Most commercial insurance policies are taken out in the expectation that a claim will never be necessary. For the most part, this expectation is borne out by experience, with the result that when the loss or damage occurs, policyholders are often unprepared for the claims process and are unsure about the obligations they will be expected to perform.
This article provides some practical tips for commercial policyholders to consider when a claim arises, along with recommendations to help smooth the claims process.
1. Read the policy – all of it!
A surprisingly large proportion of commercial policyholders buy a number of expensive insurance policies during the course of the year and never read any of them. It would clearly be preferable to make time to understand the cover and ensure it is fit for purpose before the policy is taken out. However, if an organisation believes it may have grounds to make a claim, understanding exactly what the policy does and does not cover is key. Even policies described as "all risks," or "comprehensive," will have exclusions. The extent of coverage is also likely to be conditional on certain conditions having been satisfied or obligations performed. Understanding what these are before you embark on the claims process is always advisable to avoid unpleasant surprises.
2. Check the scope of cover
Most policies will contain, hopefully somewhere near the beginning of the policy, a clear statement of what is being insured under that policy. The insuring clause defines the scope of insurers’ obligation to indemnify the policyholder.
Regrettably, some commercial policies are still written adopting what one learned judge referred to as the "kebab" principle of draughtsmanship: a series of seemingly unrelated clauses, incorporating other standard form terms, that have been garnered from various sources and skewered together. Arriving at a clear understanding of what is actually insured under this type of policy is far from easy.
If the claim is a substantial one, and your broker is not able to give you a clear summary of what is covered and what is not, it is always advisable to seek specialist legal advice urgently.
3. What is not covered?
The starting point here is the policy exclusions. In a well drafted policy, the exclusions should all be contained in one section. However, policies can be written on a composite basis, comprising a number of different types of cover. For these policies there may be general exclusions that apply to more than one section of the policy, as well as exclusions relevant only to particular sections. Understanding what the exclusions are, and what they apply to, is critical to understanding what protection the policy provides.
Policyholders also need to understand whether there are any conditions that have to be satisfied before the policy comes into existence, or conditions that have to be satisfied before insurers are liable to pay a claim. These types of conditions, known as conditions precedent to the validity of the policy, the attachment of risk, or to insurers’ liability, require close examination because they clearly limit your ability to make a recovery.
4. Are there any policy warranties?
Warranties in an insurance policy need to be treated extremely seriously: they require exact compliance. In its usual sense, a warranty in an insurance context is a promissory condition by which the policyholder confirms that something will, or will not be done, or that a particular state of affairs does, or does not, exist. For policies coming into force from 12 August 2016, this type of warranty will be interpreted as a suspensive condition. This means that insurers will have no liability for loss during the period the policyholder is in breach of the warranty (save in certain limited circumstances) but will still be liable, if the breach of warranty is capable of remedy, after the breach has been rectified.
If a claim looks likely, check carefully whether the policy contains any warranties and, if so, whether it is clear that they have been fully complied with. If you discover that a warranty may have been breached, it will be important to understand the circumstances of the breach, whether it can be rectified and how the loss or damage in question occurred and to seek professional advice. If some limited circumstances, for example if the loss occurred before the breach, or is attributable to something happening before the breach, then there may still be cover.
5. Notification obligations
Policies generally contain provisions requiring the insurers to be notified of a loss, or a claim, or of circumstances that may give rise to a loss or claim. In particular, many liability policies make it a condition precedent to insurers’ liability that they are notified promptly of any circumstances likely to give rise to a claim. Insurers want to know about the claim quickly in order to take urgent steps to investigate and limit the loss, and delays can prejudice their interests.
Any provision that makes giving notice promptly a pre-condition to recovery needs to be taken seriously. Check carefully whether the notification provision in your policy requires notice to be given in a particular way or within a particular period. If the policy only responds to claims made before the policy period expires, and you discover the relevant loss or damage close to the policy expiry date, it is clearly important to get the notification sent quickly and to make sure it is in the appropriate form. If in doubt, it is always worth seeking professional advice as to whether the notification obligation has been triggered and what is needed in order to comply with the relevant obligations.
6. What form should the notice of loss take?
Some policies, for example, comprehensive non-payment insurance (NPI) policies, contain a proforma notice of loss which the policyholder is required to complete if it wishes to make a claim. However, many other types of policy are silent as to the form of notice of loss. Absent any express clause, there is no requirement that notice should be given in a particular way. In a commercial context, it is not uncommon for the initial notification to be given by the broker, as the policyholder’s agent, telephoning the insurer. However, it is good practice to make sure that any verbal notification is followed up in writing, and that there is satisfactory confirmation of safe receipt, if timely notification is a condition precedent to insurers’ liability.
A policyholder should always ask for copies of notifications and, indeed, all communications with insurers sent by its broker. Key aspects of complicated information can get lost in translation, so all communications given to insurers on the policyholder’s behalf need to be carefully checked, and any inaccuracy speedily corrected.
7. What is the policyholder required to prove?
Generally speaking, in order to be able to recover, the policyholder must prove that its loss falls within the scope of the policy. Unless the policy provides otherwise, it is for the insurers to show that the claim falls within the scope of a policy exclusion or that the policyholder is in breach of a warranty or if a condition precedent to insurers’ liability has not been fulfilled. The exact wording of the policy in respect of these matters is key.
Ascertaining who bears the burden of proof is more complicated if a policy exclusion is subject to a carve out or exception which in some way qualifies its scope. In these circumstances, and again absent any provision in the policy to the contrary, it will be for the policyholder to prove that its claim falls within the scope of the exception to the exclusion.
The standard of proof is the usual civil standard of the balance of probabilities - in other words, that it is more likely than not. Exactly how this applies to any particular claim depends entirely on the nature of the risk that is being insured.
8. Is there an obligation to mitigate loss?
Whether a policyholder has a duty to mitigate its loss will depend upon the terms of the policy, and the nature of the risk insured. Most NPI policies, for example, impose a duty on the insured to take all reasonable measures to prevent or minimise a loss. Policies of marine insurance, governed by the Marine Insurance Act 1906, impose a duty on the policyholder to take such measures as may be reasonable for the purpose of averting or minimising a loss. Marine insurance policies invariably contain a ‘sue and labour’ clause requiring the insured to protect damaged property from further loss once damage has occurred, and insurers are required to pay the full suing and labouring costs.
Absent any express provision, for non-marine insurance policies, the so called "requirement" to mitigate probably only arises in exceptional cases where a policyholder fails to take some obvious step that any prudent uninsured would have taken in the circumstances. Based upon the recent trend of cases, this is only likely to apply in extreme circumstances, and where it can be said that the operative cause of the loss was not the risk that was insured against, but the policyholder's failure to take reasonable steps to prevent it.
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Finally, as with all situations where there is a possibility your organisation will end up in a dispute, think carefully before creating any new documents discussing relevant facts and issues since they may have to be disclosed in future litigation. The grounds upon which documents can be withheld from production on the grounds of legal professional privilege are narrow, and the tests for how these apply to commercial organisations are not straightforward.
Similarly, no documents that might be potentially relevant to the dispute should be destroyed or added to (i.e. written on with annotations which might be relevant to the dispute). If your organisation has a policy of deleting email accounts or other electronic records as part of your standard documents management processes, e.g. when an employee leaves the organisation, make sure a clear "stop notice" is issued.
Taking time to ensure that everyone within the organisation is aware of these key document management messages, is always a worthwhile investment.
