Material changes and the need to update insurance programs
Change is a constant in life and in business. In the last few years, in response to the pandemic and a volatile economic environment, many Australian businesses have been adapting and pivoting. Change also affects insurance – and when it isn’t promptly reported and accounted for, coverage can be compromised.
More than six in 10 (61%) businesses were worried about economic concerns and over half (51%) reported a decline in revenue in the past year, the 2023 Vero SME Insurance Index found.
The survey also revealed that around two in three (61%) businesses intended to make at least one change to the business in the next 12 months, with 48% planning some form of expansion, such as new products or service (17%), new markets (15%), increase in inventory (13%) or head count (6%), or new premises (8%).
Some 37% planned to make structural changes, such as simplification (13%), upgrading machinery (10%), moving premises (11%), or renovating existing premises (12%). While 26% were managing business decline, for example, through downsizing/consolidating (11%) or preparing to handover management (8%), or sell (6%).
Although changes can have an impact on insurance, 41% of owners said business insurance is the last thing they consider when making business changes.
In fact, 33% of SME policyholders said that they didn’t take anything significant into consideration when renewing their insurance. Almost a third (29%) don’t consider the increasing costs of replacement (e.g. material, labour, stock, equipment), 24% don’t consider staffing numbers, 17% changes in equipment/assets, and 15% don’t consider changes in the operating model (e.g. different markets or product offer, ways of working).
Not taking into account factors like increased replacement costs or changed revenue, can put the business at risk of under-insurance – in terms of property cover (inadequate sums insured) and in respect to business interruption limits (insufficient indemnity periods). Liability premiums could also be affected by business changes.
Because of the potential impact on insurance cover, it is imperative that policyholders inform their insurer (through your broker) of any changes to the business.
Material changes in insurance can impact the SME’s insurance program.
A business’ insurance policy is an agreement that transfers risk from the business to the insurer. It is a legal contract between the insured and their insurance company that is based on the information that the business originally provides. When a business applies for coverage, the insurance company assesses the risk of loss and other relevant factors, decides whether or not to insure the business, and then, if they do offer cover, rates the premium and determines the coverage terms based on the risk. Once the business accepts that premium and signs the insurance document, the contract has been established. Thereafter, any material changes to the information that the business originally provided must be reported to the insurance company because the risk in the insurance contract may have been affected.
Policyholders have a duty to disclose material changes.
It is standard practice in many classes of insurance for the policy to contain an express term, commonly referred to as a change of risk clause, which requires the policyholder to inform the insurer of any material changes.
A material change can be defined as “a substantial and continuing change to the insured’s situation that affects and increases the risk involved to insure the property” or “any change material to the risk and within the control and knowledge of the insured”.
As material changes can increase risk, insureds need to promptly report such changes to their insurer so that they can re-assess the risk in providing cover.
Policyholders have a duty to inform insurers of material changes. The policy will set out the disclosure obligations and all insurance contracts are bound by the principle of “utmost good faith”.
Acting in utmost good faith means each party to the insurance contract must act with fairness, decency and fair dealing, as well as honesty, in their dealings with one another. An example of this is a policyholder’s obligation to make full disclosure of all relevant facts when taking out the insurance, in line with their duty of disclosure.
The duty of utmost good faith, which is an implied statutory term inserted into every general insurance contract tin Australia under section 13 of the Insurance Contracts Act 1984, is central to, and regulates, all aspects of insurance – from inception through the terms of the contract, to each party’s responsibilities in the event of a claim.
The Insurance Council of Australia notes that “one of the reasons why the duty of utmost good faith was developed under common law was because, often, information of vital importance to the insurance contract is only known to one party. Under this duty, the party possessing the knowledge must disclose all material and relevant facts to the other party to the contract so that the other party can make an accurate assessment of what they are undertaking”.
Material change is a statutory condition under a standard insurance policy that states that the policyholder must give notice to the insurer or its agent (i.e. your insurance broker) of any change that is:
- material to the risk, and
- within the policyholder’s knowledge and control.
Examples of material changes could include (but are not limited to):
- Change in business description.
- Changing a business model.
- Mergers and acquisitions.
- Renovating, expanding or moving premises.
- Unoccupied premises.
- Changes to vehicle use.
- Purchase or sale of valuable items.
- Insolvency.
- Changes in ownership.
- Contract changes.
- Changing utility supply at the premises (e.g. installing solar panels).
- Staffing changes (e.g. WFH, sub-contractors).
- Sub-letting.
Advising the insurer enables them to reassess the premium and potentially increase or reduce the amount charged, based on whether the changes present a higher or lower risk than had previously been advised. The insurer may also need to impose additional policy conditions or excesses based on the differing business activities and corresponding level of risk. It is important the policyholder does not assume that the insurer will automatically cover the additional risk.
Failure to report a material change can have serious implications for insurance coverage.
If the insurer is not notified of changes in business activities, consequences could include:
- No insurance cover in the event of a claim.
Insurers assess the risks and agree to cover a business based on the information that is provided to them at the time of policy purchase/renewal. If this risk (i.e. business activities) changes or is varied during the policy period and the insurer is not notified, they are unaware of any additional risk. Any change or variation to business activities could fall outside the existing contract of insurance and this may see the business left without cover when making a claim.
- Depending on circumstances of a particular claim and the nature of material change not being advised, the insurer can either deny the claim or reduce it to reflect prejudice they suffered as a result of lack of notification on the part of the policyholder.
- In certain circumstances, the policy can be voided.
This means that the policy loses its legal effect and it is treated as if it never existed. This can happen if the policyholder breaches certain terms or conditions in the policy such as providing false information, failing to disclose important details or engaging in fraudulent activities.
Reporting material changes helps protect the business.
By reporting a material change in risk, the policyholder will comply with the conditions of their contract of insurance. Adjusting the policy coverage to reflect the current situation can help ensure that the protection purchased will be adequate when the business needs it the most.
While your EBM Account Manager will talk about changes to the business ahead of policy renewal, as a business owner, you should be proactive and contact your broker whenever you are planning changes, or changes occur in your business, so that we can make sure your business maintains appropriate insurance coverage.
Previously, commercial policies may have been renewed as is, assuming there were no changes to the coverage limits and no changes to the business’ operations. However, this is no longer necessarily the case. In recent times, insurance companies have been tightening their eligibility and coverage guidelines and requiring in-depth information and updates on renewal.
For this reason, it is important that you work with your EBM Account Manager to ensure your insurer has all the relevant facts to enable you to secure effective cover. The insurance policies and packs in place need to reflect your current business model and operations. Talk to your broker about:
- Existing and emerging risks including property, liability, business interruption, commercial vehicle and other plant, equipment and assets.
- Sums insured – for property covers and, also, business interruption.
- Changes to the business model/material changes to the business (industry, structure, revenue, location).
- Changes to business operations (online, click & collect, international shipping, products and services, distribution).
- Employee matters (workforce composition, WFH, hybrid and remote working, contractors, workers’ compensation).
- Future plans.
To avoid the risk of your insurance policies not aligning with your business activities, contact your EBM Account Manager to discuss your Business Insurance needs.
