Liability Insurance is often overlooked during a client’s needs analysis. It’s like the black sheep of the insurance family that intermediaries tend to steer clear of due to a misunderstanding of it or generally just because it makes them feel uncomfortable. How can one advise a client on what their specific exposure is or what cover they need if you don’t understand liability exposure, much less all the different types of liability products, coverage and extensions available? It’s already a hard sell because it is, in the main, insurance protecting intangible risks. It’s much easier to sell a client fire cover for their building asset or insurance for their car, as one doesn’t need to convince them of how the loss of or damage to the assets would impact their business operations.
Individuals and businesses often make decisions on their need for insurance based on probability – even more so during the trying economic times so prevalent at present. “What are the chances of that happening?” is what they silently ask themselves, weighed up against the cost of the particular cover.
So, what intermediaries need to do is twofold – give them hypothetical claims scenarios for their specific business type or industry, including their potential exposure in terms of amounts that could be claimed from them. And secondly, make them think further about the probability by doing the sums on their exposure to potentially cause claims against them.
How many third parties’ premises do they visit in a month or in a year? How much third-party foot traffic do they have at their premises daily, monthly or annually? How many products do they manufacture, distribute, service or repair? Is it really possible or probable that in all these interactions, nothing will go wrong?
Another important aspect to discuss is the potential claims quantum versus their current balance sheet. Would the business be able to carry the cost of a potential claim or even legally defending one?
Need to know
Liability products mainly cover losses suffered by third parties for which they hold your client, and/or their employees or products responsible. So, when conducting a needs analysis, one would need to always consider what interaction the client, their employees and their products/services have with third parties and then consider what could go wrong. This will help you figure out what liability insurance products your client would need. Let us discuss some important points and concepts around liability insurance.
Typical exclusions of liability policies: Any first party losses are usually not covered, with some exceptions. If a client does not do what they were paid to do and the third party asks for a refund, this would not be covered, as this is covered as a first party loss because the third party has not suffered a loss and the client would simply need to refund the third party’s money which they were not entitled to in the first place. In the same way, the rectification of a client’s work is usually also not covered, nor the replacement/repair of the products they have sold if they break/fail. This would be covered by a specific product guarantee policy which is not easy to obtain nor cheap.
Claims made versus losses occurring: Most asset insurance is written on a losses occurring basis. This means that claims which are made for losses occurring during the insurance period will be covered by the policy which was in force at the time the loss occurred. That is pretty straightforward. Claims-made policies, on the other hand, have three boxes that need to be ticked in order for a claim to be covered in a particular insurance period. Firstly, the event that causes the claim must have occurred after the retroactive date noted on the schedule. Secondly, the insured must become aware of it and the third party must claim against the client during the current insurance period. Thirdly, the claim must be made against the insured policy during the policy period and/or within the extended reporting period. Most liability insurance is written on a claims-made basis. The most important thing for an intermediary to remember is that if your client has a claims-made policy, they have to always have an in force policy in place with no breaks in cover. Even if they are no longer working in a particular field or if their business closed – there are some fields of business where a loss could only materialise in time, for example, the construction industry. Clients who operate within this industry should be advised to keep an active policy for a specific run-off period as extended reporting periods are limited.
Business descriptions: When declaring a client’s business description, be sure to make it as comprehensive as possible. Always include activities that are discontinued and ensure that your client lets you know about any new ventures they are embarking on. This is becoming ever more important as businesses pivot and diversify due to the impact of Covid-19 and the prevailing economic climate. The last thing you want is an insurer to decline a claim because a business activity is not noted on the schedule. I find corporate intermediaries very good at this but when one looks at a standard commercial policy where business types are selected from a drop-down list this is not the case. Ensure that if there is only a drop-down option that you request the full description to be noted by endorsement. This will also prevent unnecessary delays at claim stage.
Defective workmanship: The name of this cover almost suggests that when a client does their work poorly the cost of rework will be covered. This is a common misconception. Defective workmanship cover only covers the consequential loss resulting from defective work. It specifically excludes cover for the specific part that you were working on as well as the rectification of any defective work. Another important point to note about this cover is that it only triggers for damage occurring after completion and hand-over of the work. The cover is for loss or damage a third party suffers that the client’s poor workmanship causes, it is not cover for the poor workmanship.
Notification to an insurer: Most liability policies state that an insurer should be informed as soon as the client becomes aware of an incident that could give rise to a claim which will be covered by the policy. What does this mean, practically? If someone falls and injures themselves at your client’s premises and the client and/or their staff witness it, they should notify the insurance company even though the third party has not yet claimed any compensation from them yet. If a building project is underway and something goes wrong and a third party tells your client verbally or in writing that they hold him responsible, then the insurance company should be informed. Your client cannot wait until a letter of demand arrives before letting the insurer know. If they do that, the insurer will most likely have missed an opportunity to investigate and determine liability and may therefore decline the claim on prejudice.
Liability cover is almost always a contentious topic, and it is natural for an intermediary to steer clear of offering or discussing this type of cover with clients if they aren’t comfortable with it. It is, however, a very important part of any business’ insurance portfolio, as liability claims have the potential to cripple a business, even in the event that liability would simply need to be legally defended.
It is vital that intermediaries understand all aspects of their clients’ exposure in order to ensure the correct advice is given and not create gaps in cover for their clients. Simply omitting to discuss or offer liability cover to clients because of being uncomfortable with doing so could potentially even trigger the intermediaries’ liability due to incorrect or insufficient financial advice. Rather do the necessary upskilling and make sure your clients are adequately covered.