Risk factors

Sunday, 01 December 2013
Gordon Harris on giving full information when insuring property.

When purchasing assets on behalf of a trust as trustees – and therefore as legal owners of the assets held in trust – you have specific responsibilities. One of these may be to arrange appropriate property insurance. The insurance contract accepted by an insurer is based on material facts regarding the risk (e.g. that the property is unoccupied), and as trustees you have a duty to disclose these to the insurer. Typical information insurers require to provide a quote are:

  • policyholder details (the trust);
  • address and post code of the property;
  • type of property (detached, apartment, listed);
  • sums insured required;
  • occupancy;
  • security;
  • claims experience;
  • flood zone, and;
  • subsidence risk.

You may not know all of this information, and this is where problems can arise, especially if the insurance cover needs to be in place promptly. If incorrect information is given and a claim occurs, you may encounter a problem with the insurer, especially if the incorrect information related to a material fact and contributed to the claim arising.

Potential pitfalls

If clients arrange their own cover, a problem arises and the insurance claim is declined, blame could fall on trustees for failing to ensure correct cover is in place. Trustees must also ensure policy warranties are understood and adhered to. For example, if there is a tenant at the property and the warranties affect them, the trustee must ensure that the tenant is aware of the warranties and that they understand them.

Problems may also arise if incorrect information is given to the insurer. This may be because the trustee did not have the correct information to hand or simply didn’t know the answer. Property construction and location also needs to be considered. It’s important to advise if the property is non-standard or in a higher-risk location, e.g. if it is a thatched cottage, has a flat roof or is in a flood zone.

If clients arrange their own cover, a problem arises, blame could fall on trustees for failing to ensure correct cover is in place

Additional consideration must be given to property that is used periodically and is not the main residence. Most insurers limit cover if the property is unoccupied for more than 30 or 60 days, or may not wish to offer cover if there are long periods where the property is unoccupied.

If the beneficiary lives at the property responsibility for insurance must be determined. Who insures what? This is tricky to determine if the trust owns the contents. Who insures the personal belongings of the residing beneficiary is a grey area. Finally, trustees must bear in mind that insurers need to know if structural building works are to be carried out at the property, as this may affect the risk.

Problem claim examples

Unoccupied properties

Scenario: At the time of arranging insurance cover, the property was fully occupied. It later became unoccupied for an extended period. During the winter, a water pipe froze and burst causing substantial damage to the building and contents.

Outcome: Insurers established that the property had been unoccupied for several months, and declined the claim.

Fire damage

Scenario: The trust owned a property with a residing beneficiary. The trust officer arranged the insurance by completing a proposal form. There was a serious fire at the property in which it and most of its contents were destroyed. The property was a thatched house.

Outcome: The insurer declined the claim on the basis that a question on the proposal form asking if the property was of standard construction had been ticked ‘yes’. Insurers would not have accepted the risk had they known the property was thatched.

Insurance cover: rights and wrongs

  • Don’t leave it until the last minute.
  • Make sure you have as much information as possible about the risk.
  • Ensure questions are answered correctly. If you don’t know the answer say so, and find out the information as soon as possible.
  • Online insurers: be particularly careful if using an insurer that provides cover based on assumptions, e.g. that the property is the main residence, permanently occupied, or maintained in a good state of repair. Online insurers are invariably looking for good clean risks.
  • Use an insurance broker who understands trust structures and is familiar with the risks.
  • You have a duty to disclose all material facts both before and during the contract of insurance. If circumstances change you must inform insurers. Failure to do so could invalidate the policy cover.
  • Keep a record of all disclosures to the insurer.
  • Ensure your asset register has details of the policy, including the renewal date and who it is arranged with.
  • Cheapest is rarely the best!
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Gordon Harris

Gordon Harris is a Director at European Insurance Brokers Ltd.

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