There are hidden clauses that loom large in policy documents and some are more sinister than others. Here I explain what the secret is, why it is dirty and how it’s still a secret.

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What is insurance companies dirty little secret?

The insurance market has a reputation of escaping from legal contracts using small print.

When businesses have a dispute they often seek legal recourse. The complainant will sometimes have insurance to cover such disputes. They ask their insurer to cover the cost of taking action yet policies prevent insurance buyers from taking action against insurance companies. Not much help if an insurance  company has refused  to honour the policy they issued.

Insurers do not make this clear. It’s difficult enough when commercial disputes arise, it’s galling to find that you have been given a false impression by the people you had invested in. Insurers paying claims want to reduce the most obvious or exclude them.  It’s unfair when the exclusion prevents you taking action against a supplier that has obviously got something wrong – as is often the case when claims are badly handled. But for insurance companies to close ranks in this manner, that’s pretty low. Whatever their reasons.

Why it is dirty?

Because it’s industry wide, it’s tantamount to a cartel. Have all insurers secretly agreed that they will support claims against any industry except their own? If not, why hasn’t an entrepreneurial insurer stuck their head above the parapet and issued a policy that covers taking such an action?

Insurance disputes are common and it’s not always the broker that makes a mistake. Insurers are often culpable yet it costs almost £20,000 to take action against them. That is bad for UK business. Of course, it could be down to the fact that the insurance actuaries have worked out that insurers nearly always win cases. I suspect this is because complainants often run out of money to fund their legal case. If I’m right the figures will always be skewed.

Why it’s a secret?

I doubt if insurance companies place this exclusion at the back of their policies by accident. It’s not front and centre as you would expect such a sweeping exclusion to be.

There are other secrets in policies that are difficult to unearth and comprehend. Yet the dirty little secret of not allowing your client’s to take action against your competition is the most sinister show stopper.

Wrap up: Insurance companies do not pay claims when the insurance contract between them and their policyholder has been breached. If they refuse to pay a seemingly valid claim policyholders need to dig deep to ensure they get what is due to them. 

Top Tip: Spend time assessing the key risk to your business and make sure you understand your insurance policies which are legally binding contracts. Make sure that important contracts and agreements are not excluded from your policies.

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See our top tips section for simple ways to help yourself today.

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Accountants indemnity changes 1st September

I thought you might be interested to hear about the new rules for accountant’s professional indemnity. Here I explain why it’s important to make an early report of claim circumstances, where problems with timing could occur plus a clear definition of what should be reported.

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Why should I report a minor concern?

Some policyholders believe that premiums go up if they report scenarios that are not really claims. If they don’t report a “circumstance” it proves to be a false economy. When the rules change it’s even easier to make a costly late notification.

Claims don’t happen often yet the early warning signs are common. Questioning fees, complaints about service and a lack of communication are typical indicators that a client or third party may become litigious. Especially if they don’t get their own way.

Have the new ICAEW rules made it clearer?

The new wording applies to cover effected on or after 1^st September 2010 and makes it clear that claims can and will be declined if “circumstances” are not reported before the expiry of a policy. The intention is to ensure that insurance companies are aware of possible claims before the policy expires.

There is no longer a wishy washy wording – previously insurers refused claims notified later than they would like. This was despite the policy being on a “claims made” basis meaning claims made after the expiry would be covered if the work was completed during the period of cover. The terms of notification were not clear.

Now, possible claim circumstances not reported within the policy period will not be covered. Period.

What is a circumstance?

Definitions in policy wordings can be subtly altered without the policyholder noticing. Insurance contracts are full of detail. A “circumstance” is anything likely to affect the underwriters view of the risk. That doesn’t mean all complaints should be reported.

It’s ridiculous to report all complaints so ask your insurance supplier to interpret what is termed reasonable by your insurance company. There is no need for the new rule to result in more red tape. The fact that I’m writing about it means it probably will at the change is embedded into the policy wordings. That is not the intention, it’s just the devil is in the policy detail. We all want claims settled promptly and correctly.

Wrap up: Attempts to make policies clearer add to confusion. Indemnity policies have strict timescales for reporting claims or circumstances. Guidance on what a circumstance is should be sought before a policy expires, ie. before the renewal date.

Top Tip: Uncertainty is not good for anyone. Ask your insurance supplier for clarification of expiry dates, notification deadlines and clarify what “circumstances” are real in your World.

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2. What is the dirty little secret of Insurance?
3. Insurance Myths – Part 1

Have you contributed to Madoff’s legal defence costs?

Not all insurance disputes should be won by the insured, especially if they are fraudulent.

