Under Declaring – You are now the insurer!
Yesterday I had one of those calls where you can feel the frustration and stress in the broker, where a long standing client is under attack by another broker who is simply selling on price and stripping away the years of hard work that the holding broker has put into the client.
In this case, the attacking broker is advising the Insured to only declare 80% of the true value at risk as the policy contains an 80% co-insurance clause.
To me, this is extremely poor advice and is putting both the Insured at risk and the attacking broker’s professional indemnity program, not to mention their reputation.
With any test for under insurance, an Insured is deemed to be their own insurer for a proportion of the loss where the loss exceeds, depending on the policy, 5% or 10% of the declared value at the location.
Insurers provide an allowance for getting it wrong and provide a margin for error depending on the policy in question, 20%, 15%, 10% or 0%.
Putting aside the principle of Utmost Good Faith, and Section 28 of the Insurance Contracts Act, by declaring 80% of the estimated value there is absolutely no margin for error. To my knowledge no valuations have been obtained and so the risk of the existing values being wrong are in my experience quite high.
A significant number of claims we at LMI attend, have an under insurance problem. This can destroy all the hard work of a business and in some cases leads to business failure or at the very least a significant financial loss for the owners/shareholders and often dismissal for the person responsible for the decision.
In my experience most people cannot accept they made a mistake and look for someone to blame and of course the broker is in the firing line.
Can you put yourself in the shoes of the financial controller or accountant who deliberately under insured the assets and business interruption coverage for the organisation? A loss occurs and they have to face the owners or board members. Do they go in and say: I saved you $15,000 but just cost you $1 million, I am so sorry, or do they say, I got terrible advice from our broker and we need to sue them!
This is before we consider a total loss situation. Client after client following the Christchurch Earthquakes had insufficient sums insured and or limits of liability to rebuild the assets.
My advice to brokers is, in the strongest terms, never recommend this to your clients. Remember there is a free LMI app that helps you explain under insurance. Search for LMI Mobile in the Apps Store.
Insurance is all about protection. Protecting the organisation and its business risks and also the personal risks of the owners, employees and other stakeholders. Too much is at risk to gamble with half baked insurance.
My advice to Insureds is, if you receive this advice, stick with the broker who is there protecting your business and personal risk, or if it is your holding broker, find a new broker.