Are you playing Russian roulette with insurance?

Any business without proper insurance is gaming Russian roulette with its future. Either it’s playing fast and loose with regulatory demands for insurance, or it’s hoping that incidents never occur.

Changes in markets, technology and regulation have all altered the insurance landscape. Chris Ives, a principal associate at international law firm Eversheds Sutherland, reckons that “the single biggest factor driving change in the insurance sector – in common with many other sectors – is technology and the growth of ‘insurtech’”.

He said: “New technologies are emerging [all the time] which impact on every aspect of insurance. Analytics now allow insurers to undertake more refined and tailored assessment of risks that for some means lower premiums; permit new methods of distributing insurance products; and let insurers embrace technologies such as ‘blockchain’ to allow claims to be assessed and paid more quickly.”

Necessary insurances

Those with an ounce of common sense will be very aware of the obvious insurances that are necessary.

The starting point should be – according to Mike Hallam, head of technical services at the British Insurance Brokers Association – those insurances required by law, which “includes employers’ liability and motor insurance if the firm has vehicles”. Firms are also required by law to have regular inspections carried of items such as lifts, hoists and other powered equipment.

To fully protect any business and its employees, Mike also recommends other insurances, including property, business interruption, public and products liability, professional indemnity, legal expenses, cyber, personal accident and sickness. To this list can be added directors’ and officers’ policies and employment tribunal cover, as well as keyman and critical illness.

To others observing the market, a greater emphasis has been put into the use of cyber protection policies – particularly as high-profile cyber breaches are frequently in the news. Chris said: “Any business that stores personal data should consider taking out cyber insurance covering the risk of loss of that data.”

Insurance, by definition, is designed to cover an agreed risk. By extrapolation, it is central to the process that any business understands the risks and exposures it faces, to consider whether they are insurable, whether it wants to insure them and/or whether these exposures can be passed on to other parties.

Premiums lowered

The question of how to lower an insurance premium is as long as is it tall. A good broker, as an intermediary, will be well placed to advise on the risk management processes that firms can engage with to reduce premiums.

Mike said: “Insurers now consider many factors when rating a risk, which will vary according to the cover required. The most prominent are the risk in terms of the nature of trade and size, location and construction of the premises and claims history.”

Of course, complying with health and safety legislation, and having a documented regime, will also be taken into account by underwriters when setting premiums. As Chris knows from experience, an option when looking to make savings is to “transfer less risk to the insurer by taking a higher excess”.

This is a point echoed by Mike. He said: “Insurance is about risk-based pricing, which means the lower the risk to insurers [of a claim] the lower the premium will be to the buyer.”

As to how the risk will be identified, Mike said: “If it can be demonstrated that the business is well run with a good claims record and all risk assessments are up to date with a robust business continuity plan then generally insurance placement will be smoother.”

He added that the installation of approved security features may also attract discounts from insurers.

Any one of a number of factors can affect the cost of insurance, such as the claims record of an insured business as well as the risk of claims arising generally.

Mike said: “Importantly, if a claim is made insurers will want to see that lessons have been learned to minimise the risk of similar incidents arising in the future.”

Cost can also be stripped out of the process by purchasing, says Chris, any one of several vanilla insurances directly. However, for those with complex needs and more complicated risks, the suggested route is a specialist insurance broker.

He said: “As lawyers, we often work alongside brokers in negotiating improvements to insurance policies and advising on the liabilities a particular business may face.”

The middleman

Is a broker essential? That, reckons Mike, depends on your view. He said: “While cover may be available either direct from an insurer or a bank, it must be remembered that they only sell their own products and are usually unable to provide independent advice.”

He adds that most commercial insurance is placed through an insurance broker; they are the agent of the insured client, which means they owe a duty of care to provide independent advice on a suitable policy and they can also offer greater product choice by searching for relevant products and markets.

Careful selection of a broker is important, though, and firms should not use a broker without the right experience. The important thing for any company is getting a cover that’s as broad as necessary for a reasonable price from a company with industry knowledge. There’s no point opting for cover that underestimates the likely impact of an incident because the underwriter undervalues the cost of equipment.

Practices should shop around, with the proviso they compare like with like – lower premiums are of no use if the company refuses to pay out or undervalues the risks. Even so, Mike advises undertaking a “regular review of insurance as things change over time, such as the size of a business, which may mean a different insurer may be more suitable”.

A ray of light

Until the Insurance Act 2015, a greater potential existed for a whole policy to be declared void because of a simple mistake when completing a form or forgetting a fact. However, the act made some notable changes for the better that allowed for the suspension of parts of a policy until a contract term is complied with (previously this could have led to policy cancellation); making clearer how incidents of fraud are dealt with; and a process called “fair presentation of risk” that defines what an insurer must be told when a policy is bought, altered or renewed. Insurers are now required to respond proportionately, rather than automatically voiding a policy.

In simple terms, the act introduced more burdensome obligations on insureds to disclose information to insurers with the quid pro quo that insurers were generally less able to avoid paying claims.

Denied claims

Of course, the key to any insurance product is the confidence that a valid claim will be processed and paid out quickly.

But disputes can still arise. Chris said: “An insurance policy is a contract and whether an insurer is in fact entitled to deny a claim depends on an assessment of the contract, the law and the facts of a given case.” He says often it is possible for insureds to challenge an insurer’s rejection of a claim and negotiate a settlement, “although an insured will always have the right to challenge a declinature through the courts or arbitration”.

Before going down the legal route, an insured in dispute might want to consider the Financial Ombudsman Service (FOS). A free-to-use service (for the complainant at least), it is primarily aimed at helping the individual. However, it can help certain businesses, such as small and medium-sized enterprises and charities. It has jurisdiction over microbusinesses with less than 10 staff and annual turnover or a balance sheet that does not exceed €2 million (£1.7 million).

As for small businesses, the FOS can aid those with below £6.5 million turnover, fewer than 50 staff and a balance sheet of less than £5 million.

If the FOS agrees with the complainant, it can require the insurer makes money awards, awards for distress and inconvenience, and interest and costs. A limit on awards varies on when an event occurred – the highest is £375,000 for complaints referred after 1 April 2022 where the matter arose after 1 April 2019.

To conclude

Core principles when buying insurance haven’t changed, despite advancement of the law and technology. Firms should find a good broker, understand exactly the risks they want to insure against, declare every relevant fact and comply with every policy term.

Cutting corners might seem like a great idea at the time, but as anyone who has needed to make a claim knows, problems with insurance only ever come to the fore when disaster strikes.