Nick Towns, Eddisons, examines the key issues for IPs to consider when approaching insolvency insurance.
Arranging insurance contracts in any sector is inherently risky. Transferring operational risks into an insurance contract requires a methodical approach of identification, assessment and quantification. My first career mentor advised in arranging cover, an Insurance Broker can be 99% right but a 100% wrong.
The Insolvency Insurance market should not be underestimated in how it has responded to the dynamic and demanding needs of IPs. The market has evolved to provide a broad level of immediate blanket cover on appointment (or even prior to, where required), and deferred premium payment. Facilities have been designed to meet the needs of the vast majority of appointments; Newer entrants are introducing further innovation to the market and a greater level of competition with newer entrants providing further innovation.
Whilst there is therefore a degree of ‘Day One’ comfort, the challenge is in arranging the right cover going forward, recognising the often fast-changing nature of the appointment.
The day to day demands of IP’s can mean insufficient attention is paid in considering the insurance cover required. The process can often be regarded as a ‘necessary evil’ and consequently… keep remainder:
1) Should I rely on the Pre-Appointment insurance programme?
Although each appointment is different, consideration must be given to pre-appointment policies where possible. Sufficient lead time and access to information is required for due diligence to be undertaken which can be a challenge.
One main concern is whether the Insurer has been advised of all material facts prior to the IP’s appointment. This is difficult to determine even with robust due diligence, and will only be tested at the point of claim. The risk is compounded by the fact that the IP does not have the comfort of a wider trading relationship with the Insurers which can assist where there are challenging claims.
A specific agreement from the pre-appointment Insurer is required, as the policy may automatically cancel on appointment. There is no common position determining how existing policies respond when companies enter administration.
Ideally therefore, the optimum result is usually for cover to be arranged via an Insolvency Insurance facility, mindful of previous cover and costs.
2) How can I be sure I have arranged the correct cover for a specific appointment?
Most Open Cover insurance facilities provide up to 30 days blanket cover . In this time, the IP should establishes what cover is required, often communicated to the broker through a risk questionnaire.
A common mistake is delegating this process to a colleague without sufficient insurance knowledge.
Ideally, IPs should ask brokers for clear recommendations on appropriate cover, and brokers should undertake site visits with appointed agents to obtain the necessary information. This approach uses the broker’s insurance expertise, removing the risk from IPs and avoiding the possibility of over- or under-insuring.
3) The premiums appear expensive commensurate with estimated realisations. Why is this?
Open Cover is often criticised for expensive premiums, particularly when estimated realisations are low. Where this is the case, it’s worth asking whether cover has been arranged on the correct basis. For example:
- Would buildings be reinstated in the event of a loss? If not, consider alternative forms of cover
- If the appointment includes vehicles, is cover for road risk required?
- If it includes employees, has a split by role been provided?
- Have insurers been made aware of sold assets throughout the period of appointment?
- Have premiums been market-tested? It’s common practice for cover to remain with the open cover insurer throughout the appointment, so consider periodic reviews. For larger appointments, establish whether broker commission can be reduced so earnings are commensurate with the work involved.
- For appointments over occupied properties, consider whether premiums can be recovered from tenants in accordance with the terms of the lease.
There is now a healthy level of competition in the insurance market and open cover insurers have reduced pricing accordingly.
4) Non-compliance with insurers’ requirements
The best insurance contracts and open cover facilities revert largely to requirement for the insured to adopt ‘reasonable precautions’, a basic insurance doctrine. However, many insurance contracts introduce warranties or conditions precedent to liability, creating a risk of the contract not responding in the event of a loss.
This is often an issue with vacant properties. Most insolvency insurance contracts have a code of practice intended as a guide to what an insurer deems to be reasonable precautions. An insurer or broker may also undertake a site visit, which can introduce further requirements.
There remains however a number of tiers of advice regarding the requirements for managing vacant sites which can lead to a confusing message. For example:
- Recommendations following an insurance brokers site visit
- Recommendations following a survey by the insurer
- Recommendations from a vacant property contactor
- Recommendations from internal risk and compliance teams
The broker should be asked for clear guidance on what is reasonable based on the specifics of the appointment and insurers’ requirements. Where insurer’s requirements appear excessive, it should be the role of the broker to challenge this.
5) What sums insured should I use?
A common but easily avoidable mistake concerns the values at risk, which are dependent on the basis of cover. For example, buildings may be insured for reinstatement (i.e. on a conventional basis) or at market value. Machinery, business and other assets that are in the process of disposal should be insured on a projected realisation basis, rather than a replacement basis.
Appointment agents will normally provide insurance assessments but correct figures still need to be selected. If agents are unable to provide a valuation, the broker should be consulted.
There is a significant risk of getting valuation wrong. If too low, an average will be applied (i.e. underinsurance) which creates a shortfall in any claim settlement.
The broker should provide the necessary assistance to ensure this risk is mitigated.
6) How should I insure vacant buildings?
Vacant building insurance is a perennial problem but it doesn’t need to be. Due consideration needs to be made of the following:
- Is the market value significantly below the reinstatement value?
- Would the property need to be reinstated in the event of a loss, recognising:
- Is the property listed?
- Is there a lease with reinstatement obligations?
- Would the building need to be reinstated to facilitate a sale?
- Is the value in the land as opposed to the buildings?
- Is a prompt sale expected? What is the overall strategy?
It is important to get the cover correct from the outset. If cover is arranged incorrectly, insurance premiums can often unnecessarily represent a significant proportion of the realisation.
There will always be a balance when arranging insurances and associated risk management, between an efficient process and ensuring the required level of detail. This can be difficult when managing day-to-day working challenges. IPs should encourage brokers to be part of their team, and to be their risk advisor. Without this working relationship, the onus can be on the IP, creating an avoidable operational exposure.
Eddisons and AON entered the Insolvency Insurance Market in 2011 with the support of Royal & Sun Alliance. The offering is a legacy free business based on feedback from a number of Insolvency Practioners.
As an Insurance Business within a firm of Chartered Surveyors, the service includes a number of complimentary services designed to make the IP’s job easier, ranging from insurance valuations, vacant property management, and claims project management.
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