Insurers demand transparency with regards to bankruptcy
Within the last nine months we have seen a stark warning, which those declared bankrupt in the past, or those considering this as a course of action in the future should heed carefully, given the potential impact it may have on their insurance status.
In May 2018, one of Britain’s biggest insurers, Aviva, rejected a £1.8m fire damage claim after a Cheshire care home was allegedly set alight by vandals. The claim has thus far been declined on the basis Aviva claim a director of the claimant was an undischarged bankrupt.
Aviva believes that in reality, the person the claimant describes as a “self-employed consultant” was actually in a position of authority, being solely responsible for the company’s business in the UK. It has, therefore, rejected the claim because that individual was declared bankrupt in October 2001 but continued to act as a co-director of another company, which then went into liquidation in April 2010, making him an undischarged bankrupt. Aviva also alleges he has a history of failing to disclose material facts. The case will go to trial between November 2019 and February 2020.
In Q3 2018 there were 4308 companies entering into insolvency and voluