What happens with insurance if you provide bad risk information?

It has always been important to deliver enough risk information to the insurance company. But let’s face it, sometimes it is tricky to recognize what exactly is the data the insurer expects and is entitled to have. Finding the right balance is key as it enables insurance companies to be able to understand the risk yet the client is not being burdened with providing too much information or reveal plans or ideas rather than facts. Clients should be able to sleep at night knowing that their insurance programs will work and that this balance has been adequately found.

It’s our job as a broker to describe this to clients and help them identify such facts and manage this balancing act.

If the Insurer has noticed that material information is missing, they usually can alter the terms and premiums of the insurance accordingly. In the worst case, the insurance may even be cancelled. In the event of a claim the Insurer can reduce compensation or even avoid paying. The rules may even be stricter in other countries. Other parties besides the insured may rely on the insurance, ie. buyers rely on suppliers’ liability insurances.

In the longer run, having delivered bad information will harm the name of the Insured in the insurance market, and obtaining insurance cover will become increasingly difficult.

However, a mistake in supplying material information is not the only risk you face when arranging your company’s insurance.

The “Art of being Clever”

One, is the “Art of being Clever”.  In many cases clients will be clever in the way that they think about how they insure their risks. It also might be the client thinks they’re just being practical. Imagine this kind of situation:

The client knew that they needed to provide the replacement value of property that they were insuring. However they realized that if their factory would burn down they would not rebuild the factory in Finland but rather in China. As a result they provided the rebuild value of a new factory in China, which was roughly 50% of the rebuild in Finland.

This was a smart move, but perhaps a little too smart. The main issue was that they neglected to tell Aon or the insurance company of their plans. So a factory that should have been insured for EUR 20m was insured for EUR 10m.

1. In this case the client benefited from Aon’s broad property wording that enables the Insured to rebuild wherever they like provided it doesn’t increase the cost to the insurer. Many Insurer policies require the Insured to rebuild exactly the same factory in exactly the same location.
2. If there was a partial loss of e.g. EUR 2m, the client would not rebuild at all and would stay but their location is grossly underinsured and the Insurer would recognize this and apply underinsurance clauses. Fortunately this client was an Aon client and benefited from not having any underinsurance penalties in their policy.
3. Even if the factory did burn down totally the insurer would still see that the location is grossly underinsured.

The main point here though is not one of underinsurance. It is one of material information. 

The incorrect values the client had knowingly reported are considered material information. What the Insured was doing was rather smart, but, they needed to tell Aon and the Insurer that this was their intentions. In this way the insurer would be able to price the risk accordingly, knowing that the values were not accurate.

The legislative environment on disclosing material information is getting stricter. In the recent UK Insurance Act in force from 2016, the clients now have an obligation to not just disclose material information but to have actively investigated and researched their risks to identify such information, such that material information moves away from being disclosing just what is known but to disclose what ought to be known – a significant increase in obligations.

Therefore:

• You should disclose all material information, but in addition to this to think carefully about what you will do in the future as this affects the insurance cover that you arrange.
• Make decisions regarding your insurable risks: What property will be replaced and what won’t? Should a new high risk product range be included in the scope of your insurance? Will a new building be built using yet untried commercial methods?
• To reach the point where the insurance is placed with correct information along the insurance guidelines decided by you, it’s a broker’s job to enable and arrange open communications between Client, Broker and eventually the Insurer.

As insurance brokers we do this work all the time. Regularly finding the right balance to enable all parties to be comfortable with what has been provided and have confidence that the insurance programs will work. Our experience has shown multiple times that this is not easy, but given our market leading position and dealing with the most complex risks, we at Aon are in the best position to get this right.