Oiling the insurance cogs

ONLY A small minority of the UK business population was affected by this summer’s riots. However, the harsh lessons learnt by the unfortunate few will highlight some home truths about treatment of insurance claims.

A company will rely upon its insurers when an unexpected event causes damage to the company. But what happens when there is no actual damage, or the damage is suffered by a neighbour, but you are directly affected by it?

This case study typifies the problems arising from a classic miscommunication, how it should be dealt with, and some tips for FDs in dealing with the unexpected and its insurers.

In this case, company X, a factory in the food supply sector, was located behind a long row of shops with residential premises overhead, some of which were damaged in the riots. Company X’s factory was undamaged but access to the building, via an arched passageway in the parade of shops, was blocked. Authorities had, for reasons of health and safety, deemed the area unsafe and denied access.

When the company contacted its insurers and explained the situation, the insurer’s representative said that unless there was physical damage to the premises, it would not trigger the insurance policy. In fact, this turned out to be incorrect advice, but company X didn’t know it at the time.

Frustrated staff attempted to contact, with the neighbours’ co-operation and permission, the insurance companies of the neighbouring premises. This was met by a ubiquitous “data protection” rebuff, which is widely misrepresented as a reason for companies not speaking to unknown enquirers.

Since time and money were being lost, the chief executive wrote aggressive letters to its insurer, the insurer of the neighbouring premises, the local police compensation authority and the local authority. All to no avail. No one had the authority or the apparent will either to intervene or offer help or advice.

If your business suffers loss or damage of any kind, the insurance company will most likely prove to be the most effective route. The skill is in knowing how to get a foot in the door.

A business that has taken reasonable steps to protect itself by insurance from the usual range of possible causes will usually be able to establish a connection between the loss or damage suffered and cover under the policy.

If there is a fire, flood or an explosion, the emergency services will attend. A telephone call to the insurance company’s claims number will trigger an automatic response that will usually include sending an employee or agent of the company to the scene. There would be no question at that stage of insurers not being involved.

But in the case of company X, the situation was different. A miscommunication of the facts compounded by a gross misunderstanding by the insurer’s representative caused the company’s claims to fall on deaf ears. The blocked access meant the company could not get its goods in and out and so could not trade. This loss comes under a business interruption section of a typical combined risks insurance policy.

What was the outcome?

The company chief executive was directed to an insurance professional who identified the communication problem and was able to open a channel to the insurance company.

But this resulted in a second hurdle. The insurance company argued that the blocked access was not caused by the riot because it had not yet been proved that the damage to the neighbouring premises was caused by a riot as defined in law. Consequently, cover could not be confirmed.

All was not lost. The insurance company was able to contact the insurers of the neighbouring premises and negotiate a means of unblocking the access way to the premises. It did this because it was aware that by doing so it would mitigate any loss it may later be liable to pay under the policy, once the question of the damage being caused by a riot was established. Cover for the loss was, subsequently, confirmed.

The lesson here is that insurance is a complex combination of law and commercial trade practice. The interpretation of the combination of facts surrounding an event and the phrases used in an insurance policy constantly give rise to dispute and sometimes to litigation. In times of economic suffering, insurance companies are increasingly robust in their interpretation of the policy cover and this makes for protracted and difficult claims negotiations. The following advice will, however, give you the best possible chance of a satisfactory outcome:

Keep your cool

Never expect to get help by writing aggressive letters. People in authority can simply make things more difficult, and often do.

Understand the industry

Communication with suppliers of insurance is increasingly complicated by the call centre and telephone screening technology that create barriers between the insurer and the policyholder. Overcoming these requires knowledge of the industry. Brokers are the first port of call and a business would be well advised to place their insurances through a reputable broker. It does not increase the price of insurance, but it can reduce the cost.

Forge a relationship

Appoint at least one person in your company as the insurance liaison manager. Remember that co-operation and clear channels of communication will go a long way to softening what can seem, at times, a very hard task.

Roger Flaxman ACII MAE is managing director of Flaxman Partners