Average clauses and Insurance Act could push risk of underinsurance back onto insureds

Insurers may shift the risk of inflation back onto policyholders through underinsurance and average clauses, or by using the Insurance Act, to reduce claims payouts, Marsh and Aon warn. Inflation is seeing asset values and replacement costs rise along with business interruption losses. Failure to accurately declare exposures brings the risk of underinsurance. If an insurer identifies underinsurance they could apply ‘average’ and only pay the proportion that the buildings, or plant and machinery, were insured for. So buyers need to be mindful of any average clause that applies on their policy, advised Joshua Webb, head of property, UK retail at Aon Commercial Risk Solutions. They should also take care to ensure they are fulfilling disclosure duties and that risks are deemed to have been fairly presented, he said. Insurers may be entitled to adjust a claim under policy wording or the Insurance Act, which applies to all commercial insurance contracts written under English law including those in London, according to Clarissa Franks, placement lead for risk management, corporate and commercial business in the UK and Ireland at Marsh. Under-declaration would potentially be a breach of the duty of fair presentation under the Insurance Act, which could allow the insurer to proportionately reduce a claim settlement, she explained. “Many policies have some form of underinsurance provision or average clause, while the Insurance Act introduced an overarching duty of fair presentation of risk. One of the remedies under the Insurance Act for insurers, notwithstanding policy wordings, could be to proportionately reduce the claim,” said. She stressed that insurers are going to be much more focused on a “line-by-line” review of where values have changed and what valuation methodology has been used. “If a client has a story in terms of methodology or working with a third-party valuer, that would be incredibly valuable to include in a market submission,” she said. Where insurers are not comfortable with valuations, they will look to protect themselves from the risk of underinsurance or charge higher premiums, Franks added. She made clear that buyers should no longer rely on valuations from previous renewals. Since the start of the pandemic, rebuild costs have increased substantially while supply shortages and delays have increased periods of business interruption. In particular, insurers are concerned about the cumulative effect of inflation, according to Franks. “If each year values haven’t been reviewed, then cumulatively over a number of years you could end up with a scenario where there is 50% underinsurance. Although inflation is as high as 10% in some countries, construction and material prices have been way in excess of that over the past 12 months,” she said. The demand for information from buyers on inflation has increased, agreed Helen Eager, broking manager, retail broking at Aon Commercial Risk Solutions. “Insurers want to understand the data collection methodology for declared values, with a proactive approach to take into account inflationary uplifts. Buyers that are unable to provide the information are being challenged in the market,” she warned. “We have seen demands for independent valuations increase where buyers are not viewed as being proactive in this area. We have also seen insurers apply automatic uplifts to declared values to take into account inflationary impact, with premiums being charged based upon the higher figure, where insurers are not satisfied that enough proactivity is undertaken,” she said.

Average clauses and Insurance Act could push risk of underinsurance back onto insureds

Insurers to be laser-focused on valuations

Want to read this article?

Read Next

Risk managers taking centre stage in ESG

Costs rapidly rising for employee health insurance in Portugal

UK market must innovate rather than exclude emerging risks: BIBA

EC probes Meta for alleged breaches of Digital Services Act

Markel ‘reinforces commitment’ to Chinese market

Risk managers taking centre stage in ESG

Costs rapidly rising for employee health insurance in Portugal

UK market must innovate rather than exclude emerging risks: BIBA

EC probes Meta for alleged breaches of Digital Services Act

Markel ‘reinforces commitment’ to Chinese market

Want to read this article?

Read Next

Risk managers taking centre stage in ESG

Costs rapidly rising for employee health insurance in Portugal

UK market must innovate rather than exclude emerging risks: BIBA

EC probes Meta for alleged breaches of Digital Services Act

Markel ‘reinforces commitment’ to Chinese market

Related Articles