Underinsurance still a real risk – Markel

Insurer Markel has said that the threat posed by underinsurance is not restricted to personal lines clients.

As brokers gathered in Manchester for the annual British Insurance Brokers’ Association (BIBA) conference Nick Burgess, Technical Underwriting Manager – Financial Lines, UK at Markel said businesses cannot afford to underestimate the risk of failing to have the necessary level of cover.

“Whilst underinsurance is often in the headlines for personal lines classes such as home insurance, it is less reported in the context of professional indemnity (PI),” he explained. “And like any class, underinsurance often goes unnoticed until it’s too late with the client unnecessarily exposed to, what could be significant, risk.

“We know that underinsurance occurs when the coverage limits of an insurance policy are insufficient to cover the costs of a claim. With the policyholder responsible for the difference, it’s a discrepancy that can impose severe financial strain on a freelancer or business. And where claims can arise years after a service is supplied helping clients understand the risks of underinsurance at renewal is paramount.”

Burgess said the insurers has seen a number of incidences in the construction industry where a smaller contractors work under the umbrella of larger construction firms.

“These smaller contractors may find themselves underinsured when the contract stipulates coverage requirements that exceed their current limits. For instance, a smaller contractor might have a policy with an ‘aggregate limit’ of coverage, but the contract with the larger firm requires ‘any one claim’ coverage,” he explained. “This discrepancy can lead to significant financial exposure if a claim exceeds the contractor’s policy limits. Moreover, contracts often require cover to be maintained at the higher level for a period of time after the works are completed in view of the retro/claims made nature of cover.”

He continued in addition to limit, there is also the turnover which, along with the trade, is a primary rating factor on PI covers.

“Under declaring the turnover would be more equivalent to the underinsurance of buildings/contents insurance where the sums declared are lower than the value of the building or contents,” Burgess added. “This might lead insurers to consider application of proportional remedy, for example, only paying half a claim because only half the turnover was declared.”

Aggregate limit typically works well but can be problematic if a contractor is unaware that their contract requires ‘any one claim’ coverage he said. This misunderstanding can result in the contractor being underinsured and financially vulnerable in the event of a substantial claim.

“Should such a situation have the potential to arise, it is important that the broker discuss the details with the insurer to ensure sufficient coverage can be secured,” Burgess said. “Moreover, some in the market are reducing limits and/or restricting coverage, which exacerbates the underinsurance problem.

“As economic pressures mount, businesses and individuals are increasingly tempted to lower their insurance costs, often at the expense of adequate coverage. This cost-cutting measure can have dire consequences, particularly in professions where the risk of liability claims is high.”

He highlighted the risks associated with underinsurance is the issue of retroactive exposures.

“Most PI policies only provide cover for claims made during the current policy period even if the issue causing the claim occurred some time ago,” said Burgess. “Consider a professional who, in an effort to reduce expenses at renewal, downscales their PI coverage from £5 million to £1 million. If a claim arises from an error or omission made five years prior, when the professional had £5 million coverage, they would only be able to call on the lower £1 million limit of the policy in force at the time the claim is made.

“This scenario underscores the importance of maintaining consistent and sufficient coverage levels, especially in professions with long-tail liabilities and is certainly a strong argument against customers requesting a reduction in cover to save costs.”

Burgess concluded: “Underinsurance in PI can be problematic but customers can avoid the worst of the exposure by thoroughly reviewing their contracts to understand the insurance requirements and ensure their policies meet or exceed these stipulations.

“Regularly assessing their coverage needs, considering the potential for retroactive claims and changes in their professional activities or the legal landscape can also help. And, with the support of their broker, clients can better understand the nuances of their policies, including any limitations or exclusions that could affect their coverage.

“The consequences if insufficient or inappropriate PI cover can have far-reaching implications. By understanding common pitfalls, professionals can better navigate the complexities of PI insurance and protect themselves against financial risks.”