Liability insurance is vastly different from any other type of insurance available in the commercial market. This is mainly due to the fact that it is much easier to quantify the value of an asset for short term insurance purposes, as opposed to estimating the cost and or damages of possible litigation against the business.
This is according to Simon Colman, Executive Head at SHA Specialist Underwriters, who encourages business owners and executives to engage extensively with their insurance brokers when it comes to reviewing liability insurance requirements.
“Many brokers have access to specialist underwriting teams who can share valuable insights on both the increase in claims frequency, and changes in litigation patterns across a broad spectrum of industries.”
When it comes to reviewing a liability insurance policy, there are important considerations that a business owner needs to consider together with their broker.
Below Colman explains what some of these considerations are:
1Has the business’ activities changed in the past 12 months?
Changes in a business’ activities can lead to greater exposures to litigation. For example, if a business that has been manufacturing toys decides to venture into the retail sector and open their own store to sell its own products, a whole new range of liability risks arise.
The underwriter will need to be made aware of the change in the trading model and the business will have to rethink and develop a new strategy around its risk management.
2Is the limit of indemnity on the current liability policy adequate?
Most liability policies have a cover limit that is inclusive of legal expenses. This means that a policy with a R1 million public liability limit has to cover both the legal defence costs and any damages which may be awarded by a Court.
If a matter is taken to court, legal fees can accumulate quite rapidly and can quickly exhaust the entire policy limit. That would leave nothing behind to pay the actual award if the company is found liable, leaving the business in a financial predicament.
3Does the business trade across the South African border?
Business owners must remember that conducting business outside the Republic of South Africa means contending with varying legal systems and they could face the possibility of paying local attorneys in a foreign, and sometimes stronger, currency.
A policy limit in ZAR terms can easily be depleted if the legal fees have to be paid in US dollars. It is also advisable that businesses ensure their insurance policy will respond to claims that are brought outside of South Africa. Many of the older policy forms contained territorial and jurisdictional restrictions.
4Does the business attract foreigners?
When looking at the hospitality industry for example, an injury sustained by a foreign national is likely to attract a much higher award by a court if the company is found liable when compared to an incident involving a local national.
In 2010 a Swiss tourist achieved a settlement of more than a half a billion rand from the Road Accident Fund (RAF). Due to the fact that foreigners generally earn substantially more than locals, the limits of an indemnity policy must be increased to take the foreign currency into consideration. One should also consider the litigious nature of tourists from certain territories.
5Are contractual relationships with service providers sound?
In some instances injuries and property damage are not necessarily caused by the insured business, but by its contractors or service providers. An example would be where a cleaning company is contracted by a property owner (the insured) to maintain and clean their shopping centre.
If a customer slips on a wet floor as a result of the negligence of the cleaning company’s employee, it stands to reason that the cleaning company should be liable for the accident.
If the contractual relationship between the cleaners and the property owner is not clear or the amount of cover taken out by the contractor is not adequate, the liability could shift back to the property owner. It is vital to check agreements with service providers on an annual basis to ensure that the right policies are in place.
“There may of course be other exposures that are particular to a business and this is why business owners and executives should review their liability policy at least once a year with an experienced broker. This will go a long way to ensuring the widest possible coverage, avoiding potentially devastating financial losses” concludes Colman.