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Learning the risk of liability


From checking whether an L-plater is covered to measuring the value of business cover against cyber attack, reading the fine print is essential to not be caught short on insurance, writes Morry Bailes.

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When mitigating risk, we are always reminded of how critical it is to be adequately insured.

Insurance, like all industries, is cyclical, thus premiums can rise and fall. However, it is an important ingredient to include in an overall strategy to address risk. There is a bad habit though, that once you’re insured you ignore two factors. First, a changing external risk environment, and second a change in your own personal circumstances.

While you may be insured it remains vital to continuously question your scope of cover and potential exclusions, and act on any changes that happen in your own life or that of your business.

Here are a few examples of what can go wrong if you don’t. Let’s start with the very common situation of a teenager learning to drive. Not only is there a regulatory question of what car they may be permitted to drive, there is also a risk that depending on that choice, they may end being uninsured altogether.

It all turns on the provisions of the contract of insurance. Many cars that are above a certain value, or which are powerful, will not be included in the scope of cover if the driver of the vehicle is below a certain age or lacks experience, such as a learner driver or a P-plater. As one observes some cars that L-platers and P-platers drive, a question arises as to whether the driver or the supervisor or owner have even considered the issue. Put simply, an L-plater or P-plater cannot drive any car they wish, nor can it be assumed that the insurance you have to cover you as a driver will necessarily cover your children.

There is a universal rule with insurance. Insurance agreements are contracts, all of which are different. It is critical to have read and to understand the contract of insurance in order to have appreciation for what is insured and what is not insured. To start with then, if your L-driver and P-plater uses your car, make sure your policy actually extends to cover them. Any shadow of doubt and you should either be pulling out your policy for a careful read or ringing your insurance broker to raise the question. Sometimes it may be a matter of negotiation with an underwriter to reach an agreed position, but it is critical to conduct those discussions before a loss is incurred. Afterwards and it’s too late.

The next example is one often misunderstood. A broker has recently encouraged me to write about it. In an age where housing extension and renovation is the new normal, having adequate insurance is often overlooked. Building a house from scratch is much more straightforward. The builder has insurance and until practical completion and handover will insure the dwelling lock, stock and barrel. What happens however with work being performed on an existing home?

Let’s assume that the home owner and renovator has their own house and contents insurance. First there must be a proper understanding of the scope of that cover and importantly, what exclusions to the usual cover it may contain. It is quite typical to see an exclusion that will relate to leaving a premise unoccupied for over a certain period of time; 60 days is quite standard in some policies. In other words, if you are not occupying your home for 60 days or more, you may be uninsured in the case of loss. That means a refusal of liability and the entirety of any loss is yours. If as a result of your renovation you need to move out for a period of time, it is vital that you examine your contract of insurance to find out if there is any prospect your insurer may regard your property as unoccupied.

Second is gaining an understanding of the extent of your builder’s insurance. Building insurance is not house and contents insurance and it has its limitations. It will likely cover loss or damage caused by building. It will likely not cover contents that may be stolen, or damage due to natural events such as a storm. It is a classic situation of creating an unintended ‘gap’ in the continuity of cover, by commencing the build. Be aware of that gap and address it, don’t ignore it.

Third and tied into this is the fact that, by renovating, you have changed your own personal circumstances and the state of the house. If there are walls, roofs and roofing, windows, doors and so on that are removed or missing, it is unlikely that an underwriter, uninformed of these material changes, will cover losses that may be related to them. An insured person is under what is described as a continuous duty of disclosure. Any material change in circumstances is something that must be advised to the insurer, or there is a very real risk that liability will be refused.

Moreover, many insurance policies contemplate a reduction in the scope of cover in the event of renovation, according to the broker. So even if cover exists, the excess – or what is called in insurance language the ‘deductible’ – may increase substantially. An excess is in essence your contribution to the claim. It is your self-insured layer. If the excess goes up to $10,000, $15,000 or $20,000, you may in many instances be, in reality, uninsured. That is because most individual household items are worth less than the excess. Either you need your builder to bolster its existing building cover, even if you as the customer have to pay for it, or you need to arrange ‘gap’ cover, by paying a higher premium or contracting with a third insurer, which is not easy.

