Professional Indemnity Initiative Volume 6

Transcription

1 British Insurance Brokers Association Professional Indemnity Initiative Volume 6 Managing under-insurance A guide to prevention

2 2 BIBA Professional Indemnity Under-insurance Contents 3 Introduction 4 Insurers viewpoint 8 An under-insurance case study 12 Definitions and causes of under-insurance 15 A broker s obligations 20 Assessing and advising 24 Selecting levels of cover 30 Business interruption; special considerations 34 Liability; special considerations 40 Technical tips 42 Case law 46 Accredited professional indemnity brokers 48 Acknowledgements

3 BIBA Professional Indemnity Under-insurance 3 Introduction The purpose of this latest guide in the BIBA Professional Indemnity (PI) Initiative series is to assist all brokers in recognising the risks associated with a client 1 being under-insured. In May 2015 the Financial Conduct Authority (FCA) concluded a thematic review, TR15/6: Handling of insurance claims for Small and Medium sized Enterprises (SMEs). It reported that there were a significant number of instances where the sum insured was insufficient to cover the loss and in 12 out of the 20 case studies there were issues relating to sums insured. In eight cases the material damage sums insured for buildings, trade contents and or stock were inadequate in four cases the loss exceeded the 12 month maximum indemnity period. The consequences of under-insurance are serious for the client and, possibly, for the broker. It must be clearly understood that a broker that holds itself out to be an adviser to its client will be expected to give them sound advice, which will include advice concerning sums insured, limits of indemnity and other policy benefits. The aim of this BIBA publication is to explain the potentially serious consequences of underinsurance and raise awareness about how it can arise and how it can be prevented. Knowing how to both guide and advise clients on deciding upon a suitable sum insured or limit of indemnity will not only reduce the risk of being the victim of a professional negligence claim but more importantly, can help a broker to demonstrate their significant added value will also see the biggest change in insurance law in more than a century with the implementation of the Insurance Act Reference is made to some of its provisions in this guide but more detail can be found in two BIBA guides to the Insurance Act 2015 produced in conjunction with Mactavish and which are available at BIBA is grateful to the wide-ranging industry support we have received in putting together this document and we would like to thank the sponsors; Chubb and Hiscox, and the ABI, CILA, AIRMIC, LIIBA the CII, Mactavish and the members of the BIBA advisory boards and committees who have contributed their time and expertise to this guide. In particular, we are grateful to our principal author Roger Flaxman of Flaxman - Insurance Claims Advocates without whose input we could not have completed this guide. Lord Hunt of Wirral Chairman of BIBA Knowing how to both guide and advise clients on deciding upon a suitable sum insured or limit of indemnity can help a broker to demonstrate their significant added value. 1 Throughout this guide the word client will be used to mean policyholder, insured, customer or proposer and broker shall mean insurance broker.

4 4 BIBA Professional Indemnity Under-insurance The insurers view

5 BIBA Professional Indemnity Under-insurance 5 We are delighted to support this BIBA guide, which helps to raise awareness of the issues associated with under-insurance. According to the Building Cost Information Service and Chartered Institute of Loss Adjusters, up to 80% of properties are under-insured and 40% of businesses lack adequate business continuity cover. This is a particular problem with smaller companies, as they are least likely to have a business continuity plan and most likely to go out of business if they are under-insured and have a claim. In fact, overall, around 40% of businesses without a business continuity plan fail because they have insufficient funds to cover the expense of extended downtime, and a further 25% fail within two years as a result of lost revenue and cash flow problems. 2 As insurers we welcome any initiative that helps to educate clients on the value of insurance, the need to undertake business continuity planning whatever the size of the business, and most crucially, the risks associated with not having the appropriate levels of cover in place. One particular concern is that current economic pressures are resulting in companies focusing on cost reduction. This drive to remove cost from the business is creating a significant danger as brokers are sometimes tasked by clients to get the cheapest rather than the best deal in the market. This is a false economy, and sadly the true cost of under-insurance only becomes evident when a claim arises. There are a number of common mistakes which include: l rolling over insured sums year on year without addressing broader economic factors; l misunderstanding average clause wordings and omitting to take account of the resultant reduction in claim payouts; l underestimating the time taken to fully recover following the interruption; l failing to secure extended business interruption indemnity periods of longer than a year; l misunderstanding insurers definitions of gross profit and making erroneous assumptions on sums insured. The various case studies in this guide demonstrate how under-insurance can create serious problems for clients and their brokers. As insurance professionals it is our duty to share our insight around the issues highlighted here. Phil Sharp, Chief Operating Officer, Chubb UK and Ireland Property and Casualty Business Up to 80% of properties are under-insured and 40% of businesses lack adequate business interruption cover. 2 IBHS:

6 6 BIBA Professional Indemnity Under-insurance Joe Brown, Commercial Lines Underwriting Manager, Hiscox UK and Ireland At Hiscox we recognise that the risk of under-insurance is industry-wide, affecting policyholders, brokers and insurers alike and we are pleased to be able to be part of this BIBA awareness raising guide. We recognise that as insurers we need to support brokers in advising their clients through the process of selecting adequate sums insured. We aim to provide help and guidance on this often confusing subject matter and also in educating customers about the consequences of getting these figures wrong. Our own experience shows that at new business stage, a significant proportion of household policyholders initially under-estimate the rebuilding cost of their home by as much as 40%. In % of commercial properties were reported as under-insured (Building Cost Information Service BCIS 2012) and this is likely to be a similar figure today, the need to educate on the effects of underinsurance in both the household and commercial insurance sectors is high. A broker s expertise is often relied upon for commercial covers; from advising on how to set correct stock value through to explaining calculations for gross profit sums insured and the importance of an appropriate indemnity period. Often clients across the board rely on market value, not considering the reinstatement or replacement costs for material damage. Equally, one of the biggest problems we see is a business not fully appreciating the length of time it can take them to recover following a large loss, especially if they rely on the physical premises of the business in order to trade. The household insurance sector also sees many areas which can cause an issue; from correctly selecting a contents sum insured, through to understanding the value of a classic car. Customers need help and guidance in thinking about the adequacy of their sum insured and we would recommend seeking professional assistance if they are uncertain. Many rebuild figures are set by a mortgage valuation which can be acceptable for standard homes but often do not take into account bespoke features, one-off kitchens, home improvements or unusual properties such as listed homes. Under-insurance is an industry-wide concern and one that as an insurer we want to actively address, so we are pleased to be part of this guide for BIBA members.

7 BIBA Professional Indemnity Under-insurance 7 Customers need help and guidance in thinking about the adequacy of their sum insured.

8 8 BIBA Professional Indemnity Under-insurance Under-insurance case study The facts of this case study show a wide gap between the client s expectation of their insurance and the reality of what they had.

9 BIBA Professional Indemnity Under-insurance 9 This case study is based upon the circumstances surrounding a loss that occurred in It is an example that shows how easily issues with under-insurance can arise and it demonstrates that there can still be potentially serious consequences for the client and the broker. The insured The owner-occupier of a ladies clothing factory specialising in swim and beachwear with an annual turnover of 1.8m bought insurance, via a broker, for the property, premises, stock, machinery and plant, business interruption (BI), employers and public liability, motor fleet, computer loss, personal accident for staff, goods in transit, and several additional covers. The circumstances of the loss A night-time fire, on a bank holiday weekend, caused by an electrical fault in a cutting machine, further fuelled by loose waste material, burned down the entire premises and everything in it other than a separate office building and its contents. The loss adjusters attended the premises immediately following the fire and reported to insurers that, in conjunction with the fire brigade, they had established a possible breach of the waste warranty, and that there was evidence of serious under-insurance. The adjustment l The buildings, machinery and plant were on a reinstatement basis, but not a day-one basis. l The business interruption insurance was on a gross profit basis, subject to an average clause. Eventually, the loss adjuster, in conjunction with forensic accountants, was able to establish that there was, in relation to the sums insured: l under-insurance by more than 30% on buildings sum insured 275,000; l under-insurance by nearly 50% on machinery and plant sum insured 125,000; l under-insurance on stock of 60% sum insured 80,000; and l under-insurance on BI both in terms of sums at risk (40%) and period of cover sum insured 600,000, 12 months indemnity period. The insurers said that, even if they disregarded the possible breach of the waste warranty, they might refuse the claim on grounds of deliberate or reckless 3 underdeclaration of gross profits at risk and or underdeclaration of stock and materials. The client lost everything, their customers soon found another source of goods and the business was not able to recover. The client was also left with outstanding debts to suppliers and other service providers, with no revenue to off-set them. A post-loss meeting The client telephoned the broker complaining that they had no idea they were under-insured and asked for a meeting to discuss, amongst other things, the effect of potential under-insurance. This was confirmed in an , from the client to the broker. Key points expressed at the meeting The client s Managing Director (MD) said to the broker:- l The waste warranty was known only to our Financial Director (FD) and he had not conveyed this to me or to our Operations Manager (OM). I didn t know about it so how could I enforce it? l You recommended to the FD a 5% annual uplift of all buildings, machinery, plant and contents sums insured but never explained why. Nor did you explain the meaning of reinstatement values or the concept of the application of an average condition. 4 l Our FD relied upon our external chartered accountants to provide values of all contents including machinery and plant but you never told us that these write down sums were not suitable for replacement cost sums insured, or for our BI insurance. l You never chased the stock declarations even when they were overdue. Nor did you ever question how the stock values had been arrived at. l The OM has told the FD that he had never met you, or a surveyor, and had no idea of any of the policy obligations about warranties. 3 The same expression as is now used in the 2015 Insurance Act Part 2 Section 8 (4) concerning a qualifying breach. 4 The condition of average in an insurance policy states that where at the time of a loss the sum insured is found to be inadequate the insurer can reduce the amount of any claim by the same proportion as the relationship between the sum insured and the actual value at risk.

