Understanding Why Your Business Insurance May be Hard to Place

If your business is unusual in some respect or involves hazardous activities or materials, or if you have a claims history you may find that insurance cover is 'hard to place'. Hard to place risks are a challenge for both business owners and insurance brokers but they can be addressed in order to improve your prospects of obtaining protection.

While the nature of hard to place risks can vary enormously — from working at heights to working with chemicals — the issues for insurers can be anticipated.

Previous claims play a large role in why insurance providers might refuse to renew coverage. This is usually dependent on:

• frequency: whether the business has made a number of claims over a period of time
• severity: if previous claims have involved large sums paid out.

In these cases the insurer will be concerned about the way the business operates in terms of:

• adequate and observed safety procedures
• failure to upgrade safety after a claim
• staff education and training
• poor employment practices.

Demonstrating mitigations for known risks

Insurance companies are reliant on evidence of proactive risk management by the business concerned to evaluate a business's inherent exposures and likelihood of generating claims.

Ensuring your business insurance submission addresses potential exposures helps counteract hard to place status in the view of prospective insurers. Failure to do this could be construed as material misrepresentation, which can be seen as intent to defraud the insurer. Legally you have a duty to disclose relevant information about your business operations that may affect your eligibility for cover.

If you are renewing an existing policy, it's also essential to inform your insurer of any significant changes to operations, such as expansion, provision of new services or increased staff numbers and activities.

Information insurers seek before covering business risks

Some industries require specific types of insurance only provided by specialised insurers, so it's important that information about new activities is provided up front, so that all your material business risks are understood, along with the basis of the risks (such as handling hazardous materials).

While some known risk factors can be quantified via data analysis, enabling insurers to model accurate risk identification and pricing — a large majority of incidents that result in insurance claims arise due to human error — the causes and prediction of which is difficult to assess.

Factors considered by business insurance underwriters

Insurance company underwriters typically scrutinise a number of factors to determine how much capacity of cover they are prepared to provide and what premium to set.

Chief among these are your business's risk management protocols, which should be formalised in a written document covering both prevention and response to accidents, external events such as fire or flooding, and any inherent risks such as the use of hazardous or potentially polluting substances or materials like expanded polystyrene (EPS).

Risk mitigation example: food production business

For example a food production business using EPS insulation for temperature control would be expected to be able to show fire prevention, mitigation and containment measures. These might include, for example, an assessment of how EPS is used in the premises and the potential fire exposure it represents, along with measures such as retardants, fire-proof barriers, suppression systems and FM approved sprinkler systems.

In evaluating your business and premium costs, the potential insurer also looks closely at your business's financial position in terms of contracts or orders and the timelines involved.

If you're an unusual or specialised businesses seeking professional indemnity (PI) cover to protect you in case of client misunderstanding or dissatisfaction with the services provided, insurers are particularly interested in your fee income, or charges to customers. They usually rely on the previous year's revenue, or projected revenue for new ventures, to assign a dollar value to your PI business risk. They may also use your business's average fee income over several years to avoid distortion through spikes in payments for large contracts.

Reasons for business insurance cover being declined may be outside your control

A factor in being declined for some insurance that business owners may be unaware of is that the value of some insurance covers may exceed the underwriting authority for a particular insurer.

The insurer's prior experience with your type of business and related claims may also influence whether they are prepared to take on your business risks. If they have paid a spate of claims for your industry sector they may be applying a high loss ratio to their calculations.

How Gallagher can help

In addition to accessing a broad range of insurers locally and in overseas markets, at Gallagher we have industry specialists in traditionally hard to place sectors such as fuel distribution, trucking, jewellery and tattoo studios, to name a few.

We can also provide expert guidance in proactive risk management and helping you to prepare your insurance submission to improve your chances of obtaining the cover that your need for your operations.

Disclaimer

Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.

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