Insurance premiums for manufacturing and engineering companies could soar by as much as 50% as a result of reforms of out-of-date corporate insurance law.
Businesses will also have to meet new obligations when taking out insurance, according to Mactavish, an expert on insurance governance.
The threat of higher premiums comes as the Law Commission publishes its final consultation paper on what is being described as the first big shake-up of corporate insurance law in a century. The new rules are being devised to make policies more reliable.
Over the past three years manufacturing and engineering companies have faced an increasing number of disputes when claiming on their insurance, explained Bruce Hepburn, chief executive of Mactavish.
The firm has published a report on how out-of-date legislation affects businesses in the sector, based on consultations with 140 manufacturing businesses across Britain over the past 12 months.
The report says that many settlements are delayed and reduced because of unreliable insurance policies. Brokers and insurers are failing to provide the right cover for companies. Businesses are also to blame for not managing insurance properly or holding their brokers to account.
Manufacturing and engineering businesses that have branched out to provide new services to survive the recession are vulnerable too, because the insurance industry has failed to keep up with the sector’s evolution.
For insurance policies to be valid in the event of a claim, businesses must disclose all “material facts” that could affect an underwriter’s decision. In the modern world of manufacturing this is difficult to do. Companies have complicated supply chains with sub-suppliers which may subcontract some of the work. If insurers aren’t fully aware of these arrangements, the policies can be invalid.
Often settlements are made out of court for a lesser amount because the companies concerned have been compromised for not disclosing information.
Hepburn explained: “What you have is a law that puts an obligation on manufacturing and engineering businesses that is almost impossible to comply with. In the good years, insurers still paid the claims. But the good years are over for insurers and they are under increasing financial strain. As a result they are clamping down on claims.”
Hepburn added that under the new system premiums could rise by 20-50%. “At the moment people are paying lower premiums for a product that doesn’t work very well. A product that works well means that ultimately insurers will pay more in claims but their customers will pay more in premiums,” he said.
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