Material Facts and the Law of Average
We all assume that when something goes wrong, our insurance company is there to help us out and foot the bill. This is the wrong assumption to make as an increasingly hig number of risks are either underinsured, insured incorrectly or are not insured at all.
Insurance companies, like any other business, are there to maximise profits, it is their duty to their shareholders to do so. In the event of a claim, insurance companies try to minimise the amount that they pay out through the strict enforcement of policy terms and conditions. Insurers use little known devices such as the ‘rule of average’.
What is the rule of average? The rule of average means that if you insure your business for €500,000 when it should be insured for €1,000,000 and let’s say that a fire causes €300,000 worth of damage. In this case, your insurer will only pay out €150,000. The reason for doing so is simple and to be fair to the insurers, it is justified too. Your business would have been underinsured by 50% and therefore the insurance company should only be responsible for 50% of the damage. Making up the difference could cripple any business in crisis.
In the event of a claim your insurers will also go back to your original insurance proposal form and examine all the material facts. So what are material facts and why are these so important when it comes to a claim?
Exxamples of material facts are items such as your previous claims record, details of any criminal record, no matter how minor, if you had a break in in the past and never informed your insurer and so on. If you neglect to inform or mislead your insurer in relation to any material facts on your proposal form your insurance policy could become null and viod under the non-disclosure condition in your policy.
You must always remember the principle of good faith involved in insurance. Your contract with your insurer is based upon speculation, an insurer gives cover based on having been given all the material facts to assess the risk. If you hold anything back, not matter if it is an honest oversight, it can be deemed by your insurer as fraud and your policy could be voided leaving you in a terrible position.
We recommend that you always talk to your broker when renewing your policy and make them aware of all the material facts for your proposal form. It is also vital that any alterations to your risk, i.e. if you have a bar that now serves food or if you are starting to do home delivery. Failing to notify your insurer of any alterations to the risk will lead to endless problems in the event of a claim.
In the event of a claim always appoint a loss assessor to protect your interests, claims can be a minefield.