Demystifying Insurance Terms

When it comes to complicated phrases and unfathomable jargon, it’s fair to say that the world of finance and insurance can be on par with medical terminology.
We have demystified some of the more complex or mis-understood insurance terms in their guide below.

1. Claims made v claims occurring

Typically liability and indemnity insurance is underwritten using two basis of cover, claims-made and claims occurring.

A ‘claims made’ basis covers claims that are made and reported during the active policy period only (typically a 12 month policy period) or may include retroactive cover and/or an extended reporting period, and it will not pay out on any claims made once the policy period is over.

A ‘claims occurring’ or sometimes also called ‘occurrence made’ is a policy type that covers claims that occur during the policy period irrespective of when the claim is made, as long as the policy was in force at the time of the incident.

So, for example in the case of Medical Malpractice claims or Employers’ Liability insurance, the alleged incident or injury may only come to light years after the original treatment.
With a ‘claims occurring’ policy, valid claims made after the policy term time would still be paid out regardless of when the incident or alleged breach of duty actually occurred.
A policy underwritten on a claims occurring basis is usually more expensive since there is no limit on the time scale for making a claim.

2. Extended Reporting Period

On a claims made basis, policies may include or offer an extended reporting period which is a provision on it that extends the amount of time for reporting a claim after a policy’s cancellation. Otherwise, on lapsing or cancelling a ‘claims made’ policy, the historic cover paid for will expire with immediate effect.

3. Retroactive cover (retroactive date)

If you want to ’back-date’ cover undertaken in the past, then you can add a ‘Retroactive’ date to your policy. Unlike most insurance policies that cover you for claims that happen from the start date given onwards, professional Indemnity Insurance is different.

The majority of Professional Indemnity policies are written on a ‘Claims Made’ basis– they cover you for claims that are made against the business (practice) whilst your policy is in force. If the claim relates to work done before the policy start date, it CAN be covered if you have a Retroactive Date specified on your policy. For claims to be made against you, and to be covered correctly, you must be insured at two points, when you did the work, and when the claim is made.

So, a retroactive date is the specific date a policy’s coverage begins. This can be a past date agreed on by the insured. It is the date from which continuous and uninterrupted professional indemnity insurance cover has been held, (even if insurers have been changed during this time) or a date in the past from which an insurer has agreed to cover you. Therefore, you have protection on a professional indemnity policy to pick up claims from work undertaken before the policy started. It extends cover backwards to a specified date (the ‘retroactive date’), which is noted on your schedule and stays the same. You should advise any new insurers of this date. Any claims that arise from events prior to this date are not covered by your insurance.

It is worth noting that if you have retired and are no longer practicing, a “run-off” professional indemnity policy, if taken out, will protect you from claims made that arise after you stop practicing. Liability can even continue after death, so as health professionals make sure that your executors are aware of the risk and continue cover for at least six years after the date that your last professional work was undertaken.

4. Condition of average

Insurers take precautions to deter those who deliberately underinsure their business. In some instances, the insurer is within their rights to reduce the amount they will pay for a claim proportionate to the amount you’re underinsured by. This is a rule called the “average clause” which states that if something is insured for only a proportion of its value, for example half of its rebuild value, the insurer is only liable for the same proportion of the loss, i.e. half, when a claim is made. So, if the insurance value of a property at the time of loss or damage is less than its real value, payment by the insurance company may be reduced according to the difference. This effectively reduces the payment made by the percentage of under-insurance.

The principle of the average clause is only applied in the event of a partial loss, due to the fact that in the event of a total loss the insured would only be able to claim up to the amount insured.
Don’t assume that because the partial claim is less than the total sum insured, you would get the full repair costs paid out. The harsh fact is that if you are deemed to be under insured for the total rebuild value, it will impact on what you can claim for a partial claim as well.

For example, if a property is insured for only 50% of its correct re-build value, say £100,000 insurance cover on a more realistic £200,000 rebuild value and fire damages that property causing repairs costing £20,000, the insurance would only pay out 50% of the partial claim. So, just as with a total re-build claim, the partial claim would be reduced by the same proportion as the amount of ‘under’ insurance. In this example, you’d have to pay for the balance of £10,000 yourself.

