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.
*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.