By Simon Mitchell
I WROTE an article in December's issue of Business Times about research that concluded 80 per cent of commercial properties and 25 per cent of the business interruption claims are underinsured*. This is certainly something that should concern all business managers.
I also highlighted that underinsurance is not just restricted to property and business interruption insurance. Following changes in the assumed investment discount rate used by courts to calculate compensation for serious life changing injury claims, many businesses could now find themselves underinsured against liability for injury to employees and others. The rate change from plus 2.5 per cent to minus 0.75 per cent has increased the value of these larger liability claims significantly. To put this in perspective, a man aged 40 with an award assessed at £100,000 per annum, could see an increase from £2.6 million to £5.5 million, plus legal costs.
As reported in the press** at the time, the Office for Budget Responsibility said that the government would be setting aside an extra £1.2 billion a year to meet the additional costs to the public sector, including the NHS. The Government also initiated a review for a change to the framework for setting the rate. Draft legislation published in September 2017 made it seem likely that the discount rate would be reviewed again in early 2018, with an expectation of a new rate of around plus one per cent, effectively halving the earlier impact of the change.
At the time of writing this article, this has not happened and the subsequent intervention by the Justice Committee will inevitably lead to further delays, raising the possibility of a rate closer to minus 0.75 per cent. Add to this the Government's focus on all things Brexit it may well be that the current discount rate is here to stay. When the rate was at plus 2.5 per cent, personal injury claims for a single person exceeding £5m, whilst not impossible, were rare. With a rate of minus 0.75 per cent, claims of much more than £5m will be far more common and we have seen some personal injury claims increase to more than £10m. This will only get worse as life expectancy increases.
Unlike motor insurance, commercial Employers' and Public Liability insurance policies are always subject to maximum indemnity limits. Based on a public liability insurance limit of £5m, which is not uncommon, a more serious personal injury claim may not be fully insured. Businesses and directors could face having to fund claims without the backing of insurance - a financial disaster not worth contemplating!
All of this shows just how important it is to get it right before anything goes wrong. For a copy of Towergate's client briefing on underinsurance and the changes in the Ogden rates, with helpful tips on how to avoid the pitfalls and access to a specialist insurance valuation service, contact Simon Mitchell, Account Director, Towergate Insurance in Northampton on 01604 887325. Simon is a Chartered Insurance Broker with more than 30 years' experience and a wide range of knowledge about insurance for business. This includes specialist advice about emerging risks such as cyber crime and terrorism.
*Sources: Royal Institution of Chartered Surveyors, BIBA (Professional Indemnity Volume 6: Managing Under-Insurance - A guide to prevention. 5th May 16).
**The Guardian - 20th March 2017