In our experience, most people hold their insurance broker in a position of blind trust. They believe that the policies they pay premiums for each year will cover all of their interests and respond to claims, if and when they might arise. The consequence of this can be that insurance covers rarely, if ever get reviewed each renewal cycle, and policies if issued, are not read and understood.
This scenario may sound familiar with adjustments or changes to insurance policies not anticipated unless an adverse claims response is received from an insurer. This article highlights some common insurance issues which we believe all agribusiness owners should be informed about to ensure insurance cover will be in place when it’s needed and possible cost savings maybe achieved.
Not all insurance policies and insurance companies are the same. There are multiple insurance options available and certainly some but not all insurance companies are operated well and enjoy favourable reputations. The specific issues highlighted in this article are of a general nature and may vary between the various classes of insurance and cover offered by different insurance companies.
It may seem fundamental, but it is important that clients hold the actual insurance policy document, including the policy schedule issued by the insurer for each class of insurance. Reliance should not be placed on insurance broker summaries or premium invoices as the only evidence of insurance covers. These documents should be updated each year within 1-2 months following conclusion of the renewal of each policy. Clients are entitled to these documents and if they are not provided, they should be requested from the broker.
It is important to receive these documents in order to check details are correct and cover of assets, operations and/or liabilities is adequate. Further, in the event of a claim, ready access to these documents should avoid delays in addressing and achieving a favourable claims outcome.
Under most classes of insurance provision is made for the policy to be held in a parent company name, with cover automatically provided for all subsidiary companies and those in which the parent company holds and exercises a controlling interest. If the policy is held in the name of a corporate entity, insurance policies should automatically include cover for directors, executives and individuals who conduct the business.
If any other parties e.g. financiers, mortgagees, landlords, principals etc. impose contractual obligations which require their interests to be noted, or the more onerous obligation of being a ‘named insured’ under insurance policies, such interests are rarely automatically accommodated and require insurer consideration and consent in writing prior to cover being applicable. The policy schedule should include details of all parties covered or noted under the policy.
As a standard condition of most Public and/or Products Liability (Liability) Insurance policies, any liability which only arises under contract is excluded. This is relevant should any contracts require one party to indemnify, release and/or hold harmless another party with respect to any liability arising in relation to the performance of the contract or for breach of contract.
All Liability Insurance policies should respond to any liability imposed under the contract which also arises at law, for example negligence or statute. Any liability obligation which only arises under the contract is typically excluded unless insurers have provided their consent for cover to apply to the contract which should be reflected on the policy schedule.
BUSINESS INTERRUPTION INSURANCE
In our experience, the most overlooked and underinsured business exposure is cover for the loss of profits/income which may follow disruption to a business as a result of property damage to the business premises. This class of insurance is referred to as Business Interruption (BI) or Consequence Loss Insurance and typically forms part of an Industrial Special Risks (ISR) or Business Package (Business) policy.
For example, in the event of a fire which damages buildings insured under either an ISR or Business policy, cover is available under the BI coverage for the loss of income/profit as a consequence of the disruption to the business resulting from the fire until the pre-loss operating capacity is resumed.
The BI policy also offers a variety of additional benefits including, for example, the cost of temporarily hiring alternative premises, equipment and other ongoing business expenses. This cover can often be the difference between a business successfully recovering for an insured property loss and struggling to resume business operations.
Most ISR and Business Policies include a ‘co-insurance/ average’ clause. The consequence of this clause is that in the event of damage to the property insured, if the sums insured nominated under the policy do not reflect more than 80% of their full replacement value, the amount paid by the insurer in the event of loss or damage will be proportionally reduced by the same amount that the insured value bears to the actual replacement value. This clause is applicable in the event the amount of the damage exceeds 10% of the nominated sum insured.
The impact of this clause is best demonstrated by way of example:
Click here to view table.
The consequence of this policy provision in the event of a claim could be significant. We therefore recommend close scrutiny each year to the sums insured nominated under the ISR or Business Policy. Alternatively, and more beneficially, the ‘co-insurance/average’ clause could be deleted to avoid any adverse impact on the amount payable in the event of a claim. If an insurer will not delete this clause, we recommend quotations/ cover be sought from an alternative insurer who is prepared for this clause to be removed.
INSURANCE POLICY OBLIGATIONS
There are some fundamental obligations imposed under all insurance policies which require the prompt disclosure of information in order to avoid limiting or completely disentitling access to cover. These obligations typically include:
- disclosure of any change in the nature and type of interest insured under the policy e.g. additional locations/property or any change in the business operations,
- advice of any increase in the risk exposure to property e.g. sprinkler systems deactivated or storage of hazardous materials,
- disclosure of any other information which a reasonable person would assess as necessary for an insurance company to have in order to decide whether to offer, issue or maintain the insurance cover, and
- the prompt notification of any claim or potential claim which may be made under the policy.
The time frame in which this information must be disclosed to insurers may vary between policies but we would recommend every reasonable effort be made to ensure prompt notification within 14-30 days.
BROKER PLACEMENT AND REMUNERATION
The insurance market is cyclical which can cause significant fluctuation in the cost and accessibility of cover. Brokers also often have preferences for particular insurers and do not voluntarily seek alternative quotations as part of the renewal process. While we do not advocate that the insurer for each class of insurance is changed every renewal, to ensure insurance cover and premiums remain competitive, we do recommend clients request their brokers seek alternative quotations each 2-3 years as part of the renewal process or in the event of an abrupt increase in costs.
The form and amount of broker remuneration is not always transparent or disclosed in a way typical of other professional service providers. Broker remuneration is most often derived as commission loaded into insurance premiums, the accumulation of which can become significant and not necessarily a reflection of the work undertaken for provision of the services.
For this reason, we recommend clients seek disclosure of the full broker remuneration to evaluate the appropriateness of the remuneration, and if possible, agree a set annual broker fee which avoids the variability of the remuneration which may not equate to service.
The issues highlighted in this article reflect those most often encountered during our insurance reviews. If a more comprehensive review is not possible, we recommend clients consider these at a minimum to gain an appreciation of the basis elements of their insurance arrangements. We would anticipate these issues could also present some beneficial cost savings for clients.