6 - Insurance products: commercial insurances

Question 1

What are the main types of commercial property insurance?

Answer 1

• fire and special perils;
• all risks;
• theft;
• glass; and
• money.

Question 2

What are the 3 main parts of a standard commercial property fire insurance?

Answer 2

Fire
Lightning
Explosion (boilers and gas for domestic purposes only)

Question 3

What special perils can be included in a commercial fire and special perils policy?

Answer 3

1. Explosion from other sources
2. Aircraft (except sonic bangs)
3. Riot and civil commotion
4. Malicious damage/vandalism
5. Earthquake
6. Subterranean fire
7. Spontaneous fermentation or heating
8. Escape of water
9. Sprinkler leakage
10. Storm + flood
11. Impact
12. Subsidence, ground heave and landslip

Question 4

What are the standard exclusions under a commercial property fire and special perils policy?

Answer 4

1. War risks;
2. Radioactive contamination/explosive nuclear assemblies;
3. Terrorism (a buy-back will usually be available);
4. Northern Ireland excluded perils;
5. Pollution or contamination unless causing or caused by an insured peril;
6. Marine policies;
7. ‘More specifically insured’ property (e.g. covered by another policy);
8. Consequential loss (e.g. loss of business following a fire);
9. Sonic bangs; and
10. Cyber risks which exclude damage resulting from risks such as computer viruses, etc.

Question 5

Unfortunately, Dom’s Bakers are unable to operate their business for six months after a nearby river overflows its banks and floods their bakery.

They claim under their fire and special perils policy in respect of the loss of profits that results during the period of interruption.

What is the correct response to this claim?
A) It will be covered if the storm peril has been extended to include flood damage

B) It is not covered because the flood peril excludes damage caused by overflowing rivers

C) It is not covered because the claim is for consequential loss

Answer 5

C) It is not covered because the claim is for consequential loss

The claim is for consequential losses which are subject to a general policy exclusion.
This particular loss could, however, be covered under a separate business interruption insurance.

Question 6

Dom’s fire policy has been extended to include the full range of special perils. The bakery production line includes several large pressurised containers for boiling the synthetic cheese it uses.

If one of these were to explode, would any resulting damage be covered under Dom’s fire and special perils policy?

Answer 6

No
This risk is specifically excluded under the explosion peril in the fire and special perils policy.
The insured’s own steam and other pressure vessels would be subject to inspection requirements by statutory regulations and are insurable under an engineering policy.

Question 7

What is commercial property all risks insurance?

Answer 7

Covers accidental loss or destruction of or damage to the property insured providing the cause is not specifically excluded.

Question 8

What are the four groups of exclusions under a standard commercial property ‘all risks’ insurance? What are some examples of each?

Answer 8

1. Absolute: War, pollution, contamination, consequential loss
2. Gradually operating: corrosion, rust, wind, rain
3. Aspects of cover which can be written into the policy: glass, money, subsidence
4. Property or risks more appropriate to another class of business: motor vehicles

Question 9

How is theft defined in law and what statute does it come from? How does the definition differ for insurance purposes?

Answer 9

Theft Act 1968: Dishonestly appropriating property belonging to another with the purpose of permanently depriving the other of it

Insurance extends this to say it must include force or violence in breaking in or out.

Question 10

What are some common optional extensions to commercial property theft insurance?

Answer 10

• breakage of glass (if not insured elsewhere);
• replacement of locks, if keys are lost/misplaced;
• temporary removal – covers theft or damage while contents are temporarily away from the premises;
• index-linking (with premium adjustment at the end of the policy period); and
• extended or full theft, i.e. the requirement for ‘forcible and violent entry to or exit from the premises’ is removed.

Question 11

What are standard exclusions under a commercial property theft insurance?

Answer 11

collusion;
fire and explosion;
cash, bank notes, etc.; and
livestock.

Question 12

What does the term EML mean in respect of commercial property theft insurance? Why is it used?

Answer 12

Estimated maximum loss. The amount, often expressed as a %age of sum insured, that the insurer considers the maximum that could be lost in one foreseeable event. This is usually less than the total sum insured and is used to price the policy.

This is used because it is unlikely that everything would be stolen at the same time

Question 13

What is the purpose of commercial property glass insurance? Why might a commercial property want glass insurance even if they have a fire or theft policy in place?

Answer 13

To provide “all-risks” cover to glass breakages and usually the cost of boarding up the window until glass can be replaced.

Useful as even though glass would be covered under a fire/theft policy if one was in place there may be some exceptions that could cause glass breakage (eg accidental damage)

Question 14

What is commonly excluded from a commercial property glass insurance?

Answer 14

Scratching/chipping

Fire/lightning/explosion (because these are covered under a standard fire policy)

Question 15

What is a common extension to a commercial property glass insurance?

Answer 15

• damage to storefront contents because of broken glazing, and
• damage to washbasins and sanitary fittings in hairdressing salons.

Question 16

In a commercial property money insurance policy, what is meant by the “negotiability” of money? What are examples of non-negotiable and negotiable items?

Answer 16

How easy it is to convert into it’s cash value

Non-negotiable eg crossed checks/postal orders, premium bonds, credit sales vouchers

Negotiable eg cash, bank/currency notes, uncrossed checks or postal orders, postage stamps, gift tokens/vouchers

Question 17

On what sort of basis is commercial property money insurance usually offered?

Answer 17

All risks of damage or destruction of money, plus damage to safes or strong rooms

Question 18

For commercial property money insurance what sort of limits will apply to:
A) Non negotiable money?
B) Money stored in safes?
C) In the premises out of hours?
D) In the house of an employee/director
E) Under an escort warranty?

Answer 18

A) often £250,00 or £500,000
B) Usually between £1,000 - £10,000 (depends on the safe)
C) £250 usually
D) up to £250 usually
E) Usually between £1,000 - £10,000

Question 19

For commercial property money insurance what sort of limits will negotiable items have?

Answer 19

Modest limits depending on location or time. e.g.:

“In transit”
“In/out of safe”
“Out of business hours”
“In house of director/employee”
“Any other money” - this is the limit of the money on premises during working hours and in transit

Question 20

What does the term escort warranty mean when talking about commercial property money insurance?

Answer 20

When the amount of money in transit is over a certain amount the insurer may require it to be accompanied by a certain number of people

eg less than £1000 only one person is needed
£1,000 - £10,000 two people
£10,000+ three people

Question 21

What common extensions are usually available for a commercial property money insurance policy?

Answer 21

Personal accident
Assault
Credit card theft

Question 22

What are the usual standard exclusions to a commercial property money insurance policy?

Answer 22

Error/omissions in accounting
Dishonesty of employees not discovered within 7 days
Damage outside the UK
Theft due to a key left on the premises out of hours

Question 23

What sort of losses does pecuniary insurance relate to?

Answer 23

Losses involving direct financial loss. Pecuniary insurance indemnity will always involve the payment of money (i.e. it is something that cannot be repaired/replaced)

Question 24

What are the two main types of pecuniary insurance?

Answer 24

Business interruption
Legal expenses

Question 25

What is covered by business interruption insurance?

Answer 25

Material loss of earnings or additional expenses incurred as a result of a material loss covered under property insurance.

Question 26

Why would a business want business interruption insurance?

Answer 26

• earnings may reduce, or cease;
• some overheads will still need to be paid; and
• some costs may temporarily increase.

Question 27

When talking about business interruption insurance, what is the indemnity period?

Answer 27

The maximum indemnity period is chosen by the insured and could be 12 or even 36 months.

Question 28

What is the sum insured for business interruption policies based on?

Answer 28

Gross profit over the indemnity period

Gross profit = (Turnover + closing stock) - (Uninsured working expenses + closing stock)

Question 29

For business interruption policies what are uninsured working expenses?

Answer 29

Costs which vary in direct proportion to the turnover, eg raw materials, utility costs, carriage and packaging.

Question 30

What does the term “increased costs of working” mean in relation to business interruption policies?

Answer 30

Costs incurred so that the business can go on operating in order to reduce the loss of gross profit. The cost must be economic (less than the loss of profit they prevent).

Question 31

In business interruption policies what is the material damage proviso?

Answer 31

A policy condition requiring a property policy to be in force for an incident before the business interruption policy will operate. This is why the policies are normally linked and businesses will take out a combined PD/BI policy covering both physical damage and business interruption.

Question 32

Why do insurers normally include a material damage proviso in a business interruption policy?

Answer 32

If there is an insurance policy covering the damage to the property then it will likely be repaired quicker than if there was no policy in place, which limits the period of business interruption.

Question 33

What are some common extensions to a business interruption policy?

Answer 33

Specified suppliers (failure to deliver goods)
Unspecified suppliers (as above but to a pre-set limit)
Specified customers (unable to purchase goods)
Goods in transit
Prevention of access
Disease/murder/suicide
Failure of public utilities
Contract site where the insured is working

Question 34

What is provided by legal expenses insurance?

Answer 34

Covers a company’s costs from the need to take action in court or to defend themselves against action brought against them.

Also covers the cost of their time spent in court

Question 35

What does a standard legal expenses policy cover?

Answer 35

Employment disputes (unfair dismissal)
Property disputes
Motor cover (uninsured loss recovery)
Copyright/trademark/patent disputes
Tax proceedings
Criminal defence (usually health and safety related, things such as fines are not covered as this would be against public policy)

Question 36

What are the main types of liability insurance?

Answer 36

Employer’s liability
Public liability
Product liability
Pollution liability
Professional indemnity
Medical malpractice
Directors’ and officers’ insurance (D&O)
Errors and omissions insurance (E&O)

Question 37

In general, what is the purpose of liability insurances?

Answer 37

To cover costs or expenses arising out of negligence/lack of care in our duty to act in a reasonable way towards others and to not injure them or damage their property.

Question 38

How can negligence be defined?

Answer 38

Doing something which a reasonable or prudent person would not do, or omitting to do something which a reasonable or prudent person would do.

Question 39

What is the minimum limit of indemnity for employers liability as set out by the Employers’ Liability (Compulsory Insurance) Act 1998? What limits does the market usually offer?

Answer 39

The minimum limit of indemnity is £5 million, including costs

In practice the market standard is £10 million, with sublimits of £5 million for terrorism and workers temporarily working abroad.

Question 40

What is cover provided for in an employers’ liability insurance policy?

Answer 40

The insured’s (employer’s) legal liability only for bodily injury or disease sustained during the course of employment as a result of the employer’s negligence.

Pure accidents which do not result from the employer’s negligence are not covered.

Question 41

What is the measure of indemnity for employers’ liability insurance?

Answer 41

The claimant’s (employee’s) costs and expenses as well as any damages awarded by the court.

Question 42

In an employers’ liability policy how is “during the course of employment” usually defined?

Answer 42

Usually the moment the employee arrives at work (“passes through the boundary gates”). Can also apply when the employee is not at the usual premises if they are engaged in work elsewhere.

Question 43

What are some common extensions to an employers’ liability policy?

Answer 43

Defence costs and expenses of the insured

Adding additional insured (eg directors or partners)

Compensation for attending court

Unsatisfied court judgements by a third party for an employee if in connection to a work activity.

Question 44

In employers’ liability insurance the business activities of the insured may be defined in the policy, or exclusions may be made for certain types of machinery. What happens in the event of a claim outside of these activities or for something excluded?

Answer 44

As it is a compulsory insurance the insurer cannot refuse to deal with the claim but instead has a right of recovery against their insured (the employer).

Question 45

What is covered under commercial public liability insurance?

Answer 45

All liability that is not excluded to a third party for damages + costs in respect of bodily injury, disease, illness, or death, and for any loss of or damage to property. Consequential loss is included

There must be legal liability/negligence on behalf of the insured.

Question 46

Other than the standard common market exclusions, what else is commonly excluded in a commercial public liability policy?

Answer 46

Contractual liability (for it to be covered the insured must be legally liable)

Deliberate acts (the insured must be negligent)

Costs of rectifying defective work

Losses which would be more suitable to cover under a different type of insurance (eg first party property, employee injury, products, professional negligence, motor, boilers etc.)

Question 47

What is covered under standard product liability insurance?

Answer 47

Legal liability for third party bodily injury or property damage from goods or products manufactured, constructed, altered, repaired, serviced, sold, supplied, treated, or distributed by the insured.

Question 48

How is product liability insurance usually purchased?

Answer 48

Usually packaged with public liability in a combined PPL policy.

Question 49

What are the common exclusions in a standard product liability policy?

Answer 49

Deliberate losses
Contractual liability
Damage to the products
Faults with the products

The last two are because the policy is not concerned with the insured’s products - only the insured’s liability arising from them.

Question 50

What is usually covered under a standard pollution liability insurance policy?

Answer 50

Indemnity to the insured in relation to a sudden, identifiable, unintended and unexpected event. It must take place at a specific moment in time and place in it’s entirety during any one period of insurance.

Question 51

A covered event under a standard pollution liability insurance policy occurs. The pollution effects several parties. How many claims are made?

Answer 51

One - all pollution arising out of an insured event is treated as one claim

Question 52

What is covered in a professional indemnity insurance policy?

Answer 52

A professional’s liability for injury, property damage, or financial loss sustained by a client as a result of a failure in their professional duty or negligent acts, errors or omissions in their duty.

Question 53

On what basis of cover are professional indemnity policies usually issued?

Answer 53

Claims made rather than losses occurring. This means the claim attaches itself to the year the claim was made rather than when the loss occurred. For example if the advice was given in 2019 but the third party made a claim in 2020 about it, the claim would fall under the 2020 policy period, not under the 2019 period as it would under an occurrence policy.

Effectively this mean new claims would always be reported to the current insurer.

Question 54

Why do professional indemnity insurances contain a retroactive date?

Answer 54

A retroactive date is normally applied from the first date the insured has held uninterrupted insurance and is used by the insurer to exclude claims relating to work/advice before the insured had coverage in place.

Note that it does not have to have been with the same insurer as you should not be penalised for changing insurer - just that uninterrupted coverage has been in place.

Question 55

What cover is provided by Directors’ and Officers’ insurance?

Answer 55

Indemnifies directors in respect of their personal liability for financial loss suffered by third parties.

Also indemnifies the company in circumstances where they can indemnify the D&O’s, eg repayment of legal costs.

Question 56

What is Errors and Omissions insurance?

Answer 56

A type of professional indemnity insurance specifically protecting against claims of inadequate work or negligent actions in their duty.

Question 57

Who in insurance is required to hold errors and omissions insurance?

Answer 57

Insurance intermediaries (eg brokers)

Question 58

Why might a claim be made against a insurance intermediary’s E&O insurance?

Answer 58

The policy does not do what the client expected or what the broker said it would do.

Question 59

What does medical malpractice insurance cover?

Answer 59

Protection against damages and legal costs for claims of bodily/personal injury or damage against people in the medical profession. Patients may claim the insured did not take reasonable care, or they did not recover as quickly or as well as expected

Question 60

How does the ABI define cyber insurance?

Answer 60

Insurance covering losses relating to damage to, or loss of information from IT systems and networks.

Question 61

What is commonly covered by cyber insurance?

Answer 61

Loss of data/software
Damages to third parties following loss of data or breach of privacy
Reputational risk for losing customer data
Loss of business from interruption to systems
Theft of money through electronic means
Extortion by threatening to release data
Defence costs from legal action as a result of loss of data

Question 62

Does cyber insurance cover first or third party? What is the difference?

Answer 62

Both under different circumstances

First party relates to the insured
Third party relates to anyone else other than the insured and the insurer.

Question 63

The Public Order Act 1986 defines how many people must be gathered for something to constitute as a riot. How many people does it say?

Answer 63

12

Question 64

Under the Riot Compensation Act 2016 what is the limit to the amount that can be claimed from the police?

Answer 64

£1 million
Does not apply to consequential loss

Question 65

Under the Riot Compensation Act 2016 how long is given to claim compensation from the police?

Answer 65

42 days with a further 90 to submit full details.

Question 66

How long must employers keep their employers’ liability certificate of insurance?

Answer 66

40 years

Question 67

What did the Riot Compensation Act 2016 exclude cover for?

Answer 67

Consequential losses

Question 68

How is the policy limit applied in a pollution liability policy?

Answer 68

In the aggregate during any one period of insurance.

Question 69

How long does an insured normally have to notify their insurer of damage arising from riot or civil commotion? Why is this limited?

Answer 69

7 days

This is because the insurer can only subrogate from the police if they submit the claim to them within 42 days so the insurer needs to be promptly notified of the claim.

Question 70

The damaged (in the factory) car is only insured for third party risks and the employer receives a claim direct from the owner for the cost of repairs and the cost of hiring a temporary replacement car while the damaged car is being repaired.

Which, if any, of these claims are likely to be dealt with under the employer’s PL policy?

A) None
B) The damage claim only
C) The claim for the cost of the hire car only
D) The damage claim and the claim for the cost of the hire car

Answer 70

D) The damage claim and the claim for the cost of the hire car

The PL policy indemnifies the insured against their liability for both injury and property damage and also for the consequential losses, such as the cost of the temporary hire car.

Question 71

Doolittle Electricals sell some faulty goods to a customer in 2020. In 2021, the faulty goods cause injury to the customer and damage to his property. In 2022, the customer submits an injury claim.

Doolittle Electricals changes their product liability insurer between 2020 and 2021 and again between 2021 and 2022. Which insurer(s) would you expect to deal with the claim?

A) The 2020 insurer
B) The 2021 insurer
C) The 2022 insurer
D) All three insurers will share the claim equally

Answer 71

B) The 2021 insurer

Products liability policies are issued on an occurrence basis, whereby the insurer who is on risk when the loss or damage occurs deals with any claim, irrespective of when the goods or services were sold or supplied or when the claim is received.

Question 72

Under a business interruption policy, uninsured working expenses would include:

A) wages
B) carriage and packaging
C) advertising
D) rent

Answer 72

B) carriage and packaging

Question 73

Under UK legislation, a company director’s liability is:

A) limited to £100,000
B) limited to £1,000,000
C) unlimited
D) limited to £10,000

Answer 73

C) unlimited