Usually I’m furious when I hear that an insurance claim has been declined. This time I was pleased; Lloyd’s of London successfully defended themselves in a US court when Madoff tried to appeal that Lloyd’s were wrong to cut off the funding of his defence costs.

Lloyd’s had already parted with $4million whilst the legal eagles prepared their cases. They pulled the plug after one of his cohorts pleaded guilty to fraud of one sort or another. Evidence of illegal acts is one of the triggers for insurance problems. Once an allegation is made underwriters will refuse to continue paying defence costs or any damages awarded. Until then, the policy wording (a legally binding contract) meant that they were obliged to pay for defence costs for Madoff, other Directors, Officers and decision makers of the company that purchased the cover.

This may seem odd yet the wording of the contract states that there has to be evidence of fraud, or another type of breach, before insurers can turn off the claims tap. In this case, the reason for the admission of guilt could be anything from a guilty conscience, a shorter sentence, a smaller fine or some form of persuasion that you and I won’t know about – having not been accused of infringing the law or fleecing thousands of innocent investors.

The defence costs are covered if one of the “controlling minds” of a company (or charity) is accused of a “wrongful act” in their duty as a director (or trustee). Breach of fiduciary duties is considered a wrongful act yet it is not covered if illegal or deliberate.

There are loads of other examples of what are considered wrongful acts and surprisingly few exclusions on these policies. That’s because they’re a relatively new form of cover. Over time, as claims that shouldn’t be paid are, underwriters will start to exclude the most common instances. Most policies don’t cover fines or punitive damages. They are there to protect the innocent, not the bloody minded.

So how do you know if you contributed? If you have such a policy with a Lloyds underwriter part of your premium may now be lining the pocket of one of America’s legal eagles. If you see a picture of them when this truly momentus case comes to court (Jacko’s lawyers became celebrities) consider that you might have funded their tie or specs. Which isn’t so bad if they’ve got taste.

You can’t prevent your premium being used to defend people that appear to be crooked yet you can ask your insurance company for a summary of claims they have settled. If you think they’re settling claims that you won’t be making perhaps you can choose an alternative which is more appropriate.

Top Tip: You can defend yourself against your own innocent mistakes and even wrongful acts of your peers. Make sure you don’t turn a blind eye and assume that insurance will protect you. Insurance protects income and reputation if arranged properly. It will not prove useful if things have been ignored or buried.

See our top tips section for simple ways to help yourself today.

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1. Insurance Myths – Part 4
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Professional advisers are not always protected by their insurance

Want to know why some indemnity insurance claims are declined? I have two examples of claims being declined, one more extreme than the other, yet both prove small errors can prove costly. And I’m going to tell you why they were declined and how to avoid it happening.

The first is the most recent, only a few months ago an insurance company refused to cover a claim for a company that was being sued for £47,000. The claim related to an incident that occurred in July 2005 when they had translated a document (allegedly incorrectly) yet it would have been covered if the insurance company had been made aware of it earlier.

The incident was first reported to the business in May 2005 and the complaint wasn’t disclosed to the insurance company. The complaint may have been the reason the owner of the business sought cover in the first place. This happens quite often. Not telling the insurance company what it needs to know is an easy mistake to make and can be avoided if insurance suppliers ask the right questions when cover is requested. Alternatively, the business owner should study all the documentation including the policy wording before they agree that the cover is suitable.

The worst case of an indemnity claim being declined is quite complex. It proves timing is critical when claims are reported. Some years ago a large PR company were contracted to build mobile facilities for a large entertainment company that wanted to provide entertainment road shows at large events.

HGV’s were to be adapted and turned into “play zones” where people could interact with new products. The PR Company won the contract because they proposed to turn Lorries into fully functioning interactive units within 30 minutes – using 4 men. You might have seen Jamie Oliver cooking in one of these contraptions in the TV adverts for Sainsbury’s.

In actual fact it took twice as long and twice as much labour to convert these monstrosities. Costs escalated which annoyed the client somewhat. They made a claim against the PR Company for reimbursement of the cost of hiring the extra labour, not just those that assembled the units. There were additional extra driver costs too.

The claim was for over £1,000,000 – count the zeros – and was for negligence in advice from the PR Company which lead to a financial loss for the client. The client couldn’t change their plans because this was a major part of their product launches for that year.

The claim was refused by insurers because the complaint had not been reported early enough. The client had made a fatal error. The cover was arranged on a Monday and the application form was signed on the following Friday. The complaint was first reported by the client on the intervening Wednesday and when this came to light the claim was refused on the grounds that they had breached the contract with the insurance company.

The application form stated very clearly that it is the client’s responsibility to tell the insurance company about everything that may affect their judgment of a risk at the earliest possible stage. They didn’t declare the complaint and the insurance company refused to pay. 

