We take a look at the difficult subject of policy wording, and how some insurers are being accused of using warranties and conditions to walk away from claims
Imagine yourself involved in a major claim for a fire on a building site. In investigating the claim the insurer’s assessor identifies the breach of a warranty (failure to carry out seven-day inspections of the site and a log of all inspections). Even though this condition had no direct impact on the cause of the fire, the insurer repudiates the claim.
This kind of scenario - with its devastating impact on business continuity - is no longer a rare occurrence. More claims than ever are being rejected on the basis of breaches of warranties and conditions. And the insurance industry is getting worried about it.
Recently press reports have criticised insurers for peppering their policy wordings with loopholes that entitle them not to pay out. There are cases where companies think they have their risks covered, but in reality are paying for policies that are worthless.
Let me make it clear - conditions and warranties are an essential part of the insurance contract. All policies contain conditions relating to material facts, alterations, fraud and other conditions. If a client accepts that the installation of a certain type of security system is part of the agreement, then failure to install it will rightly invalidate the policy.
However, the waters run murkier than this.
The central issue is what is called the “basis clause”. It makes your insurance proposal form the basis of the contract - and warranties and conditions spring from this. No policy is warranty free: but some insurers limit the use of them. Others - and this where the alarm bells start to ring - will write a large number of conditions into their standard policies. Often the rule of thumb is, the cheaper the policy, the more warranties.
In fact, price lies at the heart of the problem. Over the last decade insurance premiums have been driven down. Many customers now treat insurance as a commodity where cost is the only thing that matters. But insurers have to protect their margins and as a result something has to give. As a result, more claims are being rejected.
Brokers too have been affected by the culture. Many have moved away from providing expensive all-round advice and are taking a more transactional approach. This can leave you increasingly vulnerable to legalistic interpretations of the policy wording when you make a claim.
Most big builders and construction companies, however, still rely on the professionalism of their broker to ensure their insurance cover meets the demands of their business. A construction site is a complex and ever-changing environment. You need the right cover in place to take you seamlessly through the different phases of the development. That includes choosing the most appropriate insurer and negotiating a more flexible approach towards policy wording.
There are still many commercial broking firms providing this high level of service - especially amongst the ranks of chartered brokers. A good broker will operate by understanding your business and creating a climate of trust and transparency with your insurer. From this perspective it is much easier to ensure that warranties and conditions - relating to areas such as site security, the removal of waste materials, traffic management, fire plans, etc. - reflect the realities of your risks. In drawing up and interpreting the contract for you, your broker will ensure that you are aware of warranties and conditions and know how to comply with them.
Your broker’s sole aim should be to ensure that your insurance policy will perform exactly as you expect when you make a claim. If it doesn’t it is, of course, worthless.
A construction firm made a claim following an accident caused by the malfunction of a hoist which left three contract workers seriously injured. The insurer repudiated the claim on the basis of non-disclosure of information at the time the contract was renewed. The company had not disclosed to the insurer a change of employment strategy and the use of additional contract workers. The company was thrown into months of uncertainty culminating in litigation, which resulted in severe loss of income and damage to its brand.
- Choose a chartered broker that specialises in your chosen sector.
- Look for value in your insurance policy first and then compare the prices.
- Ask your broker to scrutinise the financial stability and claims record of chosen insurers
- Discuss warranties with your broker and insurer and how properly to fulfil them
Simon Taylor is executive director of Clear Insurance