Professional advisers are not always protected by their insurance
Want to know why some indemnity insurance claims are declined? I have two examples of claims being declined, one more extreme than the other, yet both prove small errors can prove costly. And I’m going to tell you why they were declined and how to avoid it happening.
The first is the most recent, only a few months ago an insurance company refused to cover a claim for a company that was being sued for £47,000. The claim related to an incident that occurred in July 2005 when they had translated a document (allegedly incorrectly) yet it would have been covered if the insurance company had been made aware of it earlier.
The incident was first reported to the business in May 2005 and the complaint wasn’t disclosed to the insurance company. The complaint may have been the reason the owner of the business sought cover in the first place. This happens quite often. Not telling the insurance company what it needs to know is an easy mistake to make and can be avoided if insurance suppliers ask the right questions when cover is requested. Alternatively, the business owner should study all the documentation including the policy wording before they agree that the cover is suitable.
The worst case of an indemnity claim being declined is quite complex. It proves timing is critical when claims are reported. Some years ago a large PR company were contracted to build mobile facilities for a large entertainment company that wanted to provide entertainment road shows at large events.
HGV’s were to be adapted and turned into “play zones” where people could interact with new products. The PR Company won the contract because they proposed to turn Lorries into fully functioning interactive units within 30 minutes – using 4 men. You might have seen Jamie Oliver cooking in one of these contraptions in the TV adverts for Sainsbury’s.
In actual fact it took twice as long and twice as much labour to convert these monstrosities. Costs escalated which annoyed the client somewhat. They made a claim against the PR Company for reimbursement of the cost of hiring the extra labour, not just those that assembled the units. There were additional extra driver costs too.
The claim was for over £1,000,000 – count the zeros – and was for negligence in advice from the PR Company which lead to a financial loss for the client. The client couldn’t change their plans because this was a major part of their product launches for that year.
The claim was refused by insurers because the complaint had not been reported early enough. The client had made a fatal error. The cover was arranged on a Monday and the application form was signed on the following Friday. The complaint was first reported by the client on the intervening Wednesday and when this came to light the claim was refused on the grounds that they had breached the contract with the insurance company.
The application form stated very clearly that it is the client’s responsibility to tell the insurance company about everything that may affect their judgment of a risk at the earliest possible stage. They didn’t declare the complaint and the insurance company refused to pay.
The PR Company went bust. They were well renowned and had a great track record yet they could not fund the loss.
Solicitors that work for insurance companies are asked to ensure claimants have met the conditions of the insurance contract. This is an example of how badly things can go wrong if the terms and conditions of insurance contracts are not explained to policyholders. If only they had told the insurance company when they first heard of the problem the claim would have been settled.
It is never a good idea to keep things from an insurance company however insignificant the information may seem. After all, they hold the purse strings and you don’t want to have to argue with them when a client is asking you to reimburse their loss or your income has been affected by an unforeseen incident.
Trying to argue with an insurance company when they have the law on their side is a costly business — I understand it costs something like £3,000 for a solicitor to review an insurance claim file and £17,000 to issue proceedings. Legal Expenses insurance policies usually exclude insurance disputes — well they would wouldn’t they.
Tell the insurance company everything, especially the “bad” stuff. This includes incidents that could lead to claims, complaints, financial problems, etc. The worst case scenario is that you might have to pay extra premium. If you don’t disclose everything you may find that your insurance will not work when you most need it.
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