A False Economy: The Cost-of-Living Crisis and Insurance
A report by our Technical Claims Manager, Stuart Dobbins, has been filed which concerns the cost-of-living crisis and its wide-spread effects. The insurance market is far from immune to the economy’s recent tank, in fact it is heavily affected due to the close-knit relationship between a business’s operations and their policies.
Stuart goes through a wide range of factors, explaining where the cost-of-living crisis is hurting individuals and businesses. He adds some points of action which policyholders can follow, as well as advice on compliance.
The current cost-of-living crisis is multi-faceted, although at heart it simply means that individuals and companies will have less money, which in turn means that cost-saving measures are likely to be their focus through the winter months. Given how closely insurance interacts with all elements of a business’s operations it is clear that there are a number of ways in which the consequences of the cost-of-living crisis will affect, and be affected by, insurance considerations for policyholders.
Clearly one of the most prominent elements of the cost-of-living crisis is the sudden increase in everyone’s energy bills. As such, it is expected that a lot of businesses will turn the heating down or even off during periods in which their premises are not being utilised. However, significantly reducing the level of heating within a property can make it more likely that water within pipework will freeze, which in turn will make it more likely that these pipes will burst. If a business is closed for a number of days over Xmas, for example, a burst pipe can cause tens of thousands of pounds worth of damage, affecting not just the policyholder’s property but also their ability to operate their business. As such, we would recommend that policyholders continue to maintain their heating at a low level even when they are not in the property, which will also assist in minimising the potential for damp. In addition, clients may want to consider the insulation of pipework using materials readily available from most DIY stores.
If a pipe does freeze, but without an accompanying escape of water, it is recommended that the water is turned off and the pipe defrosted using a hairdryer or hot water bottle.
In the event of a burst pipe, a policyholder should immediately turn off the water at the stop cock and turn off the central heating. An emergency plumber should be contacted to try and repair the pipe quickly and cost-effectively (if possible) and the matter notified to us for the consideration of an insurance claim. It should be noted that insurance policies generally do not cover the costs of the repair of a pipe, but, depending on the terms of cover, they will often provide coverage for the consequential water damage sustained.
Reduction of Cover
During the cost-of-living crisis, one of the first outgoings that a business will look at in respect of potential savings is likely to be insurance. Whilst this is perfectly understandable, it is also likely to leave policyholders with reduced coverage when they may need it most.
For example, a government report released in March 2022 found that cyber-attacks were becoming more frequent, with almost one in three businesses and a quarter of charities experiencing cyber breaches or attacks at least once a week. However it has also been established that 29% of companies cancelled their cyber policies in the last year, leaving them significantly exposed to risks that could have a very high cost value.
In addition, policyholders may look to alternative insurance providers and intermediaries on the basis that they seem to offer a ‘budget’ service. However it must be emphasised that cut-price cover is often significantly limited and subject to onerous terms and conditions that will not automatically be made obvious to a policyholder at the point of sale. In short, whilst a business may think that it is getting a good deal, in the event of a claim they might also find that their budget insurance provider is also providing a budget claims service as well. Indeed, a policyholder may even find that they do not have any coverage at all if there has been an alleged breach of a particularly stringent policy condition.
The British Insurance Brokers’ Association (BIBA) estimates that around 40-45% of all claims currently feature some element of underinsurance, which effectively means that a policyholder has insured for a figure that is not the ‘true’ sum required for reinstatement of their property and/or finances in the event of a claim. Clearly this is a significant problem which is being exacerbated through a combination of rising building costs and the desire of policyholders to keep their premiums to an absolute minimum.
It must be stressed that any under-assessment of a business’s Sums Insured is likely to cause significant uninsured losses in the event of a claim and can even leave a client open to having their policy cancelled on the basis of misrepresentation. As such, whilst policyholders may be tempted to insure for less than the true ‘Value at Risk’, we would always counsel against such a decision as it could have catastrophic consequences in the event of a claim.
Historically, at times of economic difficulty the frequency of injury claims increases, and we are expecting the current situation to produce a similar effect. As such, policyholders should be alive to the fact that they may be targeted by individuals who will see the making of a claim for an alleged injury as a profitable means of generating some income for themselves.
Whilst it is almost impossible to stop these types of individual making a claim, a policyholder can take steps to protect themselves by reviewing their Health and Safety documentation and procedures, updating risk assessments/training and taking a pro-active approach to post-accident investigations. Any claim that is made against a policyholder has to demonstrate that they have breached their ‘duty of care’ to an individual, and therefore having good paperwork in support of Health and Safety procedures will make it much more likely that any claim can be defended. In addition, the retention of CCTV footage, witness evidence and photos immediately after an accident can assist in disputing the circumstances of a case, especially if it is felt that the allegations might be of a spurious nature.
In July this year, Zurich Insurance reported on a significant increase in the amount of fraudulent claims being submitted, fuelled by the soaring costs of food and energy. This is another trend that tends to manifest itself in times of economic hardship, and its consequence is that insurers become extremely stringent when assessing any claim that is submitted. We have already seen insurance claims departments develop a particularly hard line on cases which would previously have been settled without excessive scrutiny, and it is to be expected that the prevalence of fraud is likely to see this trend continue. As such, clients should be prepared for their claims process to be more challenging and requiring more cooperation than they may previously have experienced.
Whilst the government has been keen to stress that any energy blackouts are unlikely, there clearly remains the capacity for some form of disruption in this regard, which could in turn affect a business’s ability to operate. However coverage for any losses that may stem from this cessation of activities is almost certainly unlikely to be available, even if a policy carries an extension for ‘Failure of Electricity Supply’. The reason for this is that most extensions of this type include a ‘franchise period’ which has to elapse before cover responds – for example a policy may state that it only responds to claims where the interruption lasts longer than 24 hours. Given that speculation suggests that blackouts may be limited to a period of 3 hours it is therefore unlikely that a policy would include a franchise period that is less than the total time in which power could be restricted. Furthermore, extensions of this type will often specify that the failure of supply has to be ‘accidental’, which may not be the case in the event that a supplier deliberately withdraws or restricts its supply for a short period.
When outgoings on other expenses are high, it may be that businesses overlook some of the minor maintenance work that becomes necessary during their usual trading operations. However small problems can become much more pronounced very quickly, both increasing their likely cost as well as causing issues for coverage in the event of a claim. For example, a company may choose to cut back on the cleaning of ductwork to save money, leaving themselves exposed to a breach of policy conditions that require a particular routine in this regard. Alternatively, a business may choose to postpone maintenance to a flat roof which could end up allowing water to enter their premises. Whilst economies will be the focus of all companies throughout the next six to twelve months, it is crucial to emphasise that compliance with policy conditions is absolutely essential in order to ensure that a business is not inadvertently invalidating any aspects of their cover.
Thank you for your detailed insight Stuart.
We invite clients and policyholders to voice their worries on our social media channels. Contact Romero Insurance Brokers for advice if you are concerned about your businesses outgoing due to the cost-of-living crisis.