Vistage Business Insurance Guide for CEO’s – Small Print Matters

Business insurance is normally purchased on a relationship basis by one of your team with price being the main driver for the purchasing decision.

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

1. You or one of your Director’s was a Director of a company that was made bankrupt or went into administration
2. You or one of your Director’s have a Criminal conviction that is unspent
3. A previous loss either claimed for or paid for by the business

• Breaching a Policy Warranty

1. Policies are now full of terms and conditions the most significant are “Warranties” or “Conditions Precedent to Liability”
2. 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
3. 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
4. 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.

Insurers hold you responsible for any short fall. This is called Underinsurance or the  Average Condition

• Example:-

Stock Sum Insured £500,000 Value at risk £1,000,000

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

Summary:-

• 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.

Understand Your Warranties!

We all like to save money. Most of us like to think we are pretty savvy when it comes to shopping around for the best deal - be it that shiny new car, latest piece of technology, or the latest clothing fashion.

However, many of us do not make that purchase on the basis of price alone. We will test drive the car, check its specification, calculate the finance, and perhaps even purchase an extended warranty. This is good due diligence.

By comparison, however, the majority of us do not apply the same high standards when arranging our Insurance.  Many purchase their insurance on a ‘grudge’ basis. Perhaps that’s because it’s an intangible product, or we think “it will never happen to me.”  But what if it does happen to you?
Will you be properly insured or covered at all?

At Castlemead Insurance Brokers, when we visit a potential client to complete an audit of their insurances, we are continually amazed at how lax an attitude people have towards the warranties and conditions attaching to their policies.

Many do not realise the implications of non-compliance, and yet this is one of the first areas an insurer will investigate following a claim. Just because you paid your premium and have a policy in your hand, it does not guarantee that your insurer will settle. It will then be too late to start reading those warranties and conditions and even worse to discover that you are in breach!

Most of us joke about the ‘small print’, but when it comes to insurance the idiom is never more apt ‘the devil is in the detail.’ So, what does some of this detail mean?
According to Wikipedia “a warranty generally means a guarantee or promise which provides assurance by one party to the other party that specific facts or conditions are true or will happen.”

A few examples will best illustrate:

If your property has any proportion of a flat roof then it is probable that a Flat Roof Warranty will apply and the wording will be something along the following: “All flat roofs are inspected at least annually by a qualified person and all defects found remedied immediately.”
Most business policies will have a Waste Warranty attaching, which will state something like: “all combustible trade refuse shall be removed from the Buildings at the end of each working day. All waste or refuse outside the Buildings is stored in non-combustible lidded containers or metal skips kept at least 5 metres from any building or other property and removed from the premises when full.”

Another common warranty is the Unoccupancy Warranty which will restrict the cover on a property after it has been unoccupied for a certain period of time and will require some services to be turned off and regular inspection visits.

Non-compliance constitutes a breach, and the policy can be repudiated ab initio (from the beginning).
There are many other warranties for various types of risks. It is essential that you check your policy and make sure that you understand your warranties and conditions and the potential outcome for non-compliance.

In summary, we would do well to heed the Marine Insurance Act 1906, which bluntly states that a warranty “must be exactly complied with, whether it be material to the risk or not”.
And to quote the Law Commission in their 2012 review, “Once a warranty has been broken, the policyholder cannot use the defence that the breach has been remedied. Furthermore, the breach discharges the insurer from all liability under the contract, not just liability for the type of risk in question. Thus a failure to check a fire alarm would discharge the insurer from paying a claim for flood damage.”

However, they went on to note that such an approach is outdated and they have proposed “that a breach of warranty would suspend the insurer’s liability, rather than discharge it. Where the breach is remedied before the loss, the insurer must pay the claim. Furthermore, where a term was designed to reduce the risk of a particular type of loss, a breach would suspend liability in respect only of that type of loss. For example, a failure to install mortice locks would not affect a claim for storm damage.”

