At a glance
- Figures show that up to 40% of businesses have insufficient business interruption (BI) cover
- There are a number of steps that brokers can take to help minimise the risk of underinsurance and associated client disputes
- The BI calculator can also help to reduce errors and omissions that may lead to underinsurance
According to recent research by the Insurance Times, 44% of brokers say that they are concerned about the prospect of disputes with clients that could result in litigation.
While litigation against brokers is comparatively rare, with most cases settled before they reach court, the costs have the potential to outweigh the income earned from that customer.
There are a number of steps that brokers can take to minimise the risk of client disputes.
The main causes of litigation
According to Clive Brett, Partner at global law firm Clyde & Co: “There are various ways in which a broker can be held liable for not fulfilling their duty in relation to arranging suitable cover for their clients, but underinsurance is a frequent source of claims. In the specific circumstances of BI cover, there have been high profile cases where the client has alleged not only that it was underinsured but has claimed additional losses as well.”
Estimates suggest that the level of underinsurance in the UK commercial property market could be as high as 80%, and up to 40% of businesses have insufficient business interruption (BI) cover.
The 2007 Arbory case illustrates the particular dangers posed to brokers who may be found to have provided inadequate explanations of the methods used for calculating insured gross profit.
While brokers do not have to calculate the precise sum insured, or choose an indemnity period, they must provide a sufficient explanation to enable customers to do so. We published a guide to help brokers identify factors to consider when calculating gross profit in our article ‘Loss of gross profit: the high cost of getting your sums wrong’.
Clive says that while underinsurance is perhaps the most frequent source of claims, it is far from the only reason for litigation. “There have also been cases where there have been exclusions in the policy that should have been spotted by the broker but which were highly material to the insured’s actual requirements. In those cases, the insurer may not pay the claim, therefore introducing the risk of a claim against the broker.”
There are also potential pitfalls post-policy inception.
In a 2011 case involving a fire at Camden market, an alleged failure by the broker to pass on relevant information resulted in a much reduced insurance pay-out. “Cover had been placed, but had been made conditional on a risk assessment and the steps being taken in response. In this case, it was alleged that the broker failed to inform the insured of this condition which went unfulfilled,” explains Clive.
Measures brokers can take to avoid litigation
As well as the core broker responsibilities, such as having an in-depth understanding of the customer’s business and establishing the appropriate levels of cover, there are a number of areas that require particular care in order to avoid the risk of client disputes:
- Clearly highlighting any unusual restrictions in cover, including any particular exclusions, limitations, warranties or policy conditions
- Maintaining written records of conversations and advice given. This is particularly important for complicated business interruption calculations, which should be put in writing to protect a broker in the event of a future claim
- Ensuring that any cover placed is checked and acknowledged by the customer. This includes making sure that summaries of coverage are read, understood and acknowledged by customers. Assuming customer understanding, even of seemingly simple documents, can cause problems
- Forwarding on any information that comes to light post-policy inception. As we have seen, failures post-policy inception can lead to significant disputes.
How the BI Calculator can help
The BI Calculator represents a valuable resource to help reduce the chances of policy errors and omissions, and any costly subsequent customer disputes.
As Clive explains: “When BI has been miscalculated, brokers may find themselves pursued not only for what the pay-out under the policy would have been, but (as was the case in Arbory) for consequential losses due to the policy not being fit for purpose.”
The BI Calculator helps customers determine appropriate sums insured and indemnity periods, reducing the scope for miscalculations.
It has been designed to take brokers and their customers through a step-by-step process to calculating accurate sums insured, including guidance notes and clear explanations of key terms.
Making use of the BI Calculator and following the steps above can help to reduce the risk of errors, omissions and subsequent underinsurance and litigation.
To start using the BI Calculator today, or for more information on the issues discussed in this article, please get in touch with your local Zurich contact.