18 Jul

Insurance – protection or unnecessary expense?

The following article was written by Dr Julian Morris, Operating Partner, Plexus in Travel Law Today, 5th Edition which can be read here.

One might suggest that in this modern world, we cannot function without insurance. That is certainly true in those areas where insurance is required by law, e.g. car insurance. There are many other types of insurance that are completely optional like home contents, travel and health and life insurances. If one decides not to purchase insurance, making that decision could have risky consequences with serious financial implications. Equally, purchasing and then not following one’s obligations could have the same unwelcome result.

As many as two in five people (38%) – 9.9 million Brits – who travelled abroad in the past 12 months holidayed without the right travel insurance, took part in activities which may not have been covered, or didn’t have any insurance at all, according to new research from ABTA.

However, what of the tour operators, travel agents, hotels and excursion providers? Do they need insurance? And, once obtained, “can I just forget about it?” Alternatively, perhaps the better question is “what do I have to do with the insurance?”

A policy’s conditions regulate the manner in which the policy operates. Despite the potential for being jaw-droppingly boring, the difference between being covered and not (having paid the premium), might be whether you have a viable business or not, and solely because you failed to understand the significance of a condition.

There are several types of condition that give an underwriter, their solicitors or insurers the opportunity to limit any payments made under the policy. In essence, a condition must be complied with by one party or another to the contract.

The effect of any breach, on your part as the purchaser of the insurance, depends on whether the condition is a:

  • Condition Precedent: things to be done before the insurance contract is concluded
  • Condition Subsequent: things to be done during the life of the policy
  • Condition Precedent as to liability: things to be done before the insurers are liable to pay out any sums under the policy
  • Condition Precedent to the bringing of any claim: things to be done after the insurer agrees to cover being in place.

As a rule, the insurer must prove or establish the breach of a condition and, by way of example:

  • The Condition Precedent as to liability – requires a proper notification of the claim to the insurer
  • The Condition Precedent to the bringing of a claim – may require you for example, as the insured, to provide all assistance to insurers pursuing subrogated rights against suppliers.

From the insured policyholder’s perspective, it could be argued that it is in your best interests to keep the number of condition precedents to a minimum but where they are present; you should identify and understand the potential consequences of any breach. As explained above, notification of a claim is a precedent to liability i.e. a policyholder has to meet the condition for the insurance to kick in otherwise underwriters/insurers may decline the cover.

Deciding whether an incident or event should or should not be notified, and perhaps even more fundamentally, making sure it reaches the right person internally are central issues. It is imperative within any travel company that someone (or in larger companies, a team) co-ordinates the insurance notification process; staff must know who that person or team are and how to contact them and forward details to them. In essence, so that the correct person is made aware of an incident or event, see Kidsons vs Lloyds Underwriters.

It is then up to that person or team to decide whether the incident or event is likely or may give rise to a claim. Once an insured is aware of a claim, the clock starts ticking for notification purposes. Failure by the insured to notify the insurer that may have two consequential results: firstly, that the claim is rejected and secondly, that any future policy may be void for non-disclosure of material facts i.e. the occurrence of the claim.

So, what is the timing of the notification? This depends on what the policy says:

  • ‘Immediately’? – two days has been deemed sufficient (Lee on Realty v Kwok Lai Cheong (1985)), 17 days too long (Brook v Trafalgar Insurance Co Ltd (1946))
  • ‘As soon as possible’? – three months is too long (.HLB Kidsons)
  • ‘Within a specified number of days’? – time periods are usually strictly enforced (Adamson & Sons v Liverpool and London Globe (1953))

From the insurer’s perspective, if they consider there is a potential breach of the notification provision, they should not waive their rights but will reserve them; otherwise, they would not be able to rely on the policy point: the condition precedent as to liability.

That period of reservation will allow insurers a reasonable time to understand the claim and reach a decision. In Cosmos Villa Holidays PLC vs Trustees of Syndicate 1243 (2008) the reasonable period allowed was two months.

If the reserved rights are enforced, or indeed the claim is rejected as being out of time (e.g. notification is over a policy’s strict 30-day period for notification), the resultant defence of the claim and associated costs together with any resulting press coverage will fall to you, as the insured, to pay. Those costs come out of your bottom line and, of course, are in addition to the costs of putting the original insurance in place.

So, upon reflection, whilst taking out insurance is an expense and requires an internal understanding and organisation of processes so that you can respond properly to any potential claim, a proper understanding and implementation of the policy requirements will provide protection for what might otherwise be an expensive trip into self-insurance.