Opinion Piece – Is Business Insurance the next Mis-Selling Scandal?

Written by Richard Ingleby, Managing Director, Castlemead Insurance Brokers.

Recently the FCA have asked Insurance Brokers to consider the value of the insurance they sell, and it’s hard not to conclude that business insurance is poorer value than ever.

The industry has been forced to concede significant margin to ever larger consolidating brokers, and the only way Insurers have maintained prices at a level that customers can afford, is by introducing significant restrictions in the cover.

The industry has spawned analytics companies to look at past claims performance in great detail, in order to exclude the subset of companies and activities that are more prone to losses.

We are in danger of heading to a world where clients who have risk and need insurance can’t get it, and clients that have little risk have a wide range of cheap options, all of which take out any significant exposure for the insurer. The fundamental principles of an insurance pool sharing risk have been erorded.

Castlemead are running a series of videos about Small Print, in an attempt to outline the pitfalls in the most common types of cover.  We need to raise awareness and coach our clients to make sure that they are aware of the gaps in cover that are standard in the market.

Castlemead will help our clients avoid the common losses that happen particularly those that the insurers have no interest in covering.

Our clients need to have protection for, or at the very least, avoid these business ending events.

Below we look at some of the issues in the key areas where cover has evaporated from the policies sold.

Fire  Insurance –The classic catastrophe

The top three causes of fire are as follows:-

  1. Electrical fault
  2. Arson
  3. Hot work on site

Insurers use Warranties to avoid paying losses caused by these top 3 fire risks:

  • Electrics must be in date and certified, and documents available in the event of an electrical fire. This is for the fixed wiring of the building and PAT testing.
  • Waste bins must be locked secured and kept 5 m away from the building so that an arsonist cannot use your waste bin as a method of starting a fire in the building.
  • If you have a contractor on site they must complete a recognised Hot Works permit and follow its procedures. The terms of the permit issued by Risk Authority is so onerous no fire is possible if you follow its guidance.

We have some sympathy with Insurers as the Fire Brigade no longer respond to automatic fire alarms, and at most fires they will not enter the building unless there is human life at risk. This means that small out-of-hours fires now result in much more significant losses. The irony that the Fire Brigades were originally set up by Insurers to reduce their losses cannot be lost on them?

Flood insurance

Insurers have been using data to reduce their flood exposure for years. They gave up on insuring household flood risk and the government had to step in as many postcodes became uninsurable.

These same models, which incidentally have been found wanting in an era of heavy storms, a feature of climate change, mean that business insurance is now a one sided lottery where some clients can get full cover (for those on a hill) whilst the majority of clients in fluvial areas around major cities carry significant excesses, inner limits or can get no cover at all! Most worryingly this includes flat owners in residential blocks which are not protected by the Government Flood Re-Insurance scheme.

Theft cover

The most likely cause of a theft is poor security on a building. Most policies have minimum security conditions which outline the specification of British standard locks and window locks to be fitted to the building.

These locks take a  significantly longer amount of time for a building to be accessed and with them fitted there is little chance to no chance of a theft loss.

To be frank, thefts of computers and other stock items have significantly reduced over the course of my career.

We do see the occasional trivial theft where you may lose a laptop or iPhone or employee’s wallet from a desk. Insures don’t cover theft without a visible sign of entry or exit and naturally the employees wallet in cash and are excluded!

It should be noted that recessions and cost of living crisis result in an increased level of thefts.

What about other lines of business?

Motor insurance

Motor fleet insurance used to be on an “any driver” “any motor vehicle” basis and you would declare your fleet vehicles at inception and either at the end of each quarter or annually for the insurer to adjust premium.

In the name of reducing uninsured vehicles on the road, insurers have moved to an “as and when” basis for fleets up to 20 vehicles. Forgetting to tell your insurer of a change can result in a substantial uninsured claim both for own damage and in extremis, a third party loss.

Not “Any Vehicle” Vehicle Types

Insurers now take into consideration vehicle categories on fleets, so cars such as Teslas and Range Rovers which we see on many company fleets, have terms imposed, and have to be dealt with as we go rather than at year end.

Not “Any Driver” 

The most accident prone drivers are excluded as standard.

