The basics of business insurance – part I

Virtually everyone who reads this article has insurance. If you drive, the law requires it; if you work in the Cayman Islands, your employer bought health insurance for you, and if you own or rent property, you should have a policy for the building and contents. With respect to your work, every business should also have insurance.

Apart from those policies being triggered by car crashes, hurricanes or run-of-the-mill health insurance claims, many otherwise sophisticated business people have limited knowledge of their own insurance and the industry in general. This two part article is intended to serve as a rudimentary primer or reminder of some fundamental aspects of insurance law.

Brokers and Agents
A broker or agent is typically required to liaise with the company that actually provides the insurance coverage, the insurer. What many do not know are the type of services brokers provide.

Commercially-oriented brokers are often intermediaries for one or more global insurers. The broker may offer policies from only one insurer, or from several competitors in the same market. Generally speaking, the more specialised the type of risk to be underwritten, the more knowledgeable the broker and the more specialised their business. Large international brokers such as Marsh or Willis have broker-employees worldwide who place policies covering specialised risks. Examples include policies for diving or marine operations, and for land surveyors’ or accountants’ professional liability. More sensational examples include policies to cover lottery or football pool payouts, or kidnap and ransom insurance. If you perceive a particular type of risk in your business, then there is probably a type of insurance you can buy to mitigate the possibility of loss.

Gaps in coverage
In addition to finding you the appropriate type of insurance, your broker can analyse your various policies to determine if there are any gaps in coverage, and if so, how to fill them. For example, no one should be surprised that a fleet auto policy may exclude losses for bodily injuries suffered on board a boat. The policy after all covers autos, not boats. The policy may however cover damage to a boat being towed behind an insured auto.

Similarly, a Commercial General Liability policy may also exclude damages and injuries arising out of watercraft, and a marine policy may exclude bodily injury claims unless they occur while the vessel is on the water. This creates a gap in coverage. What happens for example, if an employee is injured while securing a boat to a trailer while the trailer is partially submerged on a boat launch? A recent case in Canada illustrates: despite having three policies in force, a man found himself not covered by three policies when he suffered eye injuries while securing a bungee cord to a boat trailer. This occurred while the boat was on its trailer parked in the boat launch. This illustrates how typical events in everyday life and business are not always contemplated and often uninsured by both insurers and businesses.

A broker or professional risk manager can help you identify how your company’s operations may be covered completely. If your situation is uncommon or you need confirmation of coverage, an insurance lawyer can provide you with an opinion. In either event, an annual review to determine whether your policy needs have changed is recommended by professional risk managers.

Honesty and transparency – the duty of good faith
An insurance policy is a special kind of contract with unique features such as an implied duty of good faith. This is a duty imposed upon both the insurance company and the insured party. Unlike a typical contract, such as one to buy a used car from a neighbour where a “buyer beware” attitude may be taken by the seller, the duty of good faith is implied into all insurance contracts.

For a business seeking insurance, it is helpful to know the key features of the duty of good faith. Not surprisingly, the primary duties are to be honest in describing the nature of the risk being insured, and to provide accurate information when notifying the insurer of a claim. In essence, the insurer needs to be able to assess the risk to price it, and needs honest facts to see if the loss should be covered. Often controversy ensues when the insurer is told it may need to make payments to settle a dispute or pay a penalty, but the compilation and communication of information has not been completely candid and transparent.

Another aspect of the duty of good faith is in the requirement to report a claim within a reasonable amount of time. This duty is now specified in almost every insurance policy, but many types of policies, notably those covering professional errors and omissions, require reporting “as soon as practicable” or within a certain number of days after the insured “knew or ought to have known” that the circumstances giving rise to a claim against them might exist.

The consequences of an insured party failing to report a claim in a forthright manner, or within the limitations prescribed by the policy should not be underestimated. Most policies provide that late claims may not be covered, and a variety of courts have upheld such limitations, especially where the failure to report has prejudiced the insurer’s ability to defend the claim, or increased the amount paid out. At minimum, the failure to report can result in lengthy delays and possibly a requirement to hire legal counsel to ensure your interests are not prejudiced.

The issues of when and how to report a claim are rather complex. It is suggested that where there is any doubt, the insured should ask their broker about reporting requirements. If the type of claim and underlying policy is complex, the advice of a lawyer should be obtained.

Next month, this article will conclude with what to do in a loss and what pitfalls to avoid.

Disclaimer: This article consists of general information only and is not intended to be legal advice. Whilst every effort is made to ensure the accuracy of this information, legal advice should be obtained from a qualified lawyer on any legal matter.



Murray Harris, Appleby associate