It’s not to try and catch you out. The Average Clause is there to encourage insurance customers to declare honest values or accurately work out their sums insured, when insuring their properties. Condition of Average is there to protect not only your own assets, but the insurance company and their other customers too. It is also there to ensure a fair premium is always contributed into the pool of premiums from which everyone’s claims are paid.

5. Re-instatement value vs Market Value – the key differences

The market value of your property is the realistic amount you would sell it for on the market at the time a valuation is made.
The rebuild value (or reinstatement cost) is the cost of rebuilding your property if it was completely destroyed from the ground up. This figure is usually lower than its market value because it only allows for the cost of the building materials and labour and not the value of the land that it is on.

6. Material fact.

No, we’re not talking about velvet or linen here! A material fact is a fact that a reasonable person would recognise as being relevant or even essential for a particular decision being made, as opposed to an insignificant, trivial, or unimportant detail. In other words, it has a logical connection to the decision process and if concealed, would result in a different decision.

7. Deferred period

This applies to locum cover and is also known as the ‘excess period’. It is the fixed amount of time that you need to be out of work before any locum cover will start to pay out a benefit claimed. It starts from the first day off work and we offer a range of options on length depending on an individual clients’ need.

Locum insurance, like all protection plans, needs to be monitored regularly to ensure that it keeps pace and the deferred period applied is a vital consideration within this.

8. Insurable interest

Insurable interest is the basis of all insurance policies and is designed to protect anything subject to a financial loss. This could be an item, a building, or an event where the damage or loss of the object would cause a financial hardship or other hardship.

Insurance policies are designed to compensate a policyholder for a covered loss, but losses should not reward or penalise holders. It is important that the value of the at-risk asset is measured appropriately to ensure adequate cover.

A tenant would have an insurable interest if they took out a full repairing and insuring (FRI) lease on a property. Such a lease puts the tenant in charge of paying for all repairs and they are responsible for insuring the property. This type of lease puts certain obligations in the tenant’s court such as the maintenance and repair of the structure of the building as well as its interior and sometimes its exterior.
In terms of their insurance obligations an FRI lease requires the tenant to have comprehensive buildings and contents insurance – a detailed policy, arranged by a specialist broker, which covers such things like dilapidations and any reinstatement costs.

9. Loss adjuster or Loss assessor

A loss adjuster works on behalf of the insurance company. The loss adjuster will assess the damage as well as asking you pertinent and searching questions about the cause of the damage, your claim history, policy conditions and disclosures.
In contrast, a loss assessor acts on behalf of you, the client, to help you through the whole claims process, with practical help and solutions to get you back up and running in the event of a claim.

The cover we can arrange, provided through Lorega, in the UK includes; –

• Expert loss adjuster to help prepare, negotiate and settle insurance claims in excess of £5,000
• Personal attendance of expert loss adjuster
• Preparation of an itemised claims schedule for submission to the insurers
• Appointment of surveyors, engineers, builders, contractors and tradesmen
• Preparation of schedules of the increased loss incurred by you and any other business interruption loss
• Negotiate interim payments where necessary
• Negotiate where possible with the insurers and their appointed loss adjusters, settlement on your behalf

10. Indemnified vs Benefit Driven

Indemnity is a comprehensive form of insurance that provides financial compensation to a party for the occurrence of a loss which is covered by the payment of premiums. The amount that can be claimed has a ceiling, as set by the premiums paid when the policy was taken out.

Whereas benefit driven cover provides a fixed pre-agreed benefit, often for things like accident and sickness. If a claim was to occur a defined amount or benefit would be paid out.

The main difference between the two types of cover is the evidence needed to claim.

The best example of this is a locum policy where indemnified cover would require a practice to provide proof of expenditure in receipts and invoices when making a claim and then only the amount that could be proven to have been spent would be paid out.

With a benefit driven policy the insurer will pay out the pre-agreed amount against a successful claim without the practice needing to provide any proof of expenditure in receipts and invoices.