10 10 BIBA Professional Indemnity Under-insurance 5 A formal indication that cover may not apply. The broker s MD and Account Executive responded: l Your FD bought purely on price and regularly told us insurance is an obvious place to save money. We don t need all this insurance. l We are satisfied the FD was properly advised. Our advice was plentiful and consistent about average, reinstatement conditions and the implications of warranties. l The FD s instructions about renewal sums insured were in writing, we were obliged and entitled to carry out those instructions, without further responsibility or liability. l The FD is an experienced, sophisticated buyer of insurance and did not need nursing about insurance matters. l The client s accountants supplied the figures for business interruption and for the machinery and plant values at each renewal and we thought we could rely on them as being correct. The FD could have asked for more help from us if he needed it. The facts Whether the remarks made by each party were accurate and true at the time does not matter for the purpose of this illustration. What matters is the message to brokers that the assertions made by the client are a possibility in such circumstances. Faced with a collapsed business, the threat of no insurance, or substantial under-insurance, the client wanted to seek compensation from somewhere. The facts of this case study show a wide gap between the client s expectation of their insurance and the reality of what they had. The professional indemnity (PI) insurer s position Following the meeting the broker rightly notified its PI insurer of a circumstance that might/may/is likely to give rise to a claim. However, after reading the broker s files the PI insurers immediately issued a reservation of rights notice 5 to the broker because, they said, there was evidence from telephone notes and s that the broker was aware of a circumstance before the meeting which they should have reported to underwriters and obtained their permission to attend. This is a debatable point and should not be taken as correct or incorrect but it serves as a reminder of the strict PI insurance policy terms stating that the insured shall do nothing to prejudice the legal rights and remedies of itself or its insurer. After investigation The insurers of the clothing company made an offer of 250,000 in full and final settlement compared with the client s loss assessor s estimate for reinstatement of 1,560,000. Litigation followed The client instructed solicitors to pursue a claim against the broker for the amount of the uninsured loss 1,310,000 plus all costs of litigation (estimated at 250,000). The allegations made by the client s solicitors against the broker included issues around: l advising on how the client should assess sums insured for buildings, contents, machinery and plant; l the basis of assessment and calculation of business interruption insurance; l explaining the consequences of under-insurance generally and or the consequences of the application of the condition of average; l the meaning and application of reinstatement value ; and l explaining the consequences of breach of a warranty. The consequences for the broker were: l management and employee time of some 350 hours to deal with the allegation; l a likely increase in PI premium at renewal, if indeed renewal would be invited by insurers at all; and l a professional negligence claim for in excess of 1,300,000 plus costs. The broker acted as a prudent uninsured and defended the claim while at the same time and at its own expense, challenging the reservation of rights issued by its PI insurers. The broker had not, in fact, prejudiced its own or their PI insurer s position by attending the meeting, but the claims notification clause that obliged them to notify the circumstance was treated by the PI insurer as a condition precedent to liability 6 and used by them in this particular instance to refuse indemnity. Personal impacts Stress on the employees in the broking firm; lawyers will interview and challenge the staff and relevant management and supervisors involved in order to test the strength and weaknesses of the defence.

11 BIBA Professional Indemnity Under-insurance 11 Lessons learned l In this case, under-insurance was a proven fact. The broker was unable to deny responsibility because the evidence showed that it had continually acted as an adviser to its client and could reasonably be expected to have been aware of the possibility of underinsurance. l The broker was unable to show any documentary evidence of its advice or that it had ever actually assessed the client s demands and needs. l While the FD had responsibility for buying insurance, he blamed the broker on the grounds that a professional broker is better informed about insurance than its client. He relied upon the broker for that advice and guidance and said it had failed. l The PI insurer used the broker s failure to advise them of, or seek approval, to attend the post-loss meeting as a reason to consider repudiation, a point the broker challenged. l If a broker attends a meeting with a client and finds that it is faced, for the first time, with a complaint, the best approach is to listen to what the client has to say, make detailed notes about their complaints and ask for time to consider it. It would be wise to consult their PI insurer at an early stage to obtain advice as to how to conduct itself with that client. Summary This case study illustrates the consequences of underinsurance for both the client and the broker. Faced with an uninsured loss, clients may challenge the insurance arrangements made on their behalf in an attempt to obtain financial compensation. Clear communication with clients and involving PI insurers at an early stage, should a cover dispute arise, may be useful in avoiding problems. The Case Law section on page 42, has equally good illustrations of the consequences of clients insurance arrangements not meeting their expectations. 6 Condition Precedent A legal term that has the effect of making a Condition in a policy into a Warranty.

12 12 BIBA Professional Indemnity Under-insurance Definitions and causes of under-insurance

13 BIBA Professional Indemnity Under-insurance 13 Under-insurance Might be understood to be: The difference between the sum declared by the client to represent the true value at risk of the subject matter insured and the true value established at the time of a claim, loss or damage. Is adequate enough? Will an adequate sum insured be sufficient throughout the period of the policy? The expression ensure your sums insured are adequate is often used to encourage clients to take responsibility for selecting a sum insured that represents the true value at risk. However, if we accept that a general understanding of the word adequate is just enough but no more, then this implies adequate allows only a very thin margin for error. If the level of insurance is just enough to be suitable at the beginning of a period of insurance will it remain just enough for the full term of the insurance? What margin of adequacy is prudent? It is important to give careful thought to what might be the consequences of a loss or claim when considering the sums insured. Contractual consequences of under-insurance If after a claim under-insurance is apparent and it is shown that the client failed to make a fair presentation then the Insurance Act 2015 will seek to put the insurer in the position they should have been, should the correct information have been supplied. This means that they could impose different terms, policy limits and or apply a proportionate remedy (in effect to apply average to any claim). 7 It may be worth bearing in mind that though some insurers may remove average clauses, they might still choose to apply proportionate remedies where under-insurances is proven to be reckless or fraudulent. Causes of under-insurance Under-insurance can arise as a result of a failure: l to correctly assess the insurance cover that meets client demands and needs; l of the client to understand how to arrive at a valid sum insured or limit of indemnity; l of the client to understand what a sum insured or limit of indemnity represents; l to keep sums insured under review from year to year, bearing in mind some cities have recently seen double digit inflation in rebuilding costs; l to select an appropriate indemnity period for business interruption cover; l to obtain up to date valuations; l to check that standard levels of cover and sub-limits within a package policy are sufficient; l to take account of the fact that accountancy and business interruption definitions of gross profits vary greatly; l to consider including Value Added Tax or other costs in the sum insured; or because of the: l neglect, recklessness or wilful blindness of the client to take care in assessing the true values of the subject matter to be insured; l deliberate intention of the client to pay the lowest premium; or l prerogative of insistent clients to buy insufficient cover and take the risk. 7 See Schedule 1 of the Insurance Act 2015 for remedies.

14 14 BIBA Professional Indemnity Under-insurance Under-insurance can apply to many types of insurance Each kind of insured item, liability or benefit requires a particular type of assessment of what it would cost to replace, repair, reinstate or compensate. In addition to the usual risks, there may be other possible impediments, delays or restrictions during the repair or reinstatement of damage that add cost. 1. Physical l Buildings l Tenant s improvements and internal decorations for which the client is responsible l Contents in the building l Office contents l Computer equipment l Property kept in the open l Machinery and plant l Stock, materials, goods held in trust, work in progress and finished goods l Motor vehicles l Vessels l Customers goods in your custody l Marine craft l Aircraft l Jewellery, works of art, collections, fine wines l Free issue materials l Landscaping l Hired-in equipment 2. Financial and economic l Business interruption, increased cost of working, and additional increased cost of working l Suppliers or customers extensions, denial of access l Loss of rent or cost of alternative accommodation l Cyber-attack consequential loss l Theft and dishonesty, fraud and loss of trade 3. Personal health l Death, accident and sickness l Critical illness l Key man 4. Legal liability l Personal liability (home-owners or occupiers) l Employers and Public and Product liability l Product guarantee l Product recall l Professional liability l Employment practices liability l Directors and Officers liability l Cyber privacy and data liability l Errors and Omissions l Privacy, data liability, fines and penalties l Legal expenses l Prosecution or defence of intellectual property l Trustees liability l Environmental liability l Road Traffic Act liability l Pension trustee liability l Property owners liability Each kind of insured item, liability or benefit requires a particular type of assessment of what it would cost to replace, repair, reinstate.