The end result of this review is that The Insurance Act 2015 received Royal Assent on the 12th February 2015, and will come into force in August 2016. It will incorporate the proposed amendment above.
In the meantime however...…….do not ignore your warranties!

If you would like a free audit of your insurance arrangements and, documented by way of a forensic report or if you have any questions arising from any of the issues raised in this article please do not hesitate to contact us.

Adrian Webb
Adrian has thirty years Insurance broking experience having managed his own business for twenty one years until it was purchased by a national brokerage. Adrian continued to run the business for its new owners prior to joining Castlemead where he has been tasked to develop a new office at Exeter as part of Castlemead’s continued growth strategy.

Controlling Credit Hire costs - the secret to cheaper Fleet Insurance

What Is Credit Hire?
Credit hire is where an innocent party to a motor claim is placed in a replacement vehicle, free of charge to that individual. The hire company then invoices the ‘at fault’ insurers directly.

Hire Claims – Why are they so expensive?

Hire claims are regulated by a contract between Credit Hire companies and Insurers called the ABI General Terms Of Agreement. (GTA).

The GTA bands vehicles into groups with standard hire rates  eg:
- Group S1 (1 litre or less) = £31.46 + VAT per day
- Group SP2 (eg mini cooper 1.6) = £78.29 + VAT per day
- Prestige vehicles BMW, Audi & Mercedes are over £100 per day.
- Don’t hit an Aston as these are £600 / day!
- If you are interested can see the agreed costs here.
- Under the GTA the motorist is permitted to hire a like for like vehicle.
- Only if  the hirer’s vehicle is older, they are expected to downgrade at least 2 classes
- It has been established that , if offered, most people would agree to a slightly smaller vehicle as long as they are kept mobile.

What can we do about it?
If we get the claim form immediately we can intervene before a third party is placed in credit hire. Once they are in a credit hire vehicle we are not permitted to take them out due to the GTA rules.

By controlling the hire for the third party...
- We can keep a much closer control over the hire period,
- We can probably put the third party in a smaller car than they would get through a credit hire company.
-  We won’t be liable to pay admin fees

Additionally The GTA sets out specific obligations controlling hire times
• Inspection must take place within 48 hours of hire starting,
• The vehicle must be off hired no later than 48 hours repairs are completed
• Once a total loss cheque is received the vehicle must be off hired in 7 days

We also need to be vigilant on settling the bill quickly
• The insurer has 30 days to pay for the hire.
• After 30 days there is a penalty payment.
•  After 60 days there is another penalty payment.
• After 90 days the rate reverts back to ‘spot rate’.

It is key therefore for us to determine liability early so payments can be made within the first 30 day bracket. It is also vital for any driver to report claims as soon as they occur.

Business Interruption

We have recently been appointed by a client who suffered a damaged roof over last winter’s storms. They had prudently purchased business interruption cover in good faith but due to a number of omissions they were threatened with having no cover at all as they were so grossly underinsured.

Here is how the problem arrived.

Gross profit – setting the sum insured

Gross Profit is a familiar term used in both accounting and insurance circles. There is a key difference however. Gross profit in insurance includes the cost of production wages due to current employment law, in the event of a fire you cannot simply terminate your staff you must either make them redundant or continue to pay them. This common mistake made a 40% difference to the sum insured alone.  The sum insured calculation on below the line purchases was also flawed resulting in a further 10% error.

Period
The client had one or two large customers and so had purchased an 18 months indemnity period. However the sum insured was entered on the policy and brokers summary as a 12 month figure 33% too little.

Growth
The business was growing.  Insurance policies typically give a 30% allowance for growth under the Declaration Linking provision. You would think that this would automatically give you adequate cover for any increase.

However there is a condition to obtain this ‘free’ extension – one which is frequently overlooked by brokers and insurers. You must provide a declaration figure from your accountant providing last year’s true figures and pay any adjustment premium due. This had not been done so allowance for growth was excluded. If you do not do this routinely Castlemead would be happy to undertake this for you

Additional Increased Cost of working

To get a gross profit claim paid you have to show that you will lose the relating turnover. Additional Increased cost of working cover gives you an allowable spend on increased costs irrespective of its effect on turnover. It is an essential component of any programme. This client had the opportunity to temporary roof the factory at a cost of £40,000 but their insurer would not meet this cost.

