Are you ready for trouble?

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It’s barely worth having insurance, you may think. You hear of so many horror stories of insurers who won’t pay up, why bother paying the costly premiums each year? They’ll only try to wriggle out of paying when or if the time comes.

Buncefield brought it home to many people. Many of the smaller businesses nestling beneath the giant petrol storage tanks in Hertfordshire found they were under-insured or un-insured when the place exploded.

Hertfordshire Chamber of Commerce says that several local occupiers found their insurance inadequate. Business continuity insurance of 12 months, for example, was too short in the case of Buncefield, where some businesses will take longer to go back into their premises.

You could tell Buncefield was going to be expensive by the number of professionals crawling like termites all over the site following the explosion in December last year. Loss adjusters were meeting gloomy quantity surveyors and chartered surveyors were lunching with strangely smug lawyers. The final cost of Buncefield cannot be known but most insurance underwriters expect it to be in the tens of millions. So they are doing their best to mitigate their loss.

Insurance companies are not hospital matrons who dry away your tears. They thrive on under-insurance. Although they don’t take your property in the way they do with more movable assets, they will act ruthlessly in their pursuit of invalidation on a big claim.

Part of the problem comes from property occupiers not making sure their insurance premiums keep pace with either inflation or with the new realities of their businesses. When you ask your plumber to repair a pipe and you hear your plumber make that sucking noise between the teeth, you know it’s going to be expensive.

What your cover says is precisely how and what you will be paid. All you can do is try to steer any claim away from your own insurers and towards someone else’s.

An FRI (“full repairing and insuring”) lease means little recourse for a tenant to a landlord. It is a lease where the costs of all repairs and insurance are borne by the tenant notwithstanding that the landlord will almost invariably take out the insurance itself and, in the case of a multi-let building, the landlord will carry out the repairs to the common parts. The landlord’s insurance costs are recovered by an insurance rent and the costs of repairs to common parts through a service charge.

Supposing your FRI-leased building is engulfed in a Buncefield-type explosion, your first port of call will be your insurer, who may still go to your landlord, because a landlord has a responsibility to a tenant who has suffered loss or damage to property. You go by the book: first writing to the insurer, the landlord and the managing agent, informing them of the damage. Take photographs and ask them to visit the site. Keep the paper trail alive. The landlord’s often legal obligation to maintain the structure means you may find that claims against landlords find their way into your service charge negotiations in months or even years to come.

Buncefield will only have a small effect on insurers’ profits but they have not been doing well out of commercial property in recent years, which may mean bad news for premiums across the range of insurance products they offer. According to insurer Norwich Union, the commercial property insurance markets gross written premiums declined in 2005, following a slowdown in premium growth rates in 2004. Growth rates have fallen dramatically in the last two years, from 24.3 per cent in 2003, to only 2.8 per cent in 2004. Most recently, in 2005, it is estimated that GWP declined by 7.4 percentage points.

Meanwhile, commercial property claims costs increased significantly in 2005, following a benign year in 2004. Overall, claims costs rose by 69.1 per cent in 2005, driven by a rise in all perils except theft. Claims costs resulting from fire and weather damage soared, and as a result, business interruption costs also increased.

Lawyers, however, do well out of disasters. Some 2,700 claims have been filed by residents, businesses and insurers over the Buncefield explosion. A group of 146 claimants is hoping to bring a class action against Hertfordshire Oil Storage. On 17 March, the High Court adjourned a hearing on whether to permit the class action until October 2006 at the earliest.

Certainly the horror stories put off all but the hardiest when it comes to the outer reaches of insurance policy small print. Defective title indemnity policies, for example, can be a lawyer’s gold field and a business’s minefield. These are meant to protect you from the unknown, such as restrictive covenants on your properties. Say you are a 3PL who picks up a contract to service a food manufacturer and there is a non-food covenant on your site, you should be covered by your DIP. But if it’s an old policy, your insurer will have a barrage of questions about the policy’s validity. What risks does it cover? Is the amount of cover too much or not enough? Is there a history of claims?

Happily, there are still two simple rules of insurance: what’s your business worth? Insure for that much. And: beware old policies. Get a new one.

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