The broker who has underscored these issues believes that the building industry has something of a ‘head in sand’ attitude in this state and is not informing customers of the problem. Whether that is a fair assessment I don’t know. But he does point to a distinction in the Western Australian approach, where in a recent building contract the builder assumed the entire responsibility for a building site including the existing house and its contents. Whilst not a fan of over regulation, it may be necessary for building contracts in this state to at least contain a requirement to inform the customer of the risk of under insurance or loss of insurance cover by virtue of the build. Living in blissful ignorance may result in dire outcomes.

An addendum to this issue is where you park and garage your car. If that changes owing to building works, that may result in your car being uninsured. Many policies require a vehicle to be garaged or under cover overnight. You may be uninsured if by reason of your build you’ve parked on the street overnight. Once again, check the fine print.

A related circumstance, and another instance of what is becoming more and more commonplace, is when people start using their home premises as an office or running a business from home. That is another material change that must be reported to an underwriter, or once again losses arising from the home office or home business could be uninsured. Home and contents is intended to insure just that; the home and its defined contents. It is not business insurance, and it is not insurance that covers a building site.

A last example relates principally to commerce and it is one I have alluded to before. It is highly relevant at present, and relates to the ever changing and ever challenging area of insurance to protect against risk of cyber hack. Without repeating in detail all of the elements of a competent risk strategy  addressing cyber threat, what must be included is decent education of staff, IT compliance, and insurance.

When it comes to the insurance aspects, it is extremely important to be reminded that cyber insurance can mean all manner of things, and as with any policy of insurance, must be fully read and understood. If I could have a dollar or for every time I have heard a person say ‘I have insurance against cyber-hacking’, only to discover the insurance is wanting, I’d be better off than I am now.

So what exactly is the problem? There is more than one reason this area is difficult. First, many customers buy cyber cover rolled in with more general liability policies, that contain broader business or partnership insurance. It is only when the hack is revealed, and resulting loss understood, that the inadequate nature of the cover becomes apparent. They have bought cyber cover on the cheap, and predictably it is full of holes.

Second, there are two types of loss that can be insured against, and those losses are often covered under separate polices. There is crime cover. Put simply crime means cover for stolen money. Then there is Cyber cover, which means cover for loss of data. Cyber hacks can have a crossover effect, resulting in an impact on, or theft of data, but also may result in theft of money, or, if you’re unlucky, both. Policies deal with these two elements of loss in different ways, so it is important to be aware of the differences and not insure against one risk and not the other or vice versa.

The third problem are exclusions to your cover, that often result in a total denial of liability if the hack occurred through, for instance, the use of unencrypted email. Exclusions may indeed include others of the list of Essential 8 promulgated by the Commonwealth Government. The Essential 8 are those eight principles recommended by the Commonwealth Government as the gold standards for business to adhere to, to reduce or avoid cyber attacks. Multi-factor authentication is amongst them. Not meeting those standards may very well mean there is no insurance cover, and a denial of liability by the insurer.

What are the lessons from each and every one of these examples? They are threefold. Each example underlines the integral need to have read and fully understood your policy of insurance, given each one is different. Even though insurance policies may bear resemblance to one another, there is no such thing as a boilerplate policy. Each turns on its own unique language, extent of cover and its particular exclusions. The next lesson is to fully comprehend your duty of full and continuous disclosure to an insurer or risk the consequences, which may be a denial of liability.

Finally, find a good insurance broker. Brokers will tailor policies around your needs, and tell you where there may be problems with the extent of cover. They will tell you when you’re not insured, or at risk of an adverse decision by an underwriter. Whatever may be paid to a good broker is some of the best money you’ll part with, particularly in circumstances of loss. I use two broking firms and wouldn’t be without either. Even if you never call on a policy of insurance, sometimes the peace of mind of knowing you’ve covered off a potential liability and addressed a potential risk, is reason alone to have it.

With insurance the golden rule is don’t ever assume anything, always ask. It should also never be a set and forget proposition.

Morry Bailes is Senior Lawyer and Business Advisor to Tindall Gask Bentley Lawyers, past president of the Law Council of Australia and a past president of the Law Society of South Australia.

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