A tale of two outcomes

DAVID runs ALP Ltd, a 20-year-old precision engineering company that makes door handles. It has 11 staff and turns over £3 million a year.

Most of the work is done by two CNC machines with a very small amount of welding at the end of the process, supported by a very skilled, longstanding workforce. The firm also owns the building, a small industrial unit.

David needs to renew his insurance for a year. ALP’s broker, Julie, has mentioned that rates are increasing, so David decides to look online. Here’s how the two scenarios play out.

David’s broker Julie arranges a rebuild cost assessment for ALP’s unit. The cost is 50 per cent more than David expected, but he reluctantly agrees to increase the sum insured.

He leaves everything else the same as before. Julie has spent a lot of time understanding his business. She has disclosed the type of work he does to his insurer, and the use of composite panelling in the building because they have surveyed the risk.

David and Julie discuss reducing business interruption cover to 12 months, but Julie advises against this, especially as the lead time for a new CNC machine would be around a year.

David opts to buy his insurance online, pays immediately, and receives his documents via email. Everything matches up with what he put online and seems sensible to him.

Most of the policy is the same as before, and upon reading the information supplements and paperwork one evening, he feels like he has made a shrewd move.

Reducing the business interruption seems smart. David even checked with the suppliers of his CNC machines. They have a lead time of just under a year, which works nicely. He wouldn’t build the building the same way anyway and thinks a simple modern industrial unit design wouldn’t take long to build.

David’s broker Julie normally schedules meetings with him twice a year and researches the needs of the business and the wider industry sector.

Julie’s advice is most useful when he isn’t sure if they need to cover something differently. Often, special requests from customers aren’t as straightforward as just adding more cost, and sometimes he’s surprised that what appears to be additional cover comes as part of the policy.

Sometimes Julie insists on certain bits of cover. Insurers have seen all the tricks and it’s impossible to skimp on the cover needed, so honesty is the best policy, she says. She asks lots of questions to make sure everything is on paper. There are admin fees for major changes, and sometimes a slightly higher premium.

Their conversations are simple, David doesn’t feel at the mercy of documentation, and regulation is done for him. When he needs to change a vehicle, he just rings up, and when he has a big stock order, he just emails to increase the insurance.

David knows his business better than anyone and feels insurance is simple; most people do their car and home insurance online anyway. There are some frustrations, however.

He is much more reliant on his memory to update his insurance. He isn’t sure about some bits, so makes a best guess; and he can’t stand when he has to call, instead of getting his broker to do this. When he does want to check on the cover, his insurers can’t offer advice. They only cover what he’s requested.

David thinks it’s obvious what he is asking for, as it’s a simple business. What worries him most is that, when he was setting up the policy online, it was hard to find a pre-set description that accurately portrayed what ALP does. He had relied on his broker for advice on what other precision engineers were doing with their cover and what he should keep an eye on.

He assumes that if it does come to a claim, he can show the insurers that there was no better description in the options.

An accident happens

David’s employees are working when a spark ignites in the welding area at one end of the unit. Everyone gets out safely, but the fire causes significant damage to the buildings, one of the computerised CNC machines and a lot of his stock.

Making A Claim

When David phones Julie after the fire, she comes to the unit within the hour. She speaks to the insurance company for him and the next morning the loss adjuster arrives. After discussions, she later confirms that he’ll have an interim payment within a couple of weeks to allow him to find alternative premises.

It takes a few months for the claim to be paid in full, but by that time, work is underway with contractors to get his unit rebuilt and the new CNC machine is on order. His employees are still being paid and, although production is limited, he is still able to fulfil some of his orders, so customers are sticking with him. It won’t be easy for a year or so, but David’s business will survive.

David calls his insurance company, is put on hold for 15 minutes and told someone will assess the damage in a few days. He struggles to work out his next move.

When the loss adjuster arrives, she looks around and tells David he may be underinsured. Some composite panelling wasn’t mentioned in his application, and when he explains what the company does, she points out that’s not what the business description on the policy says.

Even if the insurer agrees to settle the claim, it’s likely David will be out of pocket by as much as 50 per cent. His business won’t survive this. Also, a new CNC machine will take almost a year to source, so his business interruption cover won’t see him through.

The outcome

The insurance company decides that, had they known exactly what David’s business was doing, they would have charged a much higher premium. The presence of composite panelling concerned them too, even though he’d ticked the box for “standard construction”. They ruled that this was non-disclosure – and that as the use of heat and the presence of composite panels was the cause and spread of the fire, they wouldn’t pay his claim.

David was underinsured by around 50 per cent and had an insufficient indemnity period for his business interruption cover. With the online insurance he thought he’d bought cheap, his business fails – a fate he could have avoided if he’d continued to use a broker.