Summary of Key Points
The original purpose of Declaration based Business Interruption Policies was to avoid Policyholders losing out due to underinsurance resulting from high rates of inflation. Policyholders could over insure and if, when they made a (second) Declaration at the end of the year this was proved to be the case, Insurers would refund that proportion of the premium.
Unfortunately, Declarations are generally not being made, as Declared amounts are often substantially low.
The Declaration Linked basis was introduced with the idea that at the outset of the Insurance year the Policyholder would estimate the Gross Profit for the Policy Period and make an intial Declaration to the Insurer. At the end of the Period, a second Declaration should be made confirming what the actual Gross profit was, and thereby the premium that should have been paid. The balance is then paid or a return premium made.
In return the Policyholder was given a limit to the amount that could be claimed at 133.33% of the Declared amount, with no proportionate reduction (average) clause attaching to the policy. Harry Roberts view was that in his experience it was incredibly rare for the uplifted sum insured to be insufficient.
Damian Glynn went on to explain that 60% of BI policies were written on a Gross Profit Basis, 25% on a Gross Revenue basis and the remaining 15% on an Increase Cost of Working basis. Of the policies underwritten on a Declaration Linked basis, 43% were under declared, by an average amount of 50%.
This presents two issues:
Firstly, Insurers are receiving insufficient premium ; secondly, the result of the process is inequitable. This was exampled by the fact that a business that made an accurate Declaration would pay the full premium but a firm that under declared would still receive the same benefits of full cover without the application of proportionate reduction, but would not have paid the full premium. This means the underinsured businesses are subsidising the fully insured businesses.
Damian went on to provide a list of reasons why Gross Profit may be under declared as follows:
1. Failure to multiply the annual figure to match the Maximum Indemnity Period
2. Miscalculation of Gross Profit (Insurance definition may be misleading)
3. Misunderstanding the declaration form
4. Business calculating their “Estimated Maximum Loss” and using this figure
5. Simply paying what could be afforded
6. Deliberately under declaring, knowing there is a 133.33% uplift
For the Loss Adjuster there are two other factors to take account of. Firstly, the basis of the declaration varies from policy to policy and therefore the Loss Adjuster should check the precise wording in place. Secondly, there is a danger that, if the adequacy of the Declaration is not considered at the outset, when dealing with a combined material damage (MD) losses and BI loss, the Adjuster may recommend payments under the MD section, potentially estopping Insurers from taking action if it is later found that the BI element was under declared. Estopple was not discussed in detail.
Damian discussed the causes of under declarations and explained his view that perhaps Insurers could choose how to deal with the under declaration issue dependent upon what Damian describe as the “gravity” of the act leading to the under declaration. On the above list 1, Failure to multiply the annual figure to match the Maximum Indemnity Period could be seen as a low gravity unintentional act whereas 5, “Deliberately under declare knowing there is a 133.33% uplift” could be seen as most severe and perhaps more severe action taken. This section of the presentation focused on the causes of under declaration. Damien stated that very often a compromise was reached, depending on the cause
The issue as to how or whether Insurers could take punitive action was discussed by Jonathan Hall, a Partner with Clausen Miller solicitors who noted that the cause of an Under Declaration may not be relevant from a legal perspective.
Jonathan Hall explained the position concerning an under declaration and this rested on whether this was a statement of expectation or belief or a statement of fact.
For a representation to be a misrepresentation there must be:
(1) a positive statement made by the insured to the insurer;
(2) which was untrue;
(3) was material; and
(4) induced the insurer to give the cover for the premium that it did,either on the terms offered, or at all (Section 20 Marine Insurance Act 1906 (‘MIA 1906’), Pan Atlantic Ins Co Ltd v Pine Top Ins Co Ltd [1995] 1 AC 501 (‘Pan Atlantic’) and Assicurazioni Generali v ARIG [2002] EWCA Civ 1642 (‘Arig’).
A representation will be interpreted objectively by a tribunal: that is, what would the prudent insurer have understood the representation to mean? In doing this the tribunal will look to the context in which the representation was made. Highlands Insurance Co. v Continental Insurance Co. [1987] 1 Lloyd’s Rep 109.
Section 20 MIA 1906 makes a distinction between statements of expectation or belief and statements of fact.
If an under declaration is a statement of fact (a statement about the past or present but not the future), the remedy is policy avoidance, irrespective of whether the untrue statement was made innocently, negligently or fraudulently (Section 20(4) MIA 1906, Pan Atlantic and Arig).
But if an under Declaration is a statement of expectation or belief, the insurer will not be able to avoid the contract, unless the statement was not made in good faith; that is it was made dishonestly (Section 20(5) MIA 1906, Economides v Commercial Union Assurance Co plc [1997] 3 All ER 635 and Rendall v Combined Insurance Company of America [2005] EWHC 678 (Comm) (‘Rendall’)). Statements of expectation or belief include estimates (Rendall).
If the Declaration is dishonest, either section 20 (4) or (5), or both, could apply. The question is whether section 20 (4) applies if the declaration is innocent or negligent.
In summary, the seminar covered the central issues of Declaration based BI policies, the possible inequities of under Declarations and the options available to Insurers to penalise those who under Declare and the basis in law upon which these remedies exist.
