Insurance Fact Sheet Terms

This fact sheet has been prepared to help smaller companies in the construction sector to understand better how liability insurance is sold and priced. It also provides details of sources of further information on this topic and a glossary of liability insurance terms.

Introduction
One of the basic principles of insurance is that the premiums paid by the many should cover the costs of the claims made by the few. In today’s claims conscious environment the cost and numbers of claims, particularly liability claims, has risen so sharply that the size of the insurance fund has to be increased and everybody has to contribute more. Liability polices are insurance products that provide insurance cover for the damages awarded and the legal costs of claims made against your business under liability law. Such claims can arise under the laws of negligence, nuisance and contract. It is a complex area and it is important that you have some understanding of the nature of liability insurance products. The main liability products that this factsheet is concerned with are Employers’ Liability (EL) and Public and Products Liability (PL/Products) insurance.

Public Liability Insurance
Public liability (PL) covers your business for damages payments and legal costs of bodily injury to third parties and damage to third party property caused negligently during your business activities. It covers claims from members of the public, visitors, passers-by, trespassers, bona fide sub contractors both on your own premises and at third party premises where you may work. PL is not a compulsory class of insurance and typically policies can provide between £1 million and £5 million cover, but more can be negotiated. There are many conditions, exclusions and warranties that can be applied to PL policies and it is therefore important you are aware of any that are applicable to your policy. For example:

• A standard PL policy does not indemnify against claims for financial loss where there has been no injury or damage, but any financial loss to the claimant following directly from an injury or damage claim is covered;

• You may be required to or “warranted” to act in a certain way when undertaking certain hazardous activities e.g. to operate a “hot work” permit system if you carry out work such as welding at third party premises;

• Most PL policies exclude gradual pollution damage and only cover pollution damage caused by sudden and unforeseen events.

Employers’ Liability Insurance (EL)
EL covers employers against liability claims from their employees for accidents or ill health that they may suffer whilst working and that are due to the negligence of their employers. Insurance contracts are drawn up under the principle of “utmost good faith”, as insurers must be fully aware of the nature of the risk that they are insuring. It is therefore important that the description of your business that you give to your insurers via your broker includes all of your activities. EL is a compulsory insurance that all employers are required to have under Employers’ Liability (Compulsory Insurance) Act 1969. It was introduced to avoid employees who had suffered injury or illness being unable to recover compensation due to a company’s insolvency.

By law you must have EL insurance with a limit of indemnity of at least £5 million; most policies provide £10 million. EL provides cover in respect of injury or disease caused during the period of the policy. Hence the policy that is in force at the time the injury to the employee was caused will deal with the claim, irrespective of when the claim is actually made against the employer. EL will therefore cover you for claims for ill health made in the future due to exposures that may occur today but do not manifest themselves during the current policy period e.g. asbestos related diseases. Your insurance should cover all employees, including contract staff, casual and temporary workers. As a compulsory insurance only a few restrictions e.g. exclusions or warranties are allowed.

How is my liability premium calculated?
Liability premiums not only have to cover the costs of claims but also the costs of reinsurance, agents’ commission, claims handling costs expenses as well as providing an element of profit to insurers. Such costs would be included in rates charged by insurers. There are two main methods in which liability
premiums can be calculated. The first and most frequently used is called “book rating”. This starts with a base rate for specific trades that are applied to the risk exposure. For EL the exposure measure used is usually the estimated wage roll with turnover during the forthcoming year used for PL.

Base rates are obtained either from the insurer’s own experience for the trade and/or by using other data that may be available e.g. HSE statistics. They will also reflect the insurer’s appetite for a particular type or size of business. The base rate is used as the starting point for a premium calculation and this is adjusted according to the merits of an individual case for things such as:

• a good claims record;
• evidence of a positive approach to risk management; and
• size of risk.

It is therefore important that you provide your insurer with as much detail as possible of the way in which you manage your health and safety risk, as this will influence the premium charged. The premium rate is based upon the actual claims experience of that risk over a suitable time period. This figure is then adjusted to take account of insurer’s costs and expenses as well as possible changes that might affect future claims performance e.g. regulation or law reforms.

Further help and information

Other sources of further advice and information on liability insurance can be obtained from:

• Your insurer;
• Your broker.

Also from organisations such as:

Association of British Insurers (ABI)
51 Gresham Street, London EC2V 7HQ Tel: (020) 7600 3333 Website: www.abi.org.uk

British Insurance Brokers’ Association (BIBA)
BIBA House, 14 Bevis Marks, London EC3A 7NT Tel: (020) 7623 9043 Website: www.biba.org.uk

Institute of Insurance Brokers (IIB)
Higham Business Centre, Midland Road, Higham Ferrers, Northamptonshire NN10 8DW
Tel: (01933) 410 003 Website: www.iib-uk.com

Constructing Excellence Website: www.cbpp.org.uk

GLOSSARY OF LIABILITY INSURANCE TERMS

ADDITIONAL PREMIUM: A premium payable by the insured as a result of a change in policy cover or declaration adjustment to reflecting increased exposure or sums insured.

ADJUSTER: A person who investigates claims on behalf of insurers (see claims adjuster or loss adjuster).

AGENT: One who introduces a business to an insurer for commission, but can continue to act as an intermediary between the insurers and the insured.

AGGREGATE LIMIT OF INDEMNITY: The maximum amount an insurer will pay under a policy in respect of all accumulated claims arising within a specified period of insurance.

ARBITRATION: Settlement of a dispute by an independent person, whose decision is to be accepted by both parties. It is an alternative to legal action.

APR: Is the total cost of credit to the consumer, expressed as an annual percentage of the amount of credit granted. APR is intended to make it easier to compare lenders and loan options.

BROKER: An intermediary who acts as an agent for insurers and on behalf of the insured who is regulated by a professional body and codes of practice.

CANCELLATION: Termination of a policy before it is due to expire.

CLAIM: Injury or loss to a claimant against the insured arising so as to cause liability under a policy it has arranged.

COMMON LAW: The common law consists of the ancient customs and precedents that have been recognised by the courts and given the force of law. It is in itself a complex system of both civil and criminal, although it is greatly modified and extended by statute law and equity. It is unwritten and has come down over the centuries in the recorded judgments of courts.

CONCEALMENT: Deliberate suppression by a proposer for insurance of a material fact relating to the risk, usually making the contract null and void.

CONDITIONS: Stipulations written in a policy, with which a policyholder must comply. Failure to do so may result in insurers refusing to pay a claim.

CONTRIBUTION: When more than one policy covers the same risk, each insurer contributes by paying its rateable proportion of any loss.

DAYS OF GRACE: Number of days for which insurance cover continues beyond the actual expiry date of the policy, which you intend to renew. If you fail to pay the renewal premium within this period, your policy will lapse.

DECLARATION: A signed statement by the insured, usually at the foot of a proposal or claim form, certifying that the information given is accurate.

DECLARATION ADJUSTMENT: If the premium has been calculated based on estimates provided by the insured, they are required to maintain records to enable a declaration of actual wage roll or turnover during the period to be made. The insurer may then adjust the premium charged for that period by making an ADDITIONAL or RETURN PREMIUM.

DEFERRED PREMIUM: The part of a premium which, following agreement with the insurer, is payable by installments, monthly, quarterly or half yearly.

DUTY OF DISCLOSURE: Obligation placed on someone taking out insurance, to inform insurers of anything that could influence their judgment on whether the risk is acceptable, or the terms to be offered.

EMPLOYERS LIABILITY INSURANCE: Insurance for employers in respect of their liability to employees for injury or disease arising out of and in the course of their employment. With some exemptions this insurance is compulsory in Great Britain, and can only be provided by an authorised insurer.

ENDORSEMENT: An amendment or alteration to a policy, which becomes an integral part of that policy.

EXCESS (or deductible): Specified initial amount of a claim that the insured has to contribute. If a claim fails to exceed this amount stated in the policy, no payment is made by the insurers.

EXCLUSION (or exception): An event or circumstances specifically excluded from the terms of a policy.

EXTENSION: An addition to an existing policy to provide cover not previously considered or included, either temporarily or permanently.

GROSS PREMIUM: A term normally applied to gross written premiums before deduction of brokerage or commission and expenses.

INCEPTION DATE: The date from which, under the terms of a policy, an insurer is deemed to be at risk.

INDEMNITY: Insurance principle by which a policyholder is placed in the same financial position after a loss, as they were immediately before it.

INSURABLE INTEREST: The principle that the insured must have an interest, usually financial, in the risk for which the policy is to be issued.

INSURANCE BROKER/AGENT: An insurance intermediary who advises their clients and arranges their insurances. Although they act as an agent for their client, they will normally be remunerated by a commission (brokerage) from the insurer. An insurance broker is a full-time specialist in handling insurance business who belongs to a professional body and complies with their code of practice.

INSURANCE PREMIUM TAX: The Finance Act 1994 introduced this new tax on most general insurance risks located in the UK. All amounts stated on documentation should make clear the amount of tax payable.

INSURED: The person, firm or company in whose name the policy is issued.

INSURER: An insurance company or Lloyd’s underwriter who, in return for a premium agrees to provide indemnity in the event of any loss suffered by the person paying the premium as a result of some accident or occurrence.

LAPSE: The non-renewal of a policy for any reason.

LIABILITY: Legal responsibility for injury to other persons or damage to their property.

LIMIT OF INDEMNITY: Maximum sum an insurer can be expected to pay under a policy or section of a policy. May be expressed ‘per accident’, ‘per event’, ‘per occurrence’, ‘per annum’, etc. LLOYD’S (OF LONDON): A society, incorporated under Act of Parliament of 1871 and known as the Corporation of Lloyd’s, which provides the premises for a wide variety of services, administrative staff and other facilities to enable the Lloyd’s market to carry on insurance business efficiently.

LOSS ADJUSTOR: Independent professional claims expert, who is engaged by insurers to impartially check and arrange settlement of claims in accordance with policy terms.

LOSS ASSESSOR: Person specialising in compiling and negotiating settlement of claims on behalf of the insured, by whom they are paid.

LOSS: Another term for a claim.

MATERIAL FACT: Any fact that could influence an underwriter in their acceptance of the risk, or calculating the premium.

MINIMUM DEPOSIT: This is a payment payable for the first year regardless of whether the intention is for the policy to run for a full 12 months. If the policy is no longer required there is no refund of premium for the period of insurance remaining.

NEGLIGENCE: A form of tort or civil wrong that can give rise to civil liability.

NET PREMIUMS: Term variously used to mean gross premiums net of expenses, commission taxes, or any combination of these.

NON-DISCLOSURE: The failure by the insured or their agent to disclose a material fact or circumstance to the insurer before acceptance or renewal of the risk.

OMBUDSMAN: Official body, financed by participating insurers, to whom unresolved complaints can be referred.

PERIOD OF RISK/INSURANCE: The period during which the insurer can incur liability under the terms of the policy.

POLICYHOLDER: The person in whose name the policy is issued. (See also insured and assured).

POLICY: A document detailing the terms and conditions applicable to an insurance contract and constituting legal evidence of the agreement to insure. It is issued by an insurer or their representatives for the first period of risk. On renewal a new policy may not be issued although the same conditions would apply, and the current wording would be evidenced by the renewal receipt.

PREMIUM: The consideration paid for a contract of insurance.

PROFESSIONAL INDEMNITY INSURANCE: Insurance that indemnifies a professional against
their legal liability towards third parties for loss arising from their professional negligence or that
of their employees.

PROPOSAL FORM: Document completed by a prospective insured, giving details required by insurers to enable them to decide whether to accept the risk and what premium terms and conditions. Once agreed by both parties, it forms the basis of the insurance contract.

QUOTE: A statement by an insurer of the premium terms and conditions they will require for a particular insurance.

RENEWAL: Continuation of a policy for a further term, on payment of a fresh premium.

RETURN PREMIUM: A premium payable back to the insured as a result of a change in policy cover or declaration adjustment to reflect reduced exposure or sums insured. (This is subject to the under writers discretion)

RISK MANAGEMENT: The identification, measurement and economic control of risks that may threaten the assets of a business or other enterprise.

RISK: In insurance, this is the probability of an insured loss occurring.

SCHEDULE: Policy section setting out the main details of the insured, their business activities, the period of cover, the application of any special terms or restrictions plus other details specific to the particular insurance and premium.

SUBROGATION: Insurer’s right to pursue action in the insured’s name against the party considered legally liable for the loss or damage.

THIRD PARTY LIABILITY: Liability of the insured to persons who are not employees of the insured.

THIRD PARTY: Person who is injured or whose property is damaged by the policyholder (the first party). The second party is the insurer.

UNDERWRITER: A person who accepts business on behalf of an insurer.

UTMOST GOOD FAITH: Duty placed on both parties to an insurance contract. The insured has to disclose all facts material to the risk while insurers have to act reasonably and communicate clearly.

WARRANTY: A condition which forms part of a policy and must be strictly complied with for a claim to be paid under the policy for example, use of a hot work permit.