Business insurance and taking advice

We live in cynical times so perhaps we should not be surprised when judges criticize businessmen for not taking legal advice. Judges want to encourage a smooth flow of work to those still in private practice. Warning people of the dangers of relying on nonprofessionals makes “good” business for everyone. So let’s apply this to insurance and be as honest as possible. Insurance companies stopped acting like charities long ago. They are run by directors with their eyes firmly on the bottom line so they want to collect the maximum possible in premium installments and pay out the least possible in claims.

To hep them meet the profit forecast made to their stockholders, they rely on the small print to make it as difficult as possible to frame a claim the insurers will be obliged to pay. So, when you are appraising your insurance portfolio and deciding whether to make changes, who do you ask for advice?

Here’s the problem. If you only ask the agent employed by the insurer, you will never get impartial advice. The agent depends on making sales and so is motivated to tell you exactly what you need to hear to confirm that sale. The agent is not going to tell you one of his policies is not right for you. All you will hear are encouraging noises suggesting you will always be able to make a claim so long as you word it properly.

To give you an example of the type of problem that can arise, let’s take the facts of a recent case. Some financial planners were worried their insurance cover was not adequate. The value of the stocks and other investment opportunities they were now advising on were rising in value. This was creating a problem in affordability. The directors wanted a better understanding of how the deductibles were applied. The agent asserted that only one deductible would apply for claims arising from the same error in judgement. Based on this confident statement, the financial planners accepted a deductible of $40,000. In due course, the planners negligently advised 160 of their clients to buy into a particular investment vehicle which failed. Expecting only to pay only $40,000 as the deductible, the directors were surprised when the judge ruled the deductible was playable on each of the 160 claims. Needless to say, this was the cause of the financial planners going the same way as the investment they recommended, i.e. they were bankrupt.

The judge was of the opinion that any competent attorney reading through the proposed policy would have given the same advice on the issue of the deductible. Relying on the self-interested agent to give this advice was reckless and foolish. So here comes the moral of this particular story. If a lot of money could be riding on the outcome of a particular transaction, you should always get advice from a well-insured professional before committing yourself. The attorneys who write business insurances policies earn their money, making it difficult to claim against the insurer or limiting the claim in some significant way. Only by paying another attorney to interpret the small print can you protect yourself. For these purposes, note the irony of the attorney’s business insurance cover that will pay your losses should the advice prove wrong.

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