terms that you need to adhere to. Dealing with an insurer Direct makes you responsible for any omission – not a good idea.
- Read the policy or check the small print – if you need help get an audit from a qualified Broker (look for ACII or FCII)
- Talk though claims scenarios; a competent broker should be able to guide you on disaster recovery issues and the insurable costs.
- Usual mistake Not discussing until after the event. You can sue your broker but it costs circa £20,000 and takes 12 months to achieve. Your business will be at its weakest if a serious loss occurs and the banks are less than sympathetic to bridging this period.