Don't let your business fall victim to insurance fine print
Published 09 September 2015
Danny Gumm offers his perspective on the evolving insurance industry and how an insurance broker can help your business navigate your insurance policy and avoid costly pitfalls. Danny was Branch Manager of our Beenleigh office before retiring in 2016.
In a popularity contest, insurance brokers would very rarely make it to a finalist, never mind winning a medal. Regrettably, the idea of having a chat with an insurance broker has little appeal to most people due to the perceived poor reputation that the insurance industry has acquired over the years (certainly it can’t be because of any absence of charm of the insurance broker themselves, can it?).
There are valid reasons that the insurance industry of the past has deserved some of the criticism it has received, which in my opinion has predominantly come about due to:
Poor communication of the intent of insurance,
Complexity of ‘insurance jargon’ in some documents,
Poor education of the conditions that apply to insurance policies,
General acceptance that insurance is a ‘commodity’ when in fact it is anything but (indeed, I believe it is more appropriately described as a ‘tailored promise’!),
Sheer volume of claims following a natural disaster stretching resources to unacceptable proportions, resulting in delays of claims being fulfilled,
and the list goes on.
The good news you don’t hear about
Having been involved with the industry for well over 35 years, I believe the industry is very harshly judged. For every negative comment, I have seen so many ‘good news’ stories where insurance has saved both businesses and individuals from what otherwise would have been life-changing catastrophes if it weren’t for a policy to fall back on. Of course, you would not hear much about these as they do not create the headlines or publicity that current affair programs thrive on to gain ratings.
I have in fact seen not one, but many cases where insurers have actually agreed to settle losses which technically may not have to be paid because the person insured has acted in good faith and the intent was certainly that a policy should respond in that instance.
An evolving industry to meet your needs
I also believe that the insurance industry, to its credit, has done a lot (and continues to do a lot) to rectify the above weaknesses, including the following developments:
Insurance policies have never been easier to understand, especially retail ‘mums and dads’ policies which are now written in a language that most can comprehend. It was only a decade or so ago that reading an insurance policy required a solicitor to understand the mix of legal and insurance jargon used, but this is no longer the case.
The introduction of the Financial Ombudsman Services (FOS) for complaints has brought great accountability to the industry. A set process is mandatory for certain classes of insurance which provides every opportunity for an insurer to sort out a dispute with its client. However, in the event this does not occur, the matter can be referred to FOS for consideration. Once FOS has determined its outcome, its decision is not binding on the client (who is free to take alternative actions if still not happy) but is binding on the Insurer (ie they must meet the decision of FOS).
The Government has also heavily regulated our industry with the Australian Prudential Regulation Authority (APRA) in particular playing a positive role in ensuring insurers meet their financial obligations and commitments to the general public.
A different perspective on fine print
The blame for many of the events that are ‘knocked back’ as an insurance claim are often referred to as ‘fine print’. It goes back to the days gone by when a policy appeared to offer protection, only for some innocuous clause in small writing later in the policy wording to contradict the coverage offered.
In fairness, the insurance industry has done a lot of work to ensure such clauses are eliminated in documents now produced. If anything, the competition is so strong now that insurers have been forced to introduce additional clauses to provide cover in over and above the general terms and conditions of a standard policy. For you as the insured client, you’re receiving more, not less, cover as a result.
Due to the very nature of insurance, policies will always have terms and conditions, as well as exclusions, which can cause some form of debate in the event of a claim. Many of these conditions are introduced with the intent of protecting society (eg. A policy exclusion may be not to cover a loss arising where the insured client broke the law) or to protect all of the other policy holders from having to pay too high a premium for something many may not be exposed to (eg. why should a home owner on the top of a mountain pay the same premium cost for ‘flood insurance’ as someone who chooses to live in a low lying area next to a river?).
On this basis, I thought I would look at an example of one such ‘fine print’ clause that you should be aware of, and the real purpose in it being present in the policy. And no, it is not just there to help insurers avoid claims for the sake of it!
The real meaning behind the ‘under-insurance’ clause
To be fair to all policy-holders, everyone should pay the right share of premium based on the risk accepted by the insurer. For example, if your building is valued at $200,000, then you should pay a premium based on this value; if you have $80,000 in contents and stock, then your premium should be valued on this amount of coverage.
In the past, some policy-holders decided to take a chance by deliberately ‘under-insuring’ in order to minimise the cost of insurance they would pay. Using the above figures as an example, they may have insured the above $200,000 building for $50,000, or the above $80,000 contents and stock for $25,000, knowing that the vast majority of claims are likely to fall under this value, and hoping a total loss does not occur. This is completely unfair for all other policy holders who have paid the correct full premium for the risk the insurer has accepted.
"The ‘under-insurance clause’ was brought in the restore fairness in this situation."
Danny Gumm, former Branch Manager, Beenleigh
Continuing our example, if the building is valued at $200,000, and the policy-holder only insures it for $50,000, the ‘under-insurance clause’ will state that if the value only represents one quarter of the true value, then any loss should be reimbursed with only one quarter of the damage incurred. On this basis, if a claim is submitted for $10,000 for roof damage, the insurer would only pay $2,500 as three quarters of the value of the property was not insured.
Without a proper explanation, you can fully understand why a disgruntled policy-holder would criticise insurers for reducing their payment. However, once you understand that the intention is not about avoiding payment but actually about general fairness to all other policy-holders who have done the right thing, it hopefully makes more sense.
What is important is that you take the time to ensure that the values you declare are a reflection of the true replacement value of your assets, and work with a professional adviser to outline such policy terms and conditions on your behalf. Most policies provide an extremely generous margin of error which means you do not have to calculate the value accurately down to the dollar. As long as your sum insured is eighty percent of the true value of the asset, the above ‘under-insurance clause’ may not apply.
The best means of fully understanding all of these terms and conditions, and general insurance in its entirety, is to work closely with a professional insurance broker such as Gallagher. This will help to ensure that in the event of a loss, you do not fall victim to the incorrectly perceived insurance ‘fine Print’ and who knows, you may find that it’s not so bad to have a chat with an insurance broker after all.
As your insurance broker, we can help to mitigate your risks and minimise what can be a significant financial impact on your business should the unexpected happen. If you would like to know more or discuss this further, please contact one of our experts and we look forward to assisting you.