Drivers with Convictions

On the proposal or statement of fact for the majority of fleet insurance there is no automatic cover drivers with over six points or serious driving licence convictions. Again an employee who joins or acquires one of these convictions within the course of their employment can find themselves uninsured.

Young Drivers

We also see that motor insurance has gone from being on an open driving policy to be restricted to over 21s or over 25s as the majority of losses on fleets insurance are caused by this demographic.

What about theft losses?

The most common causes of loss is theft of a vehicle with keys, so there is now an exclusion on the majority of insurance policies to say that if the vehicle is stolen with keys there is no cover.

Directors and Officers Insurance

The clients that need Directors and Officers Insurance are those that have had poor trading performance, significant debt load or have outside third-party investment.

Insurers impose insolvency exclusions and seek to exclude capital transactions risk by questions on the proposal forms.

A likely sale, capital injection or funding rounds become difficult to insure in the current market.

Those clients who don’t really need to insurance are family-owned and profitable. These are the clients that the Insurers are all focusing on.

These client’s cover was broadened to give extensions such as Employment Practices Liability and Crime – this saw a number of claims and losses so the terms have swiftly been amended!

Cyber Insurance

Cyber insurance used to be underwritten on the basis of your business type and activity. The proposal form / Statement of Fact and expected level of housekeeping means it’s hard to know what cover you have. In the event of a loss as the answers given are only forensically examined post-loss.

If the security questions on a Cyber proposal form are answered in the affirmative, the prospective client will be in the top 10% of security risk in the UK, the equivalent rating to Cyber Security Essentials plus.

If you’re in the top 10% of security risk in the UK, how likely is it that you will be subject to a cyber insurance loss?

Professional Indemnity

This market is probably the most broken in the UK. From a vibrant market in 2015 where £10 million limits were readily available on “each and every” basis for construction, surveying, consultants and valuers, Insurers are unable (or unwilling) to give full financial loss cover to a significant volume of their customers, and there is little competition in the market.

You can blame Grenfell, Lloyds and Covid-19 for the reduction of capacity and the nervous state of the market, but the patchwork quilt of commercial contracts that  indemnify the lenders and owners  that are relied on have been permanently undone by an insurance market that doesn’t want to provide the counterparty risk.

We will see many consultants go insolvent over the next few years as their PI policies fail to deliver on the claims presented. We are astounded that PI brokers seem happy to sell cover that has restrictions such as “rectification cost only” on design and build contracts (as opposed to full financial loss for defective design) as being cover that satisfies Customer contracts.

Contractual liability – where a client is most exposed and least protected

The most likely cause of a loss for a consultant is for a breach of commercial contract. The majority of contracts issued to SME subcontractors have indemnity clauses that are Broad form and significantly greater than the common-law cover issued by insurers.

It is impossible to buy professional indemnity cover on this basis

Professional Advice?

Insurers Brokers professional indemnity cover is difficult to procure and many have entered into a self insurance mutual arrangement. The teaching is that we should be documenting the cover deficiencies, telling our clients that they should check the statement of facts, and read the 300 page policies, all whilst feigning ignorance over the serious gaps they contain! In reality making a PI claim against your Broker is difficult and protracted and the Broker is well protected by case law.

So where does this leave us at Castlemead?

Over the coming months we will be launching a series of videos outlining the most common types of cover and risk to your insurance, i.e. The Small Print.

Castlemead understand the Small Print – we want to be there on a Saturday morning after a loss, knowing that we have the cover in place.

Castlemead Warranty Check Service  

Castlemead are looking to launch an audit service to check what is happening on the ground, which falls outside of the Insurers scope of cover.

If you are interested in this service or any of the issues raised in the article please contact the author.

Author Note: Richard Ingleby is the Managing Director of Castlemead Insurance Brokers. His client base covers a wide range of industries including aerospace, construction, information technology, transportation and retail. Richard qualified as an associate of the Chartered Insurance Institute in 2005, and became Castlemead’s Managing Director in 2006. Richard believes that to provide a first-class insurance broking service, you need to gain a deep understanding of your client’s businesses – from the markets they operate in, down to the contractual terms they have with clients and suppliers – it all impacts on insurance and risk management.


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