Know your insurance law or risk negligence

By 6th December 2018 November 4th, 2019 News

Senior in-house lawyers are in danger of being negligent over their employer’s insurance requirements.

Regulatory developments such as the Insurance Act 2015 and the update to the corporate governance code earlier this year mean company directors and legal counsel need to be much more aware of the risks facing their organisations, but many have a poor understanding and often fail to fully appreciate their responsibilities and liabilities.

On too many occasions, in-house legal counsel neglect their duties in this area, leaving their employers and themselves dangerously exposed. These developments effectively set a benchmark on what companies must do to identify, manage and transfer risk, and also crystallise the financial and reputational risks of falling short.

In-house legal teams need to have a solid understanding of basic insurance law issues. If an employer needs to make an insurance claim, the legal department’s ability to spot issues and help to guide the process, or pre-empt them when policies are first taken out, can mean the difference between a quick pay-out and a long court battle.

Businesses are at much greater risk of having insurance claims rejected because insurers were not told about all the risks they should reasonably have known. This is not only damaging for a company and its directors, it also puts them at greater risk of being sued by shareholders.

In-house lawyers should play a key role in determining what type of insurance coverage is needed, reviewing policy detail, filing insurance claims, and answering questions from senior management about how policies work. They also have a huge contribution to make if their employer takes litigation against their insurers over failure to pay claims.

However, too many in-house lawyers do not fully appreciate these obligations, and the potential negative impact this could have in the case of a claim. Many wrongly believe this is the responsibility of their colleagues in the finance or risk departments. Insurance is viewed as a specialist area and entrusted to brokers, whose service does not include any legal or compliance advice.

As such, legal departments overlook the insurance requirements and risks facing their employers.

Data suggests that 45 per cent of larger complex commercial claims are disputed by insurers and that on average they take three years to resolve, with settlements of around 60 per cent of the initial estimated values. In-house lawyers do not have to become experts in insurance law but they do need to know the basics, and when they should get specialist help.

Bruce Hepburn is chief executive of Mactavish, a London consultancy specialising in insurance governance.