The price you’re charged for your business liability insurance cover – whether you’re renewing your policy with your existing insurance company or shopping around for alternatives – is hugely influenced by your insurance claims history.
Your past record is seen as a key indicator of how good your safety record is likely to be in the future.
As you can imagine, a good track record is something to be prized. It’s a bit like having a full ‘No Claims Bonus’ on your car insurance policy.
Conversely, firms with a poor accident/claims record are at a significant disadvantage when they try to buy cover on the insurance market. Indeed, such firms often find that many insurance companies will simply refuse to quote them for their insurance business.
On request, your existing insurance company will usually supply what’s called a ‘Confirmed Claims Experience’. This is a document that sets out your full 5 years accident record and claims history. Usually, this document shows both ‘settled’ and ‘outstanding’ claims that have arisen during the previous five years.
The word ‘claims’ here is a bit of a misnomer – its true meaning needs to be properly explained.
In insurance jargon, the term ‘claims’ is used loosely to refer to both:
We strongly recommend that if anyone has made a claim against your firm in the past 5 years – or if you’ve notified your insurers of any incidents that might develop into claims in the future – you should make it your business to find out the current position with those cases.
It’s in your best interests to make sure that all such ‘claims’ are actively managed and monitored by your insurance company – and that the insurance company's estimated claims costs (‘claims reserves’) are fair and reasonable.
Specifically, you should urge your insurance company/broker to settle (or otherwise dispose of) all genuine claims as quickly as possible – and to close-off those ‘incident notifications’ that are unlikely to result in a claim.
If you don’t keep abreast of what’s happening, you’ll run the risk of unwittingly and needlessly paying over the odds for your business liability insurance protection.
Under the terms of your business liability insurance policy, you are obliged to immediately notify your insurance company of any incident or circumstances that could give rise to a claim.
It’s important for you to remember that all such incidents/ circumstances must be reported even where:
Some people are reluctant to report incidents to their insurance company because they fear – sometimes with good reason – that this might adversely affect their premium at next renewal date.
Whatever your concerns, you should always tell your insurance company about any incident or circumstances that could give rise to a claim. If you don’t do so, your insurance company may refuse to deal with any claim that eventually arises.
Once you notify the insurance company of an incident, they are required to immediately set aside money (called a ‘Claim Reserve’) to pay for any claim that could arise in the future. They don’t wait for an actual claim to be received before making such provision – they’ll set up a ‘claims reserve’ as soon as they hear about the incident.
In other words, they take a very conservative approach and treat all reported incidents as potential claims.
This approach is generally regarded – by the regulatory authorities among others – as prudent business practice. If insurance companies don't do this, they run the risk of under-estimating their liabilities and they could end up going out of business.
(However, as we’ll see later, this system can result in unfair price increases for responsible policyholders).
It’s also worth remembering that people who are hurt in accidents often wait a long time (several years in some cases) before making their claim. Indeed, with accidents involving children, it may take a decade or more before the child realises that they have a legal right to claim compensation for their injuries.
Thus, unless insurance companies make provision for potential (as well as actual) claims, there mightn’t be enough money to pay for ‘late claims’.
If no claim is subsequently received, the insurance company will eventually close-off their file – in which case the specific ‘Claims reserve’ will be freed up and brought back into their general insurance funds.
Though there are very good reasons for insurance companies to make provision for potential, as well as actual, claims the system often causes problems for responsible policyholders. Let’s explain this further by considering the following example.
Unfortunately, as this example clearly shows, firms can be penalised for having potential claims – as well as actual claims – recorded against them.
The best way of avoiding, or at least minimising, problems like this is to make sure that your insurance company’s records are fully up-to-date and that their ‘claims reserves’ are fair and reasonable.
You should insist that the files for ‘dormant’ cases – those incidents for which no legal claims have been received - are closed off within a reasonable period. They should not be kept open indefinitely.
As a general rule, genuine compensation claims should be settled (or otherwise resolved) as quickly as possible. There are two good reasons for saying this.
First, experience shows that personal injury claims usually become more expensive as time passes. This happens because, for example, the claimant’s medical condition may deteriorate; case handling costs usually rise as the claim continues; and, typically, the longer a person is out of work, the more financial compensation they are likely to be awarded.
And remember that the higher the eventual cost of the claim, the more likely it is that you’ll face a hike in your business liability insurance costs.
So, unless there are very strong grounds for resisting a claim – where, for example, there’s no legal liability or the claim is spurious or where the claimant is looking for too much money – the case should be settled as soon as possible.
Second, any unnecessary delay in settling a case could create problems for you at your next renewal date. In fact, once you have an ‘outstanding’ claim against your insurance record you’re at risk of being caught in a classic insurance ‘price trap’. And you may find that you’re effectively locked into your existing insurance arrangements.
This can happen where:
It’s worth noting that most insurance companies view ‘outstanding’ claims far more negatively than ‘settled’ or ‘closed-off’ claims.
