In the second part of our series on disclosure, we provide more detail on how to make sure your insurer is fully in the know – and your business is properly covered.
When it comes to what should be disclosed to an insurer, there is no one size fits all. Each company is unique in terms of their structure, how they operate, the risks faced and how these are managed and mitigated.
The insurance information provided should reflect this as part of the statutory obligation to provide a “fair presentation of risk”. But because this is a complex area and there are many variables, businesses can be unsure about how much detail they need to go into. Our aim is to shine light onto this area to help interpret these legal requirements and ultimately put clients in the strongest position if they need to make a claim.
As explained in the previous article, the Insurance Act 2015 enshrines a Duty of Fair Presentation, which places the onus on the company to proactively disclose relevant information to the insurer – irrespective of whether it is asked for.
This is a big responsibility and in recent times, we have seen an increase in the number of clients wanting more clarification, particularly if their circumstances have changed.
Responding to the polycrisis
The ongoing ‘polycrisis’ continues to affect businesses across different sectors. The inflation crisis, Brexit, supply chain delays, the war in Ukraine, pandemic recovery, labour and materials shortages, borrowing restrictions and ESG, as well as climate concerns, are all having a sustained impact on companies.
The response from many businesses has been to make operational adjustments, reflecting this onslaught of crisis events. Some have adopted a more cautious approach and now focus on core competences; others have been forced to innovate quickly. But the common factor is that all of this materially impacts on insurance.
For example, companies may choose to pull out of less profitable areas or be forced to because of staff shortages or there could be a consolidation or reorganisation of company locations.
Are your risks increasing?
Even where a company is consolidating, a more restrained approach does not always mean lower risk. Fewer sites or suppliers works against resilience in the event of a problem, while staff reductions may lead to cuts in risk management activities. Further, any changes to the client, product or service mix may shift contractual risks and take time to fully control.
In short, any change to a business should be considered for relevance to insurance, whether there is contraction or expansion or merely adjustment to reflect changed operating conditions.
Get on the front foot
Any business should be proactive when it comes to disclosure, as simply answering set questions provided by the insurer is not necessarily enough and could leave your business exposed.
Working with your insurance advisers, you should consider the extent of necessary enquiries across your business to identify relevant changes and provide supplementary information that goes beyond the insurer’s standard proposal forms and questionnaires wherever this information is not adequately catered for.
This is necessary because on an increasingly frequent basis, claims are disputed when the insurer alleges that insufficient information has been provided at the time cover is taken out.
A proposal form may appear relatively straightforward, but therein lies the danger. An insurer may only ask a bare minimum, yet if they do not gain the full picture then this can store up problems that will surely resurface if there is a claim.
Although providing more detailed answers may seem like a lot of work, it does bring benefits, and not only in terms of having reliable insurance protection.
Even if you never have to claim, companies that provide more information on how they manage risk will obtain lower premiums and be in a position to negotiate better cover. It also creates scope to adapt any policy terms and exclusions which are inappropriate for your business.
What an insurer needs to know
So, simply ticking the boxes on a proposal form is not enough. We have also already pointed out that strictly adhering to the ‘yes/no’ route on forms should also be avoided. It is much better to answer with a ‘maybe’ if there is some uncertainty and to provide extra detail as to why this is. Again if the answer is ‘no’ and this may raise a red flag to an insurer, then provide commentary as to why this is the case and to how related risks are managed – such as in explaining alternative workarounds to the risk concern the question relates to.
On questions around claims history, it can also be helpful to provide detail on the near misses and the lessons learned. This can help provide a positive narrative to a negative experience, and may even be obligatory to disclose. This was shown in the infamous “Environcom” court case, where a series of small incidents (individually too small to be disclosable) were collectively held to be a material trend that the policyholder should have disclosed, but failed to do so. As a result, the insurer repudiated a much larger claim.
The following are key areas and concepts that policyholders will need to be aware of where considering what to disclose:
- Material facts
This means knowing what is ‘material’ for the purposes of insurance – and relates to any matter that would influence an insurer’s decision on whether to agree to cover and on what terms. Specifically, this includes anything you think could affect the premium, even if only slightly. Ask your adviser for guidance in this area if necessary. There are also useful pointers in the Insurance Act 2015 to help frame this.
Material facts include everything risk-relevant arising from a “reasonable search” of the business or that is (or ought to be) known to senior management, those involved in insurance or even the broker. Whilst these terms are necessarily broad (they apply to both a multinational and a small business), it is essential to consider if the information you provide – and the process used to gather and review it – is defensible in these terms.
- Unusual or higher risk activities
Is your business involved in any activities that could be deemed as higher risk or are simply more unusual, compared to what would be expected of your business type or sector? If so, this is specifically noted in the Insurance Act 2015 as requiring disclosure. Again, we can advise on this and ensure the insurer is aware of them, whilst also managing any potential concerns arising.
- Operational detail – in-depth
Supplementary information should focus on operational details that affect risk – but goes beyond a basic summary or an extract from the website. This could include explaining products and/or services, customer profiles, the supply chain and any business changes. Where possible, include explanations about how potential losses could occur and the highest risk areas along with mitigations. If this seems broad, focus on your most material concerns and be explicit about what is (and is not) included.
Website and marketing detail can not only be too high-level, it can sometimes be inappropriate to support level-headed risk evaluation, particularly if it includes ambitious claims about the company’s activities or performance that are aimed at looking innovative to potential customers more than explaining risk to insurers.
Some companies may be reluctant to outline where they are exposed. However, if properly defined, it may well appear as a show of strength in terms of risk identification and an opportunity to show off well-prepared mitigations.
- Up to date valuations
Incomplete or under-valuation remains a serious problem – exacerbated by inflation and the hangover from Covid that is still causing a backlog for valuers. Reasonable efforts must be made to ensure asset and business interruption values are correct and regularly updated – and this also means explaining any unusual aspects of how they are calculated, setting out the valuation process and specifically how business interruption figures have been calculated.
A huge problem in a high inflation environment is that more claims are being challenged where values were under-declared. This leads to claim reduction in line with such under-declaration, or even outright policy avoidance in the event of a more significant shortfall.
It is also vital to make sure that declared values only relate to assets that need to be covered. We have found some new clients have been paying unnecessarily high premiums for property already insured by other parties or for cover they did not need. This does not help in the event of claim, but will increase premium.
- Explaining unusual costs expected following a loss
In addition to the core values declared on which your policy premium is based, if you anticipate any unusual costs being incurred following a loss it is essential to explain these ahead of time.
This might include necessary workaround measures in the event of loss, or even unusual contractual exposures or customer compensation/penalties that would increase the financial impact. Unless these are clearly explained up front and reflected in the wording, they are likely to be challenged or even excluded altogether when you look to claim them.
- Risk mitigations
Even though they are sometimes asked about or only in high level terms (such as “is site X sprinklered?” or “do you have a business continuity plan?”) this often only scratches the surface of what risk mitigation detail is material to the risk and, therefore, is an essential part of a “fair presentation” as well as supporting lower premiums.
Disclosure on mitigations should consider a wide range of areas from HSE to quality assurance, supply chain management, business continuity, maintenance and asset lifecycle management, corporate governance among others.
In addition to such operational risk protection measures, an insurer will also want to know what legal protections a business has in place to control its exposures. This means providing details on how the company contracts, the key mitigations and liability limitations in place, and how these might vary in client negotiations.
Be careful not to over promise
Companies may also need guidance on how to achieve the right balance between providing enough information to present itself as well-managed, but also not saying too much. This is to avoid over-committing – some examples would be to say ‘the business always caps its liabilities at £x’ or ‘the last person to leave always checks doors are locked before leaving the office’. In this case, this would not be true – and a claim could be denied – if such measures were accidentally not taken on one occasion.
Policies with a large “worst-case” claim typically require enhanced disclosure and in our experience, we have found the following are just a few of the common considerations that go beyond standard insurer forms/questionnaires in the vast majority of cases and should be thought about carefully:
Public Liability (and Professional indemnity)
Be prepared to give extensive details on unusual contractual exposures, contractual controls, full explanations of relevant activities (including anomalous or unusual projects/clients) and specifically who are the relevant end-users of products and services. This often determines the level of liability risk rather than just descriptions of the products/services themselves.
Property Damage and Business Interruption
It will help to supply information on anticipated worst case loss scenarios, details of any unusual assets and activities undertaken on-site, the types of cost that would be expected following a major property loss, unusual sites and/or exceptions to general risk management policies.
There should also be a clear explanation of operational footprint and backup capacity, the nature of dependencies on key suppliers, hard to replace machinery and fragile customer contracts that could extend revenue loss. This is a long but not exhaustive list – aiming to at least illustrate the thought process behind what should go in a PDBI submission beyond the core values and construction detail required for underwriter pricing models.
In addition to providing extensive detail on all aspects of your IT security (and critically any areas which remain in-development or incomplete), it is worth including analysis of any unusual types of sensitive data held and any known contractual exposures in the event of IT outage or breach. In addition, details on which third party providers are used for what and how the company would look to respond in the event of a breach.
Directors & Officers
D&O disclosure is often short and heavily financial in nature, but the range of claim types is ever-widening and all of the poly-crisis events noted have D&O consequences where management can be alleged to have inadequately prepared for or managed the crisis concerned. For example, we are seeing a spate of ESG related D&O claims against individual directors.
For the purposes of D&O, therefore, it is helpful to ensure a full explanation of all business activities and entities, including smaller or unusual areas that might attract disproportionate interest from regulators or even protestors. For example, explaining the various corporate governance policies that are in place (and any which remain in development), as well as ensuring consideration by a wide group of senior leaders across the business of even early-stage matters that could later develop into a claim.
In conclusion, insurance disclosure sounds challenging since the law requires you to consider what might be relevant to a nearly infinite number of hypothetical future claims and specifically to flag areas of known concern or change in the business.
There may be times when companies believe they are putting themselves in a poor light by flagging concerns and exposures. But, insurers are fully aware that no business is risk free – and they do want to work with those firms that really understand the risks facing them and take proactive steps to manage them. Even an accusation of having breached the duty of fair presentation is in effect an allegation of not adequately investigating risk, which is a bad look for any board.
Overall, proper disclosure efforts pay off in three mutually supporting ways: wider cover, reliable policies and lower premiums. You ignore it at your peril.
Five Steps to Improve Disclosure
Being properly insured requires that you fully understand, quantify and articulate your business’s risk and take appropriate steps in disclosing them.
Download this quick and simple guide to help you improve your disclosure and protect your business from unfair claim disputes.
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