The PR Company went bust. They were well renowned and had a great track record yet they could not fund the loss.

Solicitors that work for insurance companies are asked to ensure claimants have met the conditions of the insurance contract. This is an example of how badly things can go wrong if the terms and conditions of insurance contracts are not explained to policyholders. If only they had told the insurance company when they first heard of the problem the claim would have been settled.

It is never a good idea to keep things from an insurance company however insignificant the information may seem. After all, they hold the purse strings and you don’t want to have to argue with them when a client is asking you to reimburse their loss or your income has been affected by an unforeseen incident.

Trying to argue with an insurance company when they have the law on their side is a costly business – I understand it costs something like £3,000 for a solicitor to review an insurance claim file and £17,000 to issue proceedings. Legal Expenses insurance policies usually exclude insurance disputes – well they would wouldn’t they.

Top Tip: Tell the insurance company everything, especially the “bad” stuff. This includes incidents that could lead to claims, complaints, financial problems, etc. The worst case scenario is that you might have to pay extra premium. If you don’t disclose everything you may find that your insurance will not work when you most need it.

See our top tips section for simple ways to help yourself today.

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1. Accountants insurance is changing
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Jason Cobine of insurance brokers Cobine Carmelson explains why insurance companies decline business interruption claims and offers tips on how accountants can secure the proper payment for their clients.

It’s not exactly news that insurance companies inspect paperwork relating to large claims with a fine tooth comb. In the current climate they may also be lowering their sights and taking a closer look at smaller businesses claims.  Will your clients’ cash flow be affected if they suffer a claim? How can you help your clients check they have the cover they require? Read on for a handy hint that could potentially save your clients thousands of pounds.

Insurers are looking to cut their losses, and one way they are doing this is by hiring forensic accountants to ensure that claims are settled according to the policy wording. If clients have not sufficiently checked this wording before they claim, or if they haven’t purchased the right kind of cover, this can lead to declined claims or significantly reduced payouts, which in turn will affect the businesses’ ability to operate.

Getting the right cover
These claims occur when businesses suffer an incident that affects their ability to trade. Examples include a fire at an office in Dean Street, Soho, when the whole street was evacuated and access was denied for days; the closure of restaurants in Kensington due to demonstrations outside the Israeli embassy, and more memorably, the fire at Buncefield which burned for days, causing major disruption and even resulted in the M1 being shut.

Claims are rarely paid in full if the sum insured on the policy has not been correctly calculated. This is an easy mistake to make because insurance policy definitions are not always clear.

The most common mistake businesses make when assessing their requirements for insurance cover is deducting the cost of labour from their gross profit figures, according to Richard Cameron-Williams, a forensic accountant at RGL Forensics. This can lead to insurance claims for loss of profit being reduced or declined, which can have an effect on cash flow.

Mistakes are usually made when the sum insured is not based on the policy definition; so why do so many companies fall foul of these definitions? In my experience, most claims that go unpaid are declined because of a poor exchange of information rather than the insurers employing bullying tactics. There are exceptions of course, and some claims that should be paid are not. This can result in expensive litigation if the business has the resources to take action, but not many do*.

Another reason could be that people expect to be charged inflated premiums for more cover, and so don’t purchase sufficient cover for their needs. If a typical premium for gross profit cover of £100,000 is £200, not buying what is required may prove to be a false economy.

The insurance industry has not done enough to explain exactly what these terms mean and that must change.

Help clients to help themselves
As an insurance broker, I’m making it my mission to get claims paid. We can all learn from those who have seen the same innocent errors made time and time again and watched as legitimate claimants have been caught out by ‘small print’.

As an accountant, you can help businesses avoid this common mistake by asking them to provide you with the definition of gross profit or loss of revenue from their insurance policy. Compare the figure you extract from their books with the one they have on their insurance policy (and don’t deduct labour costs).

When it comes to advice, there is no one more trusted than an accountant and you can give clients advice on this subject via a newsletter before they experience a loss. Alternatively, why not incorporate this information into a seminar you invite them to, where they can learn to work this out for themselves? Once they get it right, the businesses will be properly protected and able to thrive despite adversity.

I’ll put my neck on the line and say insurance companies can be negotiated with so they don’t charge for any increase in cover until the next renewal. That’s a job for the broker and they’ll be happy to oblige, even though they might not make any cash until renewal. Like you, they probably want to keep clients happy and help grow their business.

Telephone: 020 7371 2812
Email: jason@cobinecarmelson.com
www.cobinecarmelson.com

*Roger Franklin at Edwin Coe Solicitors has evidence of reduced business interruption claims that were eventually resolved after much legal wrangling and the inevitable legal bills. Click here to download his article on this.

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