15 BIBA Professional Indemnity Under-insurance A broker s obligations

16 16 BIBA Professional Indemnity Under-insurance 8 ICOBs 5.2.2R and 5.2.3R and 5.3.1R and 6.1.5R (1). What are a broker s obligations to its client? A broker has several concurrent and parallel obligations relating to all aspects of insurance practice: l a common law duty of care to its client to act with reasonable skill and care in the exercise of its business; l a fiduciary duty to act in good faith at all times; l contractual obligations under Terms of Business Agreements (TOBA) both with its client, and very often, with insurers at the same time; l obligations under the FCA regulations; and l obligations imposed by legislation and case law. Agent of the client It is generally accepted in UK law that a broker is primarily the agent of the client. That means that the underwriter accepts the representations made by the broker as being made by its client. The broker may also owe duties as the agent of insurers; these usually arise in relation to the preparation of documentation and other administrative functions but can also include obligations under TOBAs for underwriting or binding authority. Acting in a client s best interest means a broker puts the client s interests before its own. This is called a fiduciary duty or a duty of good faith. For example there is a fiduciary duty to put forward the best available terms for a client regardless of the outcome, remuneration or cost for the broker. A broker s obligations to its client require the broker, amongst other things, to: l understand the client s demand and needs; l arrange the appropriate cover to meet the client s demands and needs; l use reasonable care and skill to be satisfied that the client understands the limitations of the insurance such that their expectations are in line with what the insurance actually provides; l advise the client of special and onerous terms and conditions; and l explain the consequences of: a breach of policy terms and conditions; failure to disclose material information or under the Insurance Act 2015 effective 12 August 2016, make a fair presentation ; and under-insurance. Demands and needs The ultimate responsibility for a sum insured or limit of indemnity is the client s but the broker has a part to play in assisting its client with how to decide upon selecting it. In particular, if a broker holds itself out as an insurance adviser then the client may expect that the broker has considered the sum insured or limit of indemnity as part of its general duty to advise. If the broker is specifically not offering advice and the customer is aware of that, (a true non-advised sale) it would still be prudent for there to be a written warning in the process about the consequences of not taking reasonable care to buy sufficient insurance. A broker would ordinarily be able to advise a client about: l what is meant by being under-insured; l the consequences of under-insurance; and or l what can be done to avoid being under-insured. If a broker limits its own liability it might be wise to include this in the client TOBA (see PI Book 4 Facts about Limitations of Liability). Demands and needs and the Insurance Conduct of Business Sourcebook (ICOBS) Brokers are aware of the demands and needs obligations imposed by the FCA and these are entirely consistent with the objectives of the common law duty of care that a broker owes to its client. The FCA rules (ICOBS) require that in advised and non-advised sales brokers are to specify the demands and needs of the client. In advised sales a broker must take reasonable care to ensure the suitability of its advice for any customer who is entitled to rely on its judgement. Prior to the conclusion of a contract, a firm must specify, particularly on the basis of the information provided by the client, the demands and needs of that client as well as the underlying reasons for any advice given to that client on that policy. The details must be modulated according to the complexity of the policy proposed. It expects firms to provide clients with appropriate information in a comprehensible form about the policy so that the client can make an informed decision. 8 Insurance is a complex and highly technical legal contract, the value of which is often only appreciated when an incident triggers a claim. If the insurance does not respond in a way that might be reasonably expected by the client this may lead them to question whether it was correctly arranged for their needs. This is also the underlying reason for the ICOBS. Underwriting agency and conflicts of interests When using underwriting or binding authorities, exercising partnering arrangements or operating a Managing General Agent (MGA), brokers will owe concurrent duties to both the client and the insurer. That can create some conflict of interests and it is important to properly manage the separate roles to avoid them. In these circumstances if the firm styles itself as a broker, the client s interests should come first. However, it is important for the broker to have in place sufficient safeguards to protect it against breaching its legal obligations to either, or both, parties.

17 BIBA Professional Indemnity Under-insurance 17 Conflicts of interest have been managed by the industry for many decades. Where a broker believes a conflict may exist, action to reduce it, manage it or if possible remove it, is recommended. Practical implications and limitations As insurance is increasingly traded by technology, remotely from the client, the method by which advice can be given has become more challenging. However, the broker s obligations and duties to a client are not reduced by the cost or difficulty of meeting those obligations. 9 If a broker is not intending or not able to advise its client, it should make that clearly known before the transaction is commenced; or as soon thereafter as it becomes apparent to the broker that they cannot properly advise them. It is also important to recognise that what is said in a broker s advertising or on its website about their knowledge, expertise, service and specialisations are entitled to be relied upon by their clients. Its marketing representations will be taken into consideration in measuring a broker s duty to its client. Not a valuer but a guide to expertise A broker s duties and obligations include understanding how a policy will respond on matters of under-insurance and to know how the principles of the sum insured or limit of indemnity will be applied in the event of a claim. However, a broker is not required or expected, nor are they in most circumstances qualified to value the client s property or to predict loss outcomes. It can however assist the client in understanding the basis upon which valuations and assessments of risk ought to be made, for insurance purposes and guide them on how to arrive at a decision. If called upon to account for advice given, the broker would benefit from being able to show the workings ; ie. what considerations were taken into account in informing and guiding the client and how well was it communicated to them at the time? Insistent clients Occasionally a broker will encounter a client that it suspects is under-insured and it would be prudent to point this out and perhaps recommend that the client reconsiders the sum insured, limit of indemnity or indemnity period. Some clients may be reluctant to do this, despite their broker s advice simply because they prefer not to increase their premium. Sometimes a broker: l knows that the client will be under-insured; or l believes that the client will be under-insured; or l is concerned that the client is very likely to be underinsured and suspects the client is not listening to the broker s advice; or l suspects a client is deliberately or recklessly under-insuring. 9 See Case Law section - Café de Lecq- vs RA Rossborough (Brokers ) Limited.

18 18 BIBA Professional Indemnity Under-insurance If a client is insistent and gives a broker instruction to do something against the broker s better judgment, it may be useful to consider advice that the FCA gives to the pensions market in factsheet No.035 for advisers: FCA FACTSHEET No.035 What steps should I take when advising an insistent client? This is where the client wishes to take a different course of action from the one you recommend and it wants you to facilitate the transaction against your advice. There are three key steps: 1. You must provide advice that is suitable for the individual client, and this advice must be clear to the client. This is the normal advice process. 2. It should be clear to the client that their actions are against your advice. 3. Make the client aware what the risks of their alternative course of action are. It is important to act quickly and to take into consideration the consequences of a loss or claim occurring before the instructions of the client have been conveyed to the insurer. The written instruction myth It is a myth that, if the client instructs its broker in writing, the consequences of that instruction present no risk to the broker. It is not so. If a client is not willing to take advice and insure in accordance with the broker s recommendations there is a risk that in the event of an under-insured or uninsured claim that the client will try to hold the broker responsible. It is not defensible in law to knowingly carry out a dishonest or negligent act even if instructed to do so by a client. Having written instructions may not alleviate the broker of liability. A broker cannot make representations on behalf of its client (as agent) to an insurer knowing them to be inaccurate. If a broker knows or believes the client to be under-declaring values at risk (or other material facts) the broker is at risk of being in breach of its duty of care, its fiduciary duty and its contractual obligations if it withholds that from the insurer. Under the Insurance Act, the broker s knowledge is treated as the client s knowledge and supplying information that the broker knows may be inaccurate would almost certainly be seen as a deliberate and reckless breach of the duty of fair presentation and the insurer will be entitled to avoid the policy. Considering ceasing to act On rare occasions it may be necessary to cease acting for an insistent client in order to preserve the integrity of the broker s reputation as well as its duties and obligations to the insurer. While this step should not be taken without first discussing it with the insurer, neither should the broker delay, because a claim can occur at any time. Record your advice Whenever possible confirm all discussions and especially decisions made or instructions given, in writing or record them in a reliable format. When any complaint is investigated by PI insurers or lawyers the principal evidence they will need is the records of correspondence, conversations, meetings and other advice provided by the broker (including transcripts of recorded messages and conversations and all correspondence). Where there is lack of evidence in the broker s records the matter could be decided in favour of the complainant. The Insurance Act 2015 The Insurance Act (in force from 12 August 2016) will require significant changes in the approach to arranging contracts of commercial insurance; 10 in particular, how the information material to the underwriting of the risk is gathered and presented. Further to this, the broker s knowledge will be treated as the policyholder s knowledge. The Act also changes the remedies for insurers in the event of a breach of policy terms or conditions. Under-insurance will be dealt with by the proportionate remedies provided by Insurance is a complex and highly technical legal contract the value of which is often only appreciated when an incident triggers a claim.

19 BIBA Professional Indemnity Under-insurance 19 the Act. 11 Brokers will need to familiarise themselves with how these will work in practice. BIBA guides on the Act provide useful practical information about these changes. A fundamental principle of the Act is the requirement for a fair presentation of the risk. 12 It requires the insured to know what should reasonably have been revealed by a reasonable search of information available to the insured. 13 In practice this imposes obligations upon both the client and the broker to make more comprehensive enquiries about the risks known or what could be reasonably expected to be known by the senior management of a business rather than to rely upon just one person s appreciation of the risks. It also imposes a duty to find what they ought to know via reasonable search. This means that more time may have to be given to preparation in advance of each renewal so that the information can be gathered from relevant parties. The potential for under-insurance will be a feature of what material information is collated and presented as a fair presentation of the risk. The Act, at Part 2 section 4, specifically addresses the knowledge of the insured in relation to material facts. This is intended to create a greater breadth of awareness of the disclosure of material facts and it will provide a broker with a good reason to get closer to the client in understanding their business and their real needs. At Part 2 sub section 4(8)(b) it refers to the persons responsible for the insured s insurance. This is intended to include, for example, the client s risk manager if they have one, and any employee who assists in the collection of data or negotiates the terms of the insurance. It can also include an individual acting as the client s broker. Further information about the Act is available in BIBA s Guides to the Insurance Act Case law The following case studies detailed in the Case Law section explain some of duties of brokers as opined by the courts. l Understanding clients demands and needs Environcom. l Arranging appropriate cover to meet clients needs Café de Lecq. l Actively explaining a client s obligations in relation to insurance Eurokey. Summary obligations 1. In parallel, a broker owes a common law duty of care and a fiduciary duty; has contractual obligations under Terms of Business Agreements; has obligations under the FCA regulations and obligations imposed by legislation. 2. A broker holding itself out as an insurance adviser will consider how to advise the client on arriving at the sum insured or limit of indemnity as part of its general duty to its client. 3. It is generally accepted in UK law that a broker is primarily the agent of the client. 4. Binding authority arrangements and partnering agreements with insurers can create conflict of interests which prudent brokers will identify, prevent, manage and disclose. 5. A broker s obligations and duties to a client are not reduced, in law, by the cost or difficulty of meeting those obligations. 6. A broker is not obliged to decide for the client the level of sum insured, limit of indemnity or benefits. It may however assist the client to understand the basis upon which valuations and assessments of risk ought to be made, for insurance purposes. 7. When a broker offers advice as to how to arrive at a decision about selecting a sum insured or limit of indemnity or benefits it will help, at a later date, if the records show evidence of how these were arrived at. 8. A broker would be prudent to remember that, of itself, an instruction by its client in writing may not alleviate it of liability (for under-insurance or anything else). 9. It is prudent to record fully, fairly and factually the instructions, advice and recommendations that show how the conclusions were arrived at. 10. The potential for under-insurance will be a feature of what material information is collated and presented as a fair presentation of the risk under the Insurance Act For Consumers See also the Consumer Insurance (Disclosure and Representation) Act See Schedule 1 of the Act- Insurers remedies. 12 Part 2 section 3 (2) The duty of fair presentation. 13 Part 2 section 4 (6) Whether an individual or not, an insured ought to know what should reasonably have been revealed by a reasonable search of information available to the insured (whether the search is conducted by making enquiries or by any other means).

