New rules will hit business insurance protection programmes
The cost implications of a claim that exceeds your insurance cover can be devastating. A business and its directors could become liable to meet the uninsured costs above your limit of indemnity.
We have been advocating for the past year that our clients give strong consideration to increasing their liability limits of indemnity. Our reasoning was that courts were handing down larger and larger fines for negligence that causes third party injury.
Following changes made by the Ministry of Justice last month (March 2017), there is now an even stronger case for increasing indemnity limits. The MoJ has reduced the personal injury discount rate.
What is the Personal Injury Discount Rate and how could it affect my business?
The discount rate is used to calculate compensation for long-term injuries and has been reduced from the previous rate of 2.5 per cent to minus 0.75 per cent. As a result, compensation payments will be significantly higher.
As a result of these changes it is expected that insurance companies will increase premiums to meet the higher payments they expect to have to make.
This change will also have a significant effect not just on Public & Products Liability but the cost of Employers Liability and Motor Fleet insurance as well.
What will be the impact be on compensation payments?
A 30-year-old man, who has suffered workplace or third party induced injuries making him unable to work, might typically have received £100,000 per year for care costs and loss of earnings. This would have resulted in a lump sum compensation payment of £2,791,000 using the 2.5 per cent discount.
Under the new rules using the -0.75 per cent discount the compensation payment would increase to £6,325,000. This represents an increase of £3,534,000 for a single case.
The Association of British Insurers (ABI) has calculated that the estimated annual cost to the insurance industry is £5.8 billion.
How will this impact on businesses?
The Insurance industry anticipates (and we are already seeing some evidence of this) that most businesses will be hit by this change irrespective of the limits they purchase. Motor fleet premiums may increase by as much as £75 per vehicle. Public, Products and Employers liability rates are also expected to rise.
But what smart businesses also need to consider is if the level of cover they purchase is adequate to meet larger claims going forward. Should your business suffer a catastrophic event where someone (or perhaps more than one person) suffers life changing injuries (Alton Towers crash is a good recent example but there are many others) are you adequately protected or is your business at risk?
We strongly recommend all our clients review their limits of indemnity with their Account Director as soon as possible