My client wants to cancel their insurance. Should they?

This is a more serious issue than the one that I addressed yesterday, where clients wanted to cancel their business interruption insurance.

Here, is a typical question put to me:

Hi Al,

I hear you are still stranded overseas. [As I advised yesterday, I am home safe and showing no signs of having contracted the virus. I did take a lot of precautions to avoid it.]

What are your thoughts about clients cancelling their policies?

Have a few in the hospitality and travel industry looking to cancel their property and liability covers. Some want to delete their BI cover, as they won’t be trading. My view, is that they still have leases and mortgages so that they have to insure. In regards to the BI, if their property is damaged by an insured peril, wouldn’t they as long as the doors were open albeit with limited income be able to claim BI based on historical accounts?

In regards to liability they could have contractual obligations and where would they be with any product liability claims if they don’t have a current policy?

Sorry about the rant!

Stay safe

Fred [surname and email withheld]

My response was:

Hi Fred,

I fully appreciate that this is a stressful time for most of us in the community but I would be advising strongly against cancelling their insurance cover full stop.

Let me take the 3 classes of insurance that you referred to in order.

1. Fire/Property insurance. Just because a business is closed does not mean that fires, burst pipes, storms, burglaries and if things get out of hand civil unrest stop. If a business is in financial stress how do they hope to reinstate their assets and survive this crisis without the benefit of their insurance policy.

I cover Business Interruption lower down but you need to have a fire/property policy in place to be able to make any claim under a business interruption policy. This is known as the Material Damage Proviso. A typical proviso reads:

“Provided that the Insurer(s) will not be liable for any loss under this section unless the Insured’s property lost, destroyed or damaged is insured against such Damage (loss arising out of destruction or damage by explosion of Boilers and/or Economisers excepted) and the insurer or insurers by which such property is insured shall have paid for, or admitted liability in respect of, such Damage unless no such payment shall have been made or liability shall not have been admitted therefore solely owing to the operation of a provision in such insurance excluding liability for loss below a specific amount.”

2. Public Liability – for a claim to be paid the occurrence, that is the illness or property damage has to occur during the period of insurance. Let us say that something were to occur and your insured was thought to be liable even if they were not. Say a pipe burst in their premises and flooded a neighbour, or a fire started in their premises and damaged the building owner premises, or someone slipped while walking through a car park that the insured was responsible for or rented to, and they did not have their liability insurance in place then, they would have to defend the action against them themselves and if they lose: well….

3. Again, my strong advice is to retain the business interruption coverage. We do not know how long the closures will entail and the way the business interruption policy works is that the loss would be paid based on the standard turnover (typically defined as: “The Turnover during that period in the 12 months immediately before the date of the Damage which corresponds with the Indemnity Period.” of the business with adjustments for the trend and special circumstances that effects the business but for the loss.

Clearly COVID-19 is a special circumstance and if the insured were not permitted to operate during that period then their claim during the period of the shut would be reduced accordingly. However, let us say the fire causes damage and it takes 6 months to reinstate the damage and the COVID-19 shut were only to last a month, then the client would miss out on 5 months of much needed insured gross profit paid by the insurer. I would expect after being locked up for a month the public would be breaking the doors down of café’s and restaurants, pubs etc to put the month behind them and to catch up with their social networks etc.

As I said, fires, storms, burglaries etc will not stop just because we are in a shut down situation.

A much better strategy in respect of business interruption is to use the premium adjustments clause and at renewal provide a declaration of the actual gross profit of the business and seek a return of premium if warranted.

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Fred, as I said at the start, I appreciate this is a very worrying time for all of us with both our health and financial security at risk however we all need to act prudently, hope for the best but plan and insure for the worst.

One point to make which unfortunately will only upset the client who is determined to cancel their insurance is that short term rates may well apply.

Premium funding can add another level of complexity but if the client can continue to make the payments be a godsend in keeping the business protected.

With any client that wishes to cancel you need to protect your own professional indemnity and not become an insurer of last resort by documenting your advice not to cancel any insurance. It is an important safety net should more than just COVID-19 hit the business operator.

Finally, we also need to keep in mind the occupancy period allowed in client’s insurance policies. In this hour of great stress, I really hope that the general insurance industry does the right thing and does not impose any additional terms on their clients who are struggling both financially and emotionally. At this stage both SUA and Chubb have demonstrated a fair and reasonable approach to this issue.

I hope this helps.

Warm regards

Allan