20 20 BIBA Professional Indemnity Under-insurance Assessing and advising Insurance is a complex legal contract and a golden rule of broking is to assume that the client understands far less about insurance than the broker.

21 BIBA Professional Indemnity Under-insurance 21 Assessing and advising on sums insured and limits of indemnity? The methods used for assessing the amount of cover required will vary dependent on the nature of the tangible goods or property, the liability to be insured or the benefit required. While it is ultimately the client s final decision as to its sums insured or other level of cover, it is reasonable for a client engaging a broker for advice to expect general guidance because the broker is expected to know more about insurance and how it works in practice than its client. Even if the broker is making a non-advised sale (i.e. where it supplies information only without recommendation) it is prudent to provide sufficient written guidance on the principles of selecting a suitable sum insured or limit of indemnity and a warning, to all non-advised clients, if in doubt, to seek additional advice. Considerations for assessing the level of cover The main consideration is to be able to help clients with the answer to the question how do I arrive at a true value for my sum insured or limit of indemnity for any class of business? It is also wise to evidence the advice given such as: l How did you advise the client? l What did you advise? l Upon what criteria did you base your advice? l What were the methods used and the reasons for your advice? l Where is the documentary evidence of your reasoning and advice? Practical considerations Giving the right level of advice and support to a client does not come without its difficulties, especially in a technology-driven industry where so much communication is impersonal and initiated and delivered by electronic processes. The benefit afforded by carefully assessing a client s demands and needs is that it naturally directs the client as well as the broker to consider the risks and outcomes in a way that helps to avoid under-insurance and other errors or omissions. Assume nothing! Clients may not understand: l the principle of indemnity; l the principles of insurance law and practice; l the principles of the laws of liability in general; l the principles of adjusting a claim; l the principles of the condition of average; l the principles of arriving at a fair reinstatement value; l the insurance settlement differences between repair, replacement, indemnity and reinstatement; l the principles of compensation for bodily injury, property damage, financial loss... and much more. Insurance is a complex legal contract and a golden rule of broking is to assume that the client understands far less about insurance than the broker; the sophisticated client is a rarity and a broker can demonstrate its value by showing that it understands the client and its insurance needs. Too complex It is becoming widely recognised that well-meaning explanatory documentation required to be issued by FCA regulation for the protection of customers has grown to such proportions that it is often ignored by clients. The courts have criticised the burying of important facts in a deluge of paper, which, in their opinion, should have been made clear to the client in a more direct and appropriate manner. 14 Brokers need to be aware that simply advising clients to read their documentation is no guarantee that important information will be noticed and understood, or that it will serve to protect the broker from a complaint. 14 See Café de Lecq in the Case Law section appendix.

22 22 BIBA Professional Indemnity Under-insurance Guaranteed sum insured expected Clients are often under the misapprehension that whatever sum insured or limit of indemnity they select is the amount that the insurer is contracted to guarantee to pay if they have a claim. In fact, many claims are met by reinstatement or by replacements costs. The Financial Ombudsman Service (FOS) and the courts are increasingly inclined to rule in favour of the complainant over the broker if they have not properly and clearly explained how they have met the client s needs. To replace old and worn out In simple terms and in the majority of cases the overarching principle of insurance is to put the insured back into the same financial position after the loss as it was immediately before it. However, occasionally clients mistakenly believe that the purpose of insurance is to replace something just because it is worn out, not because it is damaged by an insured peril. Several types of material damage insurance policies provide new for old, reinstatement, and other benefits that are not strictly an indemnity basis. Benefit policies Some insurances provide defined benefits designed to be paid after a loss, for example, personal accident cover for loss of limb. Selecting a benefit level that is suitable for the client s needs takes some time and care but will usually avoid any disappointment if, after a claim, the client feels that the amount is insufficient. Damages and costs Liability policies are intended to pay the costs of defending an allegation of legal liability against the client together with any settlement or award of damages. This is sometimes misunderstood with some consumers and businesses believing that their own liability policy will pay them if they suffer an injury or loss at the hands of another party. Recommending independent valuation advice Referring a client to recognised building indices, or to valuers or other advisers who are expert in their specialist field, as appropriate, is good practice. The BIBA member valuation facility from QuestGates has a range of professional valuers that can be used to help clients understand the value of their goods and property. Loss adjusters, and loss assessors, who make expert assessments of loss and damage almost every day, are experienced in the real costs of insurance claims and in the cost of preparing them. They see the unforeseen problems and costs that can arise and also know how insurance operates in practice and can anticipate the kinds of assessment and adjusting that will occur in the event of a loss.

23 BIBA Professional Indemnity Under-insurance 23 Summary- assessments and advising 1. Assessing sums insured in respect of tangible goods and property requires methods appropriate to the nature of the goods and property. It is prudent to suggest to clients that they seek professional valuations and ensure that the valuer knows these are for insurance purposes. 2. It is prudent to provide written guidance to non-advised clients on the principles of assessing a suitable sum insured. 3. Loss adjusters and assessors are experienced in the real costs of insurance claims and in the cost of preparing them and can be a valuable source of advice for both the broker and the client. 4. It is wise to keep evidence of the advice given to clients and on the assessment of their demands and needs. 5. The courts have criticised the burying of important facts in a deluge of paper which, in their opinion, should have been flagged to the client. 6. Clients are sometime under the misapprehension that whatever sum insured they select is the amount that the insurer is contracted to guarantee to pay if they have a claim.

24 24 BIBA Professional Indemnity Under-insurance Selecting levels of cover

25 BIBA Professional Indemnity Under-insurance 25 In calculating the cost of rebuilding, account must be taken of the price of labour, materials and other costs. Assessment of risk The assessment of the risk determines the client s demands and needs including the appropriate sums insured or limit of indemnity to meet those needs. Providing the client with a basis of appreciation of the scope of insurance is a useful way to get them to engage with the broker in assessing their risk and what of that risk they can transfer to insurance. l l l l Most insurance is fundamentally based upon the principles of indemnity; and clients should not expect betterment or profit. The terms and conditions of the policy determine:- what is covered what is excluded from cover the conditions under which cover is provided the amount of cover the amount of self-insured excess; and special terms and conditions that may apply. There are tried and tested means of measuring and or valuing most risks for the purposes of insurance and on occasions specialist valuers might be able to assist. The sum insured or limit of indemnity can be determined in a number of ways detailed below. Basis of settlement of property claims l Indemnity A settlement that takes into account the value resulting from the age and condition of the property at the time of the loss or damage with a view to putting the insured in the same position as they were immediately before the loss. l Reinstatement A settlement of a claim that provides a replacement on a similar but not better than (or new for old) basis. This is an exception to the principal of indemnity and requires a suitably calculated sum insured. l Agreed value A settlement is based on a value agreed at the inception of the policy, for example, for high net worth properties or on cherished or classic vehicles. Most clients are unaware of these differences and a broker can help them to understand them and what to expect in the event of a loss. Market value versus cost of reinstatement Understanding the difference between the market or resale value of something and the actual cost of rebuilding, repair or reinstatement of the same thing is a consideration for clients. Failing to appreciate the difference may lead to under-insurance. Example A building worth 1m on the housing market may cost only 500,000 to rebuild whereas, another property, worth only 250,000 on the market may cost 350,000 to rebuild. A protected or listed building or one which has special features or complex physical aspects, and valued at 1.5m on the market, could cost 2.5m to rebuild. This may be because of the legal and regulatory obligations and or practical, engineering or environmental implications in rebuilding such properties. In calculating the cost of rebuilding, account must be taken of the price of labour, materials and other costs such as debris removal and architect s fees. This can be significantly different to the market value which is what a buyer is prepared to pay for the property including the value of the land the building stands on. The Value Added Tax (VAT) position must also be considered when setting a sum insured. For example, the full reinstatement cost of a residential block of flats may not be subject to VAT (though demolition, site clearance and professional fees may be), but repairs of partial damage to a building are likely to attract VAT. Appropriate professional advice in relation to the correct sums insured, VAT position and an appropriately worded policy including a VAT clause are useful considerations.

