Many policyholders believe that the insurance available on the market covering a particular type of risk is much of a muchness. The disputes about insurance cover for business interruption losses due to COVID-19 have highlighted that this assumption is misconceived. Insurance policies are not commoditised. There are no standard forms for most types of insurance and which policy is chosen can make a critical difference to whether a loss is covered. Buying the wrong policy can be a costly mistake.
Saying that you have bought a particular type of insurance is about as precise as saying that you have bought a car. It describes only in the broadest terms what you have obtained. Even though policies will be described as falling within one of the recognised categories of insurance, no two insurers will provide the same cover. Indeed the same insurer is likely to have a range of products within a recognised category. The variation in property (including business interruption), product liability, product recall and Directors’ & Officers’ insurance is enormous. The cover you may have under any of these policies could be radically different from that provided under other insurance policies on the market, possibly with little or no difference in price.
At renewal time, much of the focus is on the level of cover (the financial limits) and the premium. Often, less attention is given to the issue of whether there will be any cover for certain situations. This can have important consequences. For example:
- Some business interruption policies will be found to cover COVID-19 losses, while others will provide no cover – whether there is cover or not may well have made no difference to the premium – whether a company bought a policy that will provide cover is probably a matter of pure chance
- Product liability insurance may be limited to cover for liability for injury or damage caused by products, but it may also provide cover for certain purely financial losses
- Product recall insurance varies significantly as to the losses and costs that are recoverable, and even as to the types of recall that trigger the cover
- Most D&O insurance extends to a wider group of insured persons than just directors and officers, but policies vary between covering a restricted group of insured persons and, at the other end of the spectrum, almost anyone with any responsibility – in the context of an investigation by a government or regulatory authority, that can make a significant difference.
When choosing insurance, it is important to focus on the cover that the particular policy provides and not to rely exclusively on the accepted market descriptions of what a type of insurance “usually” covers. The cover is determined by the words in the contract, not by generalised assumptions. A sensible review of available insurance would include the following:
- An explanation from the broker of the differences between the policies on offer, often with little difference in premium
- Asking “will this insurance cover us if X or Y happens?”
- Looking at the various extensions or “add-ons” to cover that are often available – some may be obtainable at little or even no cost
- Checking the exclusions – this is going to be even more important as insurers review the cover they offer with the experience of COVID-19 in mind
Paying more attention to the insurance options available and being more demanding will mean that you are less likely to pay for insurance that does not respond when you need it.
Richard Hopley, Partner, Cooley