Policy academy
The relationship between insurance brokers and their customers has been put to the test over the past five or six years, as people have discovered too late that certain risks have not been included in cover.
This highlights one of the basic requirements of buying insurance, which is to read the policy document. Surprisingly few people do this, and with some of the more recent entrants to the market, there are gaps in cover, says consultant and broker David Locket.
Locket, of Surrey-based insurance consultancy LMS says: "A lot of the schemes on the market are very good - the real crunch comes in how things are handled when you have a claim.
"You need to find out three things from your broker. First, what does he understand about your business and its requirements? Next, what can he tell you about the underwriter of the scheme he is proposing, and its record on paying out? Last, are you able to have direct access to the underwriter if necessary?
"A lot of businesses are not properly insured at the most economic rate - not only are they paying too much, but they also have inadequate cover."
A long-term agreement may offer between 5% and 7.5% off premiums for those prepared to commit themselves to the same underwriter for three to five years. Premiums would then only increase if sums insured rose during that period, but on the same basis of calculation as under the original contract.
"It's important when comparing quotes to make sure that they are on a like-for-like basis - some companies will not quote while a long-term agreement is running," says Locket.
He comes across the same mistakes time after time. He says that people generally don't think hard enough about sums insured. "It's not for the broker to tell you what these should be, but it's essential that you insure for replacement value. Under-insurance is common, especially for antiques and paintings.
"Public liability is an area where people are often not aware of the risks they are running. If the broker doesn't understand the business, he will follow the proposal form rather than interpret it for the circumstances of the business."
As well as the usual areas of cover - employer's liability, buildings, contents, public liability and cash - think about what cover you realistically need for other areas, such as business interruption and fidelity of staff. Cash handling, loss of keys, personal assault, deterioration of stock (due to storm, flood or fire), loss of licence or of book debt should also be examined when reviewing insurance cover, advises Locket.
Business interruption cover is an area that can easily be miscalculated, he says. People are often over-optimistic about the time it can take to rebuild a fire-damaged hotel or restaurant, and that time could double if it is a listed building.
And it's not just a question of the earnings lost during that time - if it is a prolonged closure you will lose staff and the business may need time to re-establish its reputation, so earnings could be down for a while even after re-opening.
"It may also be worth considering what legal assistance might be offered by the underwriter on issues such as health and safety - some run a helpline, for example. And if you do outside catering, are you adequately covered on both employer and public liability?" he adds.
One of the biggest changes Locket sees for the future is that underwriters will tighten up on compliance with legal requirements and on the security measures taken by the hotel and catering sector.
"We're moving into an era of litigation, and more restrictions will be put on policies in future so that in some cases, if you are not complying with legal requirements, or if you do not follow the security procedures that have been laid down, then you may not be fully covered."
Avoiding the risks
"Don't worry - at least we're insured!" After the initial shock following a fire, accident, theft or other incident, it is usually a relief for the owner of the business to know that someone else is likely to be paying for the damage. After all, that is what he pays his premiums for.
But that attitude is just not good enough, says Rodney Hall, head of insurance at Forte. He maintains that many businesses could help themselves by being more aware of the opportunity for reducing and avoiding risk, rather than simply relying on insurers paying out time after time.
"If you have repeated claims, you will simply be paying for them in bigger premiums," he says.
"In particular, areas of public and employer's liability, where there is so much legislation, offer scope to look at your practices and how you might reduce or avoid claims," says Hall.
"Risk reduction has to be part of your culture at an operational level. In health and safety terms, an accident doesn't even have to happen - there just needs to be the threat of a dangerous occurrence.
"Cutting the cost of your insurance may mean taking an excess so that you are accepting some of that risk on your own account.
"For example, we have taken on a substantial excess across all classes to eliminate small claims, and in return we've got a good discount. The incentive is that the excess doesn't need to cost you anything."
Insurance should be regularly reviewed, usually once a year. This process means you have to determine the main risks and prioritise them, advises Hall. "As part of the exercise, you need to decide which you can cope with, which to minimise and which to avoid.
"A good example is on a contract for a building extension. In a standard Joint Contracts Tribunal contract you will find that as the employer of that contractor, you are responsible for damage caused to your building by his men. We have reversed that and made the builder responsible for his own negligence. What you then have to watch is that he has sufficient financial strength and insurance to support any damage caused.
"If, after your review, there are risks you can't avoid, can you live with them financially? - That has to be a personal decision in each case," says Hall.
While it may be a personal decision, other parties such as a major shareholder or the bank may also have to be considered, as their position and security could be affected by your decisions.
As with other businesses, employer's liability and motor insurance are the only two areas in which there is a legal obligation to be insured, apart from a technical requirement associated with the inspection of pressure vessels and lifting equipment, which the insurer usually undertakes.
"You cannot afford to take risks with public liability, and the cover you decide on will be dictated by the seriousness of the risk and the cost of cover. For any business to have less than £1m public liability cover is crazy. I would advocate a minimum of £5m - you only have to look at the record for the largest single personal award of more than £3m for injuries.
"Once you get above the first £1m, the cost of this insurance reduces progressively. Not only are people more risk-conscious now, but they are more aware of their rights. The general publicity given to large awards and the freedom of solicitors to advertise has encouraged both employer's and public liability claims in recent years."
The practice of average can cause some headaches. This is the insurance industry's device for discouraging under-insurance. It effectively cuts the pay-out where under-insurance has occurred.
For example, if a building costing £1m to replace is totally destroyed by fire, but is insured for only £500,000, then it is 50% under-insured. As a result, the insurer will only pay out 50% of the sum insured, which in this case would be £250,000.
However, Hall says that average is not a problem in periods of low inflation. "As long as you are within 85% of the full value, then average won't apply."
The threat of average highlights the importance of correct and up-to-date valuations. "They are not cheap to do, but I would say valuations should be updated every three to five years.
"The trouble with insurance is that it is intangible, and you really have no way of measuring how good your cover is until you have a claim, and then it is too late.
"Using brokers means that you have access to a whole spread of skills, and some have specialists to check the security of insurers, which it is almost impossible for an individual to do. But brokers will, not unnaturally, seek to avoid responsibility for an insurer who fails financially.
However, they do have a duty of care, and if they fail in that, they have their own professional indemnity insurance against claims from customers.
Chasing business
The insurance market is a competitive one, thanks to general over-capacity, but chasing business is not always good for long-term service.
Some buyers of hotel and leisure insurance do not like the cyclical pattern of premiums caused by intense competition, and there are worries about the stability of insurers, which can be difficult for individuals to check out.
Competition has been increased by some large hotel and leisure companies setting up their own captive insurers - subsidiary companies, whose sole purpose is to underwrite risk for the parent company. This sector continues to grow.
The insurance business was at the bottom of its cycle between five and seven years ago, when premiums were so low that some insurers simply pulled out of the market. It has partially recovered since then, but with premiums never getting back to their former highs.
Immediate worries include employer's liability insurance, which until January this year provided unlimited cover. The massive rise in claims and in the size of awards in recent years has led the industry to withdraw unlimited cover. In its place it is generally providing £10m standard cover.
Cover of at least £2m has been a legal requirement since 1972. Businesses now need to be able to assess their level of risk, rather than simply relying on unlimited cover. There is ample capacity to provide cover above £10m, but it means an increased cost.
There are also concerns about the possibility of increases in the rate of insurance premium tax Introduced in autumn 1994, at 2.5%, this is administered by Customs and Excise, leading to fears that it will gradually increase to the general VAT rate.