26 26 BIBA Professional Indemnity Under-insurance 15 CII P93 Commercial property and business interruption insurances. Property risk assessment It would be prudent for a broker to check any unusual features or other exceptional risk factors when assessing demands and needs. Liability risk assessment Assessing liability risk is more difficult because it is intangible. The assessment will take into account: l the sources of liability that are ordinarily intended to be covered by a particular kind of liability insurance policy; l the ordinarily foreseeable types of accident, loss or legal liability that accords with the client s business and circumstances; and l whether the limit of indemnity will be sufficient for multiple claims. More information is in the liability section on page 34. Business interruption risk assessment. Under-insurance of business interruption (BI) risk is a problem that may beset commercial clients. BI insurance aims to replace the lost income and or profit which would have been achieved if the interruption to the business had not happened, not loss of sales as some clients may believe. BI insurance will also help businesses to continue to trade after a material damage claim. 15 Clients need to be guided on both the appropriate sum insured and the period of indemnity. Underinsurance could arise because: l The client has not understood the basis of measuring revenue or gross profit as defined in the policy. The calculation is not the same as the accountancy convention. The definitions in the policy are a crucial factor for setting the sum insured and clients often need help to understand these. l The client is over-optimistic about the time it will take to get the business back to the trading position that it enjoyed immediately prior to the loss. It is generally accepted that, because of regulatory and other administrative constraints, 24 months is likely to be the minimum period needed for a business to fully recover its trading level. However, full consideration of each individual client business is needed to arrive at a suitable indemnity period. More information is in the business interruption section on page 30. Authoritative sources of special advice Indices are available for all kinds of property and real estate and therefore brokers may be able to either access it themselves or advise their client to do so. The following sources including the BIBA member facility provided by QuestGates might be useful, however it is important to understand how different tools treat VAT and ensure it is included as appropriate valuation-facility/ Location-specific professional valuations are always safer than applying broad regional indices, as they are able to take account of individual features of the property and its location as well as any unusual fees that may be associated with its reinstatement. It would be prudent to discuss the replacement costs of complex or high value contents including plant and machinery suppliers and/or relevant specialists. It is also important to enquire how any existing sums insured were arrived at were they purchase prices (as new), or were they accounting values (depreciated/ book values/internal transfer values), and consider whether these remain appropriate. Get the numbers right From a broker s point of view this is an important consideration as clients might ask them to recommend a sum insured and there may be a temptation to simply suggest annually increasing the current sum insured by a percentage. However, if the sum insured or limit of indemnity is wrong to start with, the error will simply be perpetuated. The cost of materials and labour are likely to change every year and so it is prudent to uplift or revalue on a regular basis. Show your workings The old saying of maths and science teachers to show your workings might provide a useful record of how sums insured have been arrived at. The client must take final responsibility for deciding upon the sum insured or limit of indemnity but it is often the broker that will be relied upon for advice as to how to arrive at it. If the broker is able to point to an index, surveyor, loss adjuster or other specialist party with the necessary competence to assess the probable cost of reinstatement, replacement or repair then that, in itself, is helpful advice. Armed with that validation the broker can reasonably rely upon it as being a sound basis of setting a sum insured or limit of indemnity. Possible scenarios If a client provides a broker with a recently commissioned valuation of property but the broker suspects, from experience, that the particular kind of property is more difficult to replace or repair in practice, then the client is likely to find this information valuable. The discussion may result in an adjustment of the sum insured.

27 BIBA Professional Indemnity Under-insurance 27 Classic car case study Keeping up with changes in values The Historic Automobile Group confirmed that between 2005 and 2015, average classic car values rose by 430%. Though this was distorted by massive increases in the most desirable super-cars including Ferrari s, Bugatti s and Bentley s, the more humble classics also benefited. While being good news for owners, it could affect the appropriateness of owners insurance if they had not reviewed their vehicle s replacement value for several years. Realising this, a BIBA member who saw a rise in value of his classic Jaguar wrote to all the firm s classic car clients suggesting they review the value of their car, perhaps by looking at price guides or similar vehicles for sale. Some of their clients cars had almost doubled in value since the last valuation and they felt the broker was looking out for their needs. Under-insurance operates on classic car insurance: where the premium is partly calculated based on the value in a similar way to home insurance. Consequently, if there is underinsurance the client could receive just a fraction of the car s true value. Darren Campbell, a Surrey-based motor engineer, bought his 1970 Porsche 911S in 1997 for just 8,000, and subsequently increased the sum insured gradually to 45,000. He said: I hadn t used it much for the past couple of years, but now I ve started using it again I decided to look up what it was worth because I thought it must have increased. It was a pleasant shock when I realised it was worth about 80,000 and I ve seen some go for near 100,000 it s easy to take your eye off the ball. I ll be keeping track of it every year from now on to ensure it is covered for the right value. It is a case that proves that it is essential to keep abreast of market prices and trends, especially on collections and unusual objects. It is prudent to review valuations every year. Using experts Bringing in expert help to assess complex values is often regarded by clients as an important service and the time and cost to the broker of assisting in this kind of advice and assessment, enhances their reputation.

28 28 BIBA Professional Indemnity Under-insurance A business suffering a substantial loss may find that it has to change its work patterns or processes which may increase its costs. 16 There is a duty to manage asbestos under the control of asbestos regulations Similarly, if, in the broker s experience, the assessment of sums insured provided by the client appears incorrect or is not what the broker expected then the broker has a duty to say so and alert the client to the possible error. If, at a later date, criticism is laid at the broker s door, being able to show the workings (i.e. the advice they gave) may be useful in any defence of a complaint or claim. Own cost of claim preparation A client presenting a claim to an insurer may reasonably assume that it will be indemnified against all reasonable costs, subject to any policy limits, directly arising out of the loss. This can often be taken to include the costs of claims preparation, such as the costs of instructing an expert. However, unless a policy has a specific extension that covers this cost, a policyholder may find itself out of pocket. In particular, as a policyholder is generally obliged under a policy to prepare the claim for presentation to insurers, consideration should be given to including a specific extension in any relevant policy, although wordings can vary and exclusions may apply. This is a common, but subtle, area of under-insurance in standard policy wordings and so is an excellent opportunity for brokers to demonstrate their added value. Is reinstatement possible? A further consideration is whether it is actually possible to replace, repair or reinstate the subject matter of the insurance as it was before the event. Considerations l The destruction of a listed 17th century building clearly may pose particular problems in reinstatement. The cost of restoration is likely to be far higher than simply replacing with a similarly sized building of modern construction. Skilled craftsmen may need to be employed and specialist materials sourced both of which are more costly and this might take far more time than a modern build project. It might be wise to discuss possible bases of reinstatement at the outset of the policy. Bear in mind also that listing has different categories and grades and may only apply to one part of the premises such as a façade or an internal feature like a staircase or wood panelling. l Some buildings, not being listed or of other historical interest, requiring reinstatement may be termed obsolete because its design makes it impracticable to rebuild in a like for like manner or it is no longer suitable (perhaps because of changed regulations) for the purpose it was originally built. In these cases the sum insured may need to represent the build cost of a modern construction, purpose-built property or the purchase of an alternative, similar property plus costs etc. In these cases an obsolete building clause may be added to the policy which will require a written letter of intent about the desired method of reinstatement in the event of a claim and an estimate of the anticipated costs. l The risk of finding asbestos 16 or pollution at the time of a loss that might increase reinstatement costs or of discovering that regulations that require the installation of new health or hygiene facilities in the building that would amount to betterment are considerations that may be discussed when advising on calculating sums insured. Related factors that may be considered include: planning requirements, access for repairs, availability of matching or suitably permitted materials, specialist communications facilities and utilities to name a few. l Machinery, plant or computer equipment that is no longer manufactured or repairable has to be insured for the cost of replacing it as new. l The valuation of tooling, patterns and moulds can be difficult because these may become obsolete but may still need to be included within the sum insured. Thought may be given also as to whether free-issue materials and customers and suppliers goods are to be included and on what terms. l A business suffering a substantial loss may find that it has to change its work patterns or processes, which may increase its costs. This is an important consideration in a business interruption calculation.

29 BIBA Professional Indemnity Under-insurance 29 Summary selecting levels of cover 1. Help clients to understand the basis of cover and how a claim will be paid. 2. A broker is not expected to know the correct sum insured for its client but is expected to know how to direct them in finding out what it should be; pointing them towards a solution. 3. It is good practice to recommend a client to get a professional valuation of property from time to time to reduce the possibility of being under-insured. 4. Take time to help clients get their numbers right. If you suspect a figure is insufficient, say so and put it in writing. And, always show your workings. 5. A client s time engaged in collating facts, figures and other evidence for a claim will not be paid unless there is specific provision for such costs in the policy. 6. If you suspect practical difficulties with any future potential claim settlement because of achievability or other impediments to repair or reinstatement, take the time to discuss them when arranging the insurance. Do not leave it until the problem is experienced at the time of a claim.

30 30 BIBA Professional Indemnity Under-insurance Business interruption; special considerations An originating cause of under-insurance is the inaccurate estimate of the sum insured and the indemnity period from the outset.

31 BIBA Professional Indemnity Under-insurance 31 A cause of under-insurance claims While BI insurance usually goes part and parcel with insurance for property or material damage risks, the knowledge and skills required in arranging it is sufficiently different to merit special consideration from the point of view of potential under-insurance. Giving the policyholder a sound and practical explanation of how insurance works in connection with BI insurances is invaluable; especially with regard to sums insured and the period of indemnity. Clients that find their BI insurance to be insufficient to keep the business going, both in sums insured and in the period of time for which the cover continues may present a PI risk. It is prudent for brokers to be able to demonstrate how they advised their client about considerations that it ought to take into account when assessing their sums insured and the indemnity period. Known complexity BI insurance is one of the most complex of insurances and it is important to have a firm grasp of the underlying principles of both: l how a BI claim will be measured after a loss or damage claim; and l how to plan and arrange a BI insurance programme that will meet the client s needs. The Chartered Institute of Loss Adjusters (CILA) provides excellent, informative booklets and guidance notes on BI and brokers are recommended to consult them. The publication Business Interruption Policy Wordings - Challenges Highlighted by Claims Experience produced by The Insurance Institute of London, the CII and CILA and BI Coverage Issues by Damien Glynn are freely available as a download from These clearly set out the problems encountered with under-insurance and inadequate indemnity periods. Limitations of quotation software Quotation software whether online or from a software house may simply quote on the basis of a minimum sum insured and indemnity period and there is a risk that might not be what the client needs, as was the case in Café de Lecq. In this case the broker operating the quotation system was held to be liable for a serious uninsured total loss. See the case study in the Case Law section page 42. Link to material damage cover Under-insurance of any linked material damage policy may cause a delay in completing repairs. Such delays would not be covered by a BI policy because they were not a direct result of the insured loss but rather the result of insufficient claim monies. This might result in the business not achieving its pre-loss trading position before the end of the indemnity period. This can be especially pertinent to tenants who are reliant on landlords to carry out works to damaged premises. Accountants mismatch A common originating cause of under-insurance is the inaccurate estimate of the sum insured and the indemnity period from the outset. Very often this is because the figures used to determine the estimated turnover or gross profit are based upon the ordinary accounting convention whereas they should be based upon the convention described in the BI insurance policy. There is a risk that accountants may not know this. The differences in gross profit calculation l Accountants define gross profit as the residual profit after selling a product or service and deducting the costs associated with production and sale and deduct all direct costs l Insurers define gross profit in the policy, for example, the difference between the sum of income, closing stock and work in progress and the sum of opening stock, work in progress and uninsured working expenses. Property and BI adjusters deduct variable costs and deduct uninsured working expenses often defined in the policy as, purchases less discounts received, bad debts, rent and any other item described in the schedule. These are examples of gross profit definitions; it is important to base the assessment of the sum insured on the definition in the policy wording. Bases of cover The sum insured basis The sum insured is based on the estimated amount of gross-profit, revenue, or increased cost of working (as defined in the policy) that the client expects to earn or incur during the selected indemnity period. If, in the event of a claim, the sum insured is found to be less than the actual gross profit, or revenue that would have been earned but for the loss that prevented it, then any amount payable under the policy will be proportionately reduced by the amount by which the sum insured is less than the projected amount. This is a similar principle to a condition of average being applied to a material damage loss. In addition, though increased cost of working is not subject to average, selecting a sum insured for increased cost of working that is less than the costs incurred after a loss may leave the client self-funding any additional increased costs needed to get them back to their pre-loss trading position.

32 32 BIBA Professional Indemnity Under-insurance 17 See Also Schedule 1 of the Insurance Act 2015 Insurers remedies. The declaration-linked non-average basis A declaration-linked, non-average basis of insurance is preferable to a sum insured basis because it provides a comfort zone of 33.3%, providing that the sum insured and period of indemnity are both correct in the first place. In the event of a loss the insurer s liability under the policy is typically between 133% and 150% of the estimated gross profit or revenue. Using this basis, an estimate of the gross profit or revenue for the coming year is provided at inception of the policy and adjusted pro-rata to take into account the length of the business indemnity period and the anticipated growth of the business. At the end of the policy period, a declaration is made of the actual gross revenue (or gross profit) achieved against the estimated amount and the premium adjusted, up or down, accordingly. There may be a limit on the amount of the premium refund (usually in the region or 25% to 33.3%) if the declared sum is much less than the estimated sum insured, but note that if the calculations are recklessly or deliberately under-declared the insurer could deny liability for the claims and void the policy. 17 It is important to check a client s annual declarations for obvious errors, and submit them in accordance with policy terms. A review of the estimated gross profit or revenue figure and the indemnity period is usually necessary at each renewal. It is important to recognise that a BI policy requires a strict interpretation of costs and if the basis upon which the sum insured is calculated is wrong at the outset then the outcome after adjustment will put the client at risk of underinsurance. When the BI sum insured is based upon figures supplied by an accountant it is worth checking that these meet the definitions of gross profit set out in the policy wording. Partial loss a trap Most BI losses are partial, where it is unlikely that the overheads and fixed costs will be reduced at all and the variable costs may not reduce proportionately to the reduction in turnover or revenue. This can lead to an error in the calculation of the sum insured. If the broker is prepared to challenge the first estimate of sum insured using a partial loss scenario to ask how much of the fixed and variable overheads and costs will be reduced by a partial loss on a property insurance, it will often lead to a very useful discussion about the sum insured. It can be a very sobering thought and often leads to the broker being recognised by its client as a valuable adviser.

33 BIBA Professional Indemnity Under-insurance 33 Indemnity period A 12 month (default) indemnity period as provided by some standard policies may in many circumstances prove insufficient. It would be prudent to consider a 24 month period as the minimum feasible amount of time needed to put a business fully back on its feet. Some types of business will require even longer periods of indemnity. When advising on setting indemnity periods it is important to know how much control (or how little) the client will have over the speed and efficiency of the repairs and reinstatement of the associated material damage loss. Dependency upon landlords and their insurers, for example, can cause significant delays that can result in a need for a longer period of indemnity. Other impediments include: l the nature of the property (listed or unusual buildings will take longer to reinstate); l the availability of materials and labour; l the procrastinations of local authorities, planners and professional advisers; l the impact of copious regulations; l the unavailability of a robust Disaster Recovery Plan for the business; l long term pollution of a watercourse or other environmental contamination as a result of the damage; l the potential for facilities and utilities to be closed down after a serious incident; l the impact of a long interruption period on a client s customers who may go elsewhere; and l supplying goods on long term contracts or with maintenance contracts or which have a long build time affect recovery time. If the indemnity period is too short then the client will not be covered for the loss of profit after the end of the indemnity period and will also have no cover for the extra expenses incurred, such as the cost of moving back in to the rebuilt premises. Further complexities There are special BI insurances to cover: l Increased Cost of Working (ICW) and Additional Increased Cost of Working (AICW); l Advanced Profits where clients have expansion or research and development plans which will generate profits in the future. A material damage loss may mean these plans cannot be realised and cover is needed to cover the loss of planned future profit; l Denial of Access where there is no material damage to the client premises; l Suppliers and Customers, where there is a dependency on them (normally identifiable on a business continuity plan); and l Failure of Public Utilities. All of these are variations on the BI theme and it is important for a broker selling BI insurance to be able to explain the principles and the availability of each to a client. Brokers might also be wise to keep abreast of developments in insurer practice relating to BI. Summary Business interruption Insurances 1. Make sure an accountant s figures for gross profit match the defined terms in the policy. The accountancy convention terms for revenue and gross profit calculation are not suitable for use in BI insurance. 2. Be sure to understand the basis of the BI policy and discuss the various options with clients. 3. Remember that delays in building insurance claim settlement (which may be caused by under-insurance) will usually cause delays in business recovery. 4. Online quote systems limits of indemnity and indemnity periods may be too low and too short. 5. It is prudent for a broker to advise a client to arrange their BI cover on a declaration-linked basis as this helps reduce the potential for under-insurance and may allow for an uplift in the sum insured. Care must be taken to ensure that the estimated sum insured at the outset is correct. 6. Most clients do not appreciate the realities of how long it takes to get a business back to its pre-loss state of profitability and sustainability. 7. BI insurance has complexities; consider additional extensions to cover that may be necessary including customer and supplier extensions and denial of access.

34 34 BIBA Professional Indemnity Under-insurance Liability; special considerations

35 BIBA Professional Indemnity Under-insurance 35 It is important for brokers to know the basis of operation of the policy and explain it. Under-insurance can occur in liability risks just as easily as it can for any property or other risk. Furthermore, if a limit of indemnity is less than the total realisable assets of the client s business a claimant taking action against the client may be able to claim against those assets once the limit of indemnity is exhausted; potentially putting the business under severe financial pressure. This could lead to a complaint about being under-insured. It is worth remembering when discussing limits of indemnity that, as well as personal injury costs, the potential for claims for damage to property can be substantial, especially where the costs of reinstating property are spiralling. For example in the 2005 Buncefield Oil Storage incident, liability claims against the company were some 700m, of which the personal injury claims formed a very small percentage. Economic loss is a significant part of liability claims and this is often a challenge for brokers because it is complex to assess in advance. It is a good idea to become familiar with the principles of economic loss and pure economic loss (sometimes called financial loss) and the limited extent to which it is covered by insurance. The International Underwriting Association produces a useful guide which can be accessed at loss 18 Insurers may agree to provide Financial Loss extensions to Public and Products liability covers, but brokers need to be aware of restrictions within these covers including the application of any sub-limits. It is important to remember that pure economic loss, (without causative injury or damage), is typically excluded from cover. CILA has material explaining how this complex aspect of insurance works in practice. Standard (default) limits of indemnity A standard limit of indemnity of say 5m might appear to be a substantial sum on paper but if an unexpected event arises that causes 12m of legal liability, the client may want to consider why they were not advised to buy more. As with property insurance, showing the workings of how you arrived at your advice is equally important in matters of liability cover. Limits of indemnity under the liability sections of motor, household, small business, travel and some personal accident policies are commonly pre-set by the insurer and are not usually negotiable, though they may offer a range of limits from which to choose. However, it is worth considering whether limits of typically between 2m and 10m will be sufficient for a client s needs, and remain alert to reasons why a higher limit of indemnity might be needed. 19 For example, the legal liability of a typical householder to a visitor or passer-by may be reasonably foreseeable at anything up to around 10m, but how is the liability of a small business, manufacturing cosmetics, assessed for potential damage caused by the products it sells? The considerations are very different. The latter requires careful consideration of the nature of the products, the likely damage they can cause, to whom, where in the world and the foreseeable consequences of that damage. Unusual risks may benefit from a more specialist legal review to assess the potential liabilities. If a broker feels unable to offer a client a reasonable assessment of an unusual kind of liability risk it should recommend the client seeks legal advice or perhaps guidance from an experienced loss adjuster or another, more specialist, liability broker. Finally, for more substantial risks there is often a requirement to arrange excess layers of liability insurance. If so, it is important to ensure that the terms and conditions of the excess layers follow those of the underlying policy so that there is no mismatch of cover. 18 Broadly, economic loss is the pecuniary loss that flows from the original damage. Pure economic loss is pecuniary loss not consequent upon any preceding physical loss or damage. 19 See Case Law section DE, RDA and ACH Collier Vs VA Norton (2012) for an example of high personal injury awards.

36 36 BIBA Professional Indemnity Under-insurance Few businesses can afford to defend a legal liability claim without sufficient insurance. Considerations when assessing limits of indemnity l Identifying the recognised, known or reasonably foreseeable possible liabilities and their sources and triggers that arise because of the nature of the risk is a useful exercise to undertake with a client. l The risk of claims being made against the client emanating from overseas, especially the USA, Canada and similar jurisdictions, where personal injury awards can be much higher than in the UK. l The risk of an incident at the client s own property causing loss or damage (or bodily injury or loss or damage) to a third party (e.g. explosion, collapse or pollution). l Consideration as to whether the expression of the limit of liability is suitable, i.e. any one claim or in the aggregate will depend on the foreseeable likelihood of multiple claims arising in any one year or from any one cause and whether the limit of indemnity is sufficient to meet multiple claims. l The number and nature of employees in any one location may affect suitability of usual EL limits. l The risks associated with economic loss flowing from damage caused to third parties. l The costs of defending an allegation of legal liability, irrespective of the outcome. l Whether the defence costs are included in the limit of indemnity (and can erode it) or are in addition to the limit of indemnity. l Whether the self-insured excess applies to costs and expenses of defence of the claim. It is better that it should not. l Cyber liabilities. l Liability under contract. l Estimated and probable maximum losses. l Fleet owners hazardous locations & high category hazardous goods require special consideration. A limit of indemnity of just 1m (the UK statutory limit per accident for third party property damage) for hazardous locations is almost certainly insufficient.

37 BIBA Professional Indemnity Under-insurance 37 Clients that are in denial Client denial is encountered from time to time and may need to be carefully challenged, not simply accepted. The view expressed by a business or individual that they would never negligently cause damage or injury is not uncommon. This gives the broker an opportunity to explain that most such events are often not foreseen but they happen, somewhere, every day. Few businesses can afford to defend a legal liability claim without sufficient insurance. Case histories that demonstrate how easily an accident can happen are a useful way to illustrate this point. It can be prudent to warn the client in writing that they may be under-insured. See also Insistent clients on page 17. Liability assumed under contract This is an aspect of liability risk that is easily overlooked. It can lead to under-insurance if cover is denied because the liability has been caused by a contractual obligation for which the client would not have been liable in the absence of that contract. Businesses may, as a matter of course, enter into terms of business agreements with customers which may give a contractual undertaking, guarantee, or promise of performance designed to encourage custom but which actually goes beyond the company s common law obligation to the customer. Contractual obligations are not typically covered by insurance unless arranged by prior agreement with the insurer. This exposure to risk can be significant and it is prudent in discussions to mention the risk of liabilities assumed under contract and the fact that there may be no cover in place. It may be useful to take a client s standard terms of business into consideration while considering their demands and needs.

38 38 BIBA Professional Indemnity Under-insurance Bases of cover losses occurring, causation and claims made Most general liability insurances are on a losses, (damage or events or injury) occurring basis and pay claims under the terms of the policy that was in force at the time the loss or injury occurred. This means that clients have to anticipate the value of money several years ahead to meet potential losses that would be covered under the current policy. The causation basis of cover is different in that it is the policy in force when the injury was caused not when the injury was suffered. For example, in mesothelioma cases where the EL policy is on a causation basis, then it is the policy in force when the asbestos fibres were inhaled that will respond as that was when the cause of the injury happened. Product liability policies are normally on an injury or loss occurring basis. If a product sold today does not cause an injury until several years later it will be the policy in force at the time of the claim that will respond and that policy will need to cover products previously supplied even if they are not part of the clients current range. Some policies, notably Professional Indemnity Errors and Omissions (E&O), Directors & Officers (D&O) insurances and some third party policy extensions within a standard losses occurring policy, are on a claimsmade basis and will respond only to those incidents notified as actual or potential claims and accepted by insurers within the policy period. This means that run-off insurance is required for several years after ceasing the business or activity covered by the policy. It is important for brokers to know the basis of operation of the insurance policy and explain it to their client: losses occurring, causation or claims made. l General third party liability and associated liabilities are usually insured on a losses/injury occurring basis. l Employers liability is on a causation basis. l Professional liability, medical malpractice, D&O and similar types of insurance are usually on a claims made basis. Future indemnity requirements In losses occurring and causation bases of cover the limit of indemnity must take account of the potential for claims arising many years after the policy has expired. For example, if in 2015 a loss occurring would need 1m of cover then what is the monetary equivalent of 1m in 10 years time? The value of 1 has increased on average 33.75% every ten years since On that evaluation the client might be recommended to buy 1,500,000 of cover in 2015 to cover an equivalent loss in In some occupations it is reasonably foreseeable that a claim may occur twenty or more years ahead and clients will need to consider a limit if indemnity suitable for that situation. How many losses in a year? Limits of indemnity can be expressed in several ways: l any claim or series of claims arising out of one event; l any one claim; l any one claim and in all; l any one claim and in the aggregate; l each claim; l each and every claim. The terms used differ according to the type of liability policy and care must be taken to understand the meanings and implications which will mean that the limit of indemnity is either a sum for each claim or a sum for all claims arising in the policy period. In addition there may be a limit to the amount paid for any single claim or to how many claims can be made in the policy period. It is particularly important to take care to understand the limits of indemnity, restrictions and qualifications in the more complex covers for products liability, professional indemnity and D&O. The activities of the client s business might suggest potential claims arising from a particular source or cause. For example, a visitor slipping or tripping, or a Looking at past claims experience will often determine foreseeable future claims or patterns and so assist in selecting a suitable limit of indemnity.

39 BIBA Professional Indemnity Under-insurance 39 fire spreading from its premises to third party property, or injury or damage caused by the products it manufactures and sells or from similar advice or service given to multiple clients. Looking at past claims experience will often determine foreseeable future claims or patterns and so assist in selecting a suitable limit of indemnity. Multiple claimants It is especially important to consider the risk of multiple claimants arising from the same event, act, error or omission as aggregate limits in a policy may be overlooked. In 2010 a professional firm of over 60 years standing experienced a 15m loss from multiple claimants. They were insured for only 2.5m because no-one had assessed their vulnerability to multiple loss. This can apply to any service where there are multiple sales of product, service or advice. Consideration may need to be given to the effects on cover of expressions such as arising out of one event ; arising from the same original source or cause ; in the aggregate etc. in policies. These might limit cover in respect of multiple losses and how they work in practice, including how they apply to any excess. Any limitation or aggregation carries the potential for under-insurance. For example, a limit of indemnity of 2m, any one claim might be suitable for a client whose foreseeable liability for any single claim is less than 2m. However, if the limit of indemnity of 2m is qualified by any one claim, and in all then the client might need to contemplate buying a far higher indemnity limit if it is reasonably foreseeable that several claims could occur in the same year. Costs and expenses of defending the claim can be either included within the indemnity limit or in addition to it. Costs and expenses can seriously erode the indemnity limit, as if they are included within the limit, the amount available for a settlement or an award of damages will be reduced by the amount of the costs and expenses. This can be a cause of under-insurance and so should be taken into consideration. The excess can also be inclusive or exclusive of costs and expenses and may affect the amount of excess a client is willing to bear. Legal liability insurance is complex especially where it goes beyond standard EL/PL/Products combined policies where specialist underwriting or advice might be called for. Summary Liability limits of indemnity 1. Standard limits of indemnity may not be enough; particularly if the claim is made several years after the policy has expired and account has to be taken of the effects of inflation or increasing court awards. 2. Consider the risks of a substantial legal liability claim being made against the client. If the limit of indemnity is lower than their realisable assets another party may be able to claim against those assets once the limit of indemnity is exhausted. 3. Do not overlook the risks of liability assumed under contract. 4. Consider the effect of multiple claims from multiple claimants. 5. Remember to show the workings of how you arrived at your advice and keep a record of your advice. 6. Ensure that any excess layers of liability insurance follow the underlying policy so that there is no mismatch of cover. 7. Consider a checklist to remember the ordinary considerations for assessing a limit of indemnity. 8. If a client is in denial about their level of risk, it may be prudent to put your advice and recommendations in writing. 9. It is important that the qualifications and restrictions of the limits of indemnity are brought to the attention of the client. 10. It is important to recognise the potential erosion of cover impact of costs and expenses being included within the limit of indemnity. 11. Remember the self-insured excess may also follow the definitions applied to the limit of indemnity and it may also include or exclude costs and expenses.

40 40 BIBA Professional Indemnity Under-insurance Technical tips Toptip Not every client understands insurance or its technicalities or jargon. Where possible make sufficient time to get to know and understand your clients risks and requirements well before renewal or inception. This will give them the time to consider your advice and fully assess their sums insured or limit of indemnity.

41 BIBA Professional Indemnity Under-insurance 41 General Tips l If you are not intending to advise your client about values at risk and levels of indemnity or to give advice in relation to insurance generally tell them in writing before the transaction is arranged. l Check that sub-limits in package policies are sufficient for the client s needs. l Check documentation to ensure accuracy it may have errors. l Cyber risks are often not understood by clients and the covers available are unfamiliar. It may be prudent to discuss the risks associated with technology and with using and storing data. Liability l Employers are required to have Employers Liability cover of at least 5m 20 but clients will need to consider how many employees are based at a single site and whether in the event of a serious incident the limit of indemnity would be sufficient to cover all claims from all the employees. l Public liability is often sold with a default limit of indemnity and it is prudent for the client to consider whether any standard limit is sufficient for the risks to which they are exposed. l Product liability limits of indemnity are typically in the aggregate. Consideration must be given to the likelihood of an event which causes damage to hundreds or thousands of third parties. Business Interruption l It is wise to review the length of the indemnity period as well as the sum insured many BI claim issues stem from inadequate indemnity periods. l Delays in finalising the material damage loss perhaps because of disputes or claims supply chain issues may impact the length of time it takes a business to recover to its full pre-loss trading position. l It may be appropriate to discuss special extensions to BI cover such as denial of access, advanced profits and customer or supplier extensions with clients. l Business Continuity Plans are encouraged because not only can they mitigate a loss to the business but, in preparing them they often expose a dependency on suppliers and the anticipated level of customer loyalty following a major incident. Both of these can significantly affect the amount of BI cover required. Property l For an indemnity basis of cover, sums insured should be assessed as the cost of re-building or replacing, less an allowance for wear and tear or betterment. l Reinstatement basis sums insured should be calculated as rebuild or replacement costs including architects and surveyors fees, the cost of debris removal, demolition, professional fees, VAT (dependent on the status of the building), the cost of public authority and EU requirements and inflation or other increasing costs during the policy period and during any rebuilding period. l Sums insured should include everything for which cover is required special features including renovations, outbuildings, car parks, boundary walls and even swimming pools need to be included if they fall within the definition of building. The installation costs for machinery and plant and any new equipment should also be taken into account. Customers goods held temporarily in the custody and control of the client will also need to be included. l Consider that Building Regulations, standards and legislation might result in additional costs. l Public authority requirements may be unknown at the time of arranging insurance. They can include requirements of Health and Safety such as: lifts, rails and ramps, disabled access, and planning obligations which can all increase costs. l Some things cannot be replaced or reinstated. Obsolete building clauses may require the client to put in writing how they intend their premises to be reinstated and clients may need to plan ahead for this. l Listed buildings may have increased rebuilding costs due to the need for specialist skills and materials. Clients need to be clear about the nature of the listing and the effect this has on their sums insured. l Recommend your client to use professional valuers when you set up the policy and keep these valuations up to date. l Registers and inventories are helpful tools to monitor insurance needs and as a record of what has been lost after a claim. 20 See pubns/hse40.pdf

42 42 BIBA Professional Indemnity Under-insurance Case law

43 BIBA Professional Indemnity Under-insurance 43 Evidence of both written and verbal communications is increasingly important. NICHOLAS G JONES v (1) ENVIRONCOM LTD (2) ENVIRONCOM ENGLAND LTD & MS PLC (T/A MILES SMITH BROKERS) Facts: Environcom s premises were damaged by fire and it made a claim on its property insurance placed by its broker. However, the insurers avoided the policy citing material non-disclosure. Environcom then sued the broker on the grounds it had failed to properly advise on what should be disclosed. The broker defended the claim, asserting (among other things) that the standard documentation it issued to all of its clients (such as proposals, quote packs, TOBAs) contained advisory warnings about the duty of disclosure. Although the claim against the broker did not eventually succeed, on grounds of failure to prove causation of damage, the court commented that, in any case, the legal duty of care of the broker is not discharged by standardised warnings and demands and needs statements. The broker must actively and specifically explain to the client their obligations and duties relating to insurance and, specifically, the disclosure of material information. Key points for brokers: The facts of this case support the objectives of the new Insurance Act to fully understand a client s business in relation to their insurance requirements and ensure that there is always a fair presentation of the risk. On new risks and renewals it would be wise for brokers to satisfy themselves that the client understands what kind of information needs to be disclosed and the consequences of failing to disclose it. Evidence of both written and verbal communications is increasingly important to satisfy the need for certainty in the event that a complaint or claim is made against a broker. The absence of evidence is usually an opportunity for a court to find in favour of the client (claimant). Where there is a change of personnel dealing with insurance, the new person should be fully briefed on the insurance arrangements. It is important for brokers to appreciate that merely complying with FCA regulations will not necessarily protect them against claims in civil law for damages.

44 44 BIBA Professional Indemnity Under-insurance Simply telling a client here is the policy documentation: be sure to read it and check that it meets your requirements is not good enough. CAFÉ DE LECQ LIMITED v R.A. ROSSBOROUGH (INSURANCE BROKERS) LIMITED Facts: A business, the Jersey beach Café de Lecq, bought a combined cover, online. A fire caused by an overheating deep fat fryer resulted in the cafe being totally destroyed. The policy contained a warranty that stipulated that the deep fat fryer must be fitted with a thermostatic automatic cut-out in the event of overheating. The automatic cut-out was not fitted so the insurer rejected the claim for breach of the warranty. The court found the broker had negligently failed to draw its client s attention to the terms of, and the consequences of not complying with, a key warranty. Café de Lecq sued the broker on the grounds of it not having made them aware of the requirements of the warranty and the consequences of not complying with it; i.e voidance of the policy. In its defence the broker asserted that the individual that bought the policy was an experienced insurance buyer and that the accompanying documentation had contained the information necessary to warn the client about, amongst other things, the warranty. The court rejected their plea and the judge said:...simply telling a client here is the policy documentation: be sure to read it and check that it meets your requirements is not good enough, irrespective of the client s experience in insurance matters. The court awarded damages of 528,000 (exclusive of costs) against the broker and criticised its quote-engine sales process (referring amongst other things to the default 12 month BI indemnity period) as being more in the interests of the broker than in the interests of the client. Key points for brokers: Even where an automated sales process is used, there remains a need to ensure the client understands the cover and its limitations and obligations. It might be risky to assume a client is experienced in buying insurance and understands every aspect of cover. It would be prudent to check that they have understood their obligations. The case illustrates the inherent weaknesses of relying solely upon automated processes to deliver insurance as a commodity, potentially failing to deliver the service that a client may ordinarily expect when engaging a broker.

45 BIBA Professional Indemnity Under-insurance 45 A broker is not expected to verify a client s financial information unless he has reason to believe it is not accurate. EUROKEY RECYCLING v GILES BROKERS Facts: The broker was retained by Eurokey to place its commercial insurances, including BI cover. Eurokey s turnover was stated to insurers as 11m. Following a fire at Eurokey s premises insurers discovered that their turnover was in fact 17m and threatened to void the policy for gross misrepresentation of the true turnover. Eurokey agreed a settlement with insurers, which was significantly less than their BI loss, and subsequently brought a claim against the broker for negligently failing to properly advise them. The judge dismissed Eurokey s claim on the basis that the broker had provided a suitably clear explanation of business interruption cover and it had no reason to challenge the stated turnover figures. In reaching this decision, the judge set out the duties owed by a broker to a client when placing business interruption cover. l A broker is not expected himself to calculate the business interruption sum to be insured or to choose the indemnity period - both matters are for the client. However a broker must provide sufficient explanation of business interruption insurance and indemnity periods to enable the client to do this; including an explanation of the business interruption formula in the policy. l The broker must take reasonable steps to ensure that the client understands the term gross profit in a business interruption context, but is neither required nor expected to conduct a detailed investigation into the client s business. l Importantly, a broker is not expected to verify a client s financial information unless he has reason to believe it is not accurate. Key points for brokers: This case serves as a reminder of the benefit of carefully documenting what advice is given to a client. DE, RDA AND ACH COLLIER v VA NORTON (2012) Facts: Mr Norton, pulled out of a junction and into the path of the vehicle in which the Claimant was travelling, causing it to swerve and collide with an oncoming lorry. The collision killed the Claimant s mother,, who was driving, and left the Claimant, aged 13 at the time, tetraplegic with only limited upper limb function. The defendant insurer admitted liability on behalf of its client, and the Court awarded a 7.25m lump sum which, taken together with the application of a lifetime multiplier to the periodic payment order of 270,000 a year, is expected to reach a cumulative figure of 23m making it the highest award to date in a personal injury claim in England and Wales. Key points for brokers: Motor insurance cover is unlimited for personal injury and so there is no under-insurance issue. However, and despite the fact that this case had a rare combination of factors including the severity of injury, young age and high earning potential, there is as much chance of a catastrophic personal injury award being made under an EL or PL policy which will have fixed limits of indemnity. Note the chance of a catastrophic personal injury award being made under an EL or PL policy.

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