As costs are squeezed, many insurance companies are inserting conditions and warranties into policies – and if they aren’t met, you risk being left high and dry, suggests Richard Davies.
In a recent article in the London Evening Standard, Anthony Hilton attacked the way that some commercial insurance contracts are written. He quoted industry research, which concluded that “companies which think they have their risks covered are in fact paying for policies not worth the paper they are written on”.
When disaster strikes, the last thing a business needs is to discover that their insurer is legally entitled not to pay out. Much of the problem lies in the way insurance contracts are written. Recently some insurers have taken a more legalistic approach to policy wordings and have refused to pay out on commercial claims. But why?
The simple answer is price. For a long time the main selection criteria of customers – and this is particularly true of the construction industry – has been how much they pay for their insurance. But, as premiums are driven down in price year on year, something has to give. Which is why a handful of insurers are getting very tough on the interpretation of their policy wordings.
All construction policies contain a range of conditions and warranties relating to areas such as site security, traffic management, and fire plans. Some policies are loaded with them.
If the unthinkable happens, are you confident your insurance will pay out?
Conditions and warranties are very different in their impact on the policyholder. In simple terms if you fail to comply with a condition, such as, say, the regular inspection of electrical systems, the insurer may be able avoid liability for a fire claim. But failure to comply with a warranty can mean automatic termination of the whole policy.
So breaching a warranty to keep a timetable of safety checks on cranes and hoists may void your insurance. That can have long-term implications for your company because you will be forced to replace the cover, often following a failed claim, and a new insurer is likely to load the premium heavily to reflect this recent track record.
Even if an insurer simply repudiates a claim on the basis of an unfulfilled condition, you will face a long period of uncertainty. Negotiations with the insurer can drift into years of litigation with the associated loss of income, clients and reputation.
Don’t get caught out – read the small print
- A claim for damages caused by a crane collapse was rejected by insurers because the event was not fully notified to the insurer in the approved manner or in time. The policy contained the condition that “the insured shall within thirty days… deliver to the company a claim in writing containing as particular an account as may be reasonably practicable of the accident…”
- A warranty relating to the use of fork lift trucks at a site stipulated that the charging point must be kept clear up to a distance of two metres. A loss adjustor investigating a claim for theft on the site photographed boxes stacked within less than a metre of the charging point. The insurer not only rejected the claim but terminated the policy for breach of a warranty.
So what are the warning signs? Sometimes the cheaper the policy, the more conditions and warranties are attached. With a raft of obligations that you are contracted to carry out, it is only too easy to fall foul of the many traps that may be sprung.
To illustrate the point, take a look at just one set of conditions in your policy, for example “hot works”. Wordings will vary, but you will probably find a long list of precautions and responsibilities that must be carried out before hot work starts, when in progress, and after it finishes, together with some more general conditions which may take the form of a warranty. The question is: are you compliant with every one of them?
Traditionally it has been the broker’s task to guide procurers through these pitfalls. That process includes both choosing the right insurer and getting the appropriate cover in place for every phase of the contract, including the most flexible and realistic approach to policy wording. A good broker can reduce the number of warranty clauses in your policy and ensure that you are fully aware of the implications of those that remain. As a result, your policy will perform exactly as you expect when you make a claim.
Sadly, this level of client care is not universal among brokers – cost cutting has affected them too and many brokers have given up on the advisory role and are now effectively “execution only”. But many professional brokers, particularly those with chartered status, still put the emphasis on understanding their clients’ needs to the full. And there are plenty of specialist brokers working in the construction arena.
To ensure that the policy performs to meet the specific needs of your sites, these brokers will place a strong emphasis on interpreting the contract: ensuring that you are aware of warranties and conditions and know how to comply with them.
When the very future of your business rests on the confidence that your insurance policy will perform when you make a claim, there should be no question of cutting corners.
Richard Davies is corporate director at O’Connors insurance broker. www.oconnorinsurances.co.uk