In total the client had a claim for £250,000. They were offered a payment of just £43,333.

Claim		£250,000
Underinsurance		£125,000
Discount for  12 month sum insured		£83,333
	Add temporary roof cost	£40,000
	Amount not covered	£206,667
	Uninsured amount	83%

The broker and insurer are both household names. Fortunately the client’s bank agreed an overdraft to cover the costs and the client continues to trade.

Castlemead's advice:

• Use a professional broker who can calculate the likely gross profit loss for you and has experience of claims in this area.
• Review this calculation with your operational team and set an appropriate Additional Increased cost of working sum insured
• Get a completed declaration into your insurer annually
• Buy the right number of years for the business to recover – this could be 3 – 5 years in extremis.

Security technology that can be defeated for £75

Castlemead Insurance Brokers have become aware that GPS and GSM/3g based tracking and alarm technology can be blocked with off the shelf jammers available on the internet. Sites such as iforgou.com based in China offer gadgets that will jam mobile phones and GPS.

At the moment there is no law against owning one of these devices however use of them is a breach of the Wireless Telegraphy Act 2006. Somehow we doubt that thieves of high end vehicles or those involved with hi jacking high value loads from trucks will worry about this minor offence.

We urge you to be aware of the potential deficiencies in these technologies and ensure that you consider these as part of your security strategy.

Flood Barriers

You may have seen the ongoing debate between the Government and the insurance industry regarding who will pay for flood damage in areas that repeatedly suffer damage.

We act for a Flood Barrier designer and manufacturer and could never understand why these are not regularly used as a method for defeating this issue. Germany has many areas that flood annually and their cities are protected by miles of aluminium barriers installed each autumn. It appears that no UK insurer recognises flood barriers as an effective defence.

The British Standard that is set up is a start - See the video here but the specification does not deal with the depth or require a zero leak result, rather it compares the result to sandbags which cannot stop damage being caused. If you have commercial premises that need protection, we do have an insurance backed solution.

Please talk to Castlemead Insurance Brokers and we will afford you
an introduction.

Motor Fleet Risk Management

Castlemead Insurance Brokers find the haulage business remarkable as it’s one of the few businesses where you send a new employee out of the yard with £100,000 of kit and up to £300,000 of load and say we will see you back in a couple of days time! We've been working at ways to reduce this risk.

Our customer Framptons Transport Services have recently been featured on the BBC1 One Show demonstrating their new camera system. Castlemead were instrumental in getting them to fit cameras to their fleet of vehicles to protect them from fraudulent claims and reduce the number of incidents settled 50/50.

Interestingly the cameras were self funding as Castlemead negotiated a discount on the fleet premium that paid for the cameras in the first year. Motor fleet premiums are driven by claims cost. Every time an accident can be defended it helps in the next year's renewal negotiation.

Framptons have already seen two incidents where the camera has acted as the indisputable independent witness where the truck would have been found liable in absence of the video.

Castlemead have experience in rolling out cameras to large fleets and can help you with understanding the cultural issues that drivers naturally worry about. We are also working with Drivecam.com an American Camera supplier. They have combined cameras with remote monitoring and an analysis bureau. When the camera is tripped by a sudden manoeuvre the in-vehicle footage both out of the windscreen and of the driver gets sent for review to Drivecam's team.

They review the footage to see how the driver has performed in what may be a near miss late braking situation. If they have concerns they email the footage to the transport manager for them to review.

This could be invaluable where a driver has only just started with the business. The hope is that an accident can be avoided by training and good management using the footage as an aid. We also believe that this will change an organisation culturally to make their drivers aware that the business is looking for them to perform safely and professionally.

Need help with this type of insurance?