Insurance Post

Underwriting Property: Going for gold


Cited as a key factor in the British cycling success at the London 2012 Olympics, the philosophy of marginal gains can also be applied to underwriting.

Even those with no interest in sport will remember the extraordinary performance of the British Olympic cycling team at London 2012. When asked why the team had been so successful, the director of performance, David Brailsford, put it down to the concept of “marginal gains”, saying: “If you break down everything you could think of that goes into riding a bike, and then improve it by 1%, you will get a significant increase when you put them all together.”

He then went on to give examples, some of which were surprising. They included making sure all the riders slept in the correct position, took the same pillow they used at home with them on tour and washed their hands properly to avoid illness.

This is not to say Sir Chris Hoy owes his sixth Olympic gold medal to the fact he brought his favourite pillow with him – what Brailsford meant was that the details matter. And it is hard to argue with the result – a remarkable seven out of 10 gold medals.

The idea of marginal gains can apply in business as much as in sport. If everything in a property insurance policy were broken down and improved by 1%, the result would be a much tighter, clearer document. This would mean fewer disputes about coverage and quantum when claims come in, which would in turn drive down the cost to the insurer.

Of course, it is impractical for underwriters to pore over each and every policy clause, but there are some that raise issues time and again, and would certainly benefit from the marginal gains philosophy. By checking these clauses to make sure they are clear and reflect the parties’ intentions, underwriters can help reduce the scope for potentially costly controversy further down the line.

The definition of ‘insured’ is a good place to start. It may be surprising that something so seemingly simple gives rise to debate, but it often does. A word or phrase in the definition of the insured can make a big difference to the scope of cover.

If it includes, for example, ‘contractors and sub-contractors’, ‘joint ventures’ or even simply ‘associates’, then the scope of cover increases accordingly. And when a group of companies is being insured, it is vital to identify the correct company in the group and to be clear about any coverage for subsidiaries or any associated or affiliated companies – if necessary by listing these in a schedule.

A second area to check is the definition of ‘occurrence’ – or, in some policies, ‘loss’ or ‘event’. This is important because what constitutes an occurrence is crucial in working out how deductibles or aggregate limits apply to a claim. In drafting the policy, a key consideration is whether the definition of occurrence should be drawn narrowly – increasing the likelihood of multiple per-occurrence deductibles and a series of smaller losses – or widely, so that there are likely to be fewer deductibles and fewer, but larger, losses.

At the narrow end of the spectrum are definitions of occurrence that refer simply to an event – a loss arising out of a singular incident. The English courts have construed an event in a relatively limited way, as something that happens at a particular time, in a particular place, in a particular way. When looking at what constitutes a unifying event, the courts have also referred to the four unities of time, place, cause and human intent and action. Where all these unities are present, one is likely to be looking at a single event.

A wider definition of occurrence is ‘a series of losses/events/incidents’, and potentially more expansive still is the phrase ‘attributable to one originating cause’. The courts have held this to have wider connotations than an event.

The circumstances of any given loss may mean that what constitutes an occurrence is problematic, even when the wording is clear. An unclear or a circular definition exacerbates the difficulties in an area where the definition often has a value in hard cash. Care with this part of the wording can pay dividends for insurers.

A connected issue is the definition of any deductibles or sub-limits. Normally underwriters know precisely what these ought to be, but it can prove surprisingly tricky to put them into words in a way that makes it clear how the cover fits together.

Particular issues with deductibles and sub‑limits can arise if an occurrence causes loss under more than one section of the cover. The policy should say clearly which deductibles and which sub-limits apply in those circumstances, as well as what happens if one or more of the applicable sub-limits are exhausted.

Sub-limits should also expressly state what is being sub-limited. If, for instance, there are sub-limits for evacuation expenses or expediting expenses, these expenses should be defined. Another issue to treat with special care is where deductibles vary or are scaled according to circumstances – for example, according to the insured’s percentage share in a joint venture. The correct scaling of a deductible is frequently the subject of debate when claims arise, so it is vital that the wording is clear.

A further area that merits careful attention is business interruption cover. This is a topic all on its own but, for present purposes, it is worth highlighting a couple of clauses where clear wording can avoid problems. The first is cover for business interruption caused by physical damage to an insured’s suppliers or customers, also known as contingent business interruption cover.

Insurers often provide different levels of CBI cover in respect of specified and unspecified suppliers or customers. Where suppliers or customers are specified, these should appear in a schedule showing the names of each and the amount of cover provided.

Given the extended supply chains in many industries, the cover should also state whether or not CBI cover is provided where the interruption to the insured’s business arises from damage to the suppliers of its suppliers, or the customers of its customers (second-tier suppliers or customers), or to suppliers or customers even further up the chain.

A second area that can often be tightened up is cover for interruptions to an insured’s business caused by denial of access arising from damage to property outside the insured’s premises, or denial of access cover. There is generally some kind of territorial limit in denial-of-access clauses. The more precisely this limit is expressed, the better. For example, ‘In the vicinity of the insured’s premises’ is a recipe for future controversy. But ‘within a radius of five miles from the perimeter of the insured’s premises at 20 Primrose Street, London’ is much clearer.

Applying the idea of marginal gains to these clauses may strike some as the equivalent of telling Sir Bradley Wiggins to wash his hands – a trivial matter compared with the importance of the premium clause. But on a series of claims, or even one large claim, making sure these clauses are clear could be the difference between a profit and a loss. The object of the exercise is, after all, to make a profit – which is something every insurer wants to win medals in. 

Andrew Schütte
Partner, Hill Dickinson

This article was published in the 14 November 2013 edition of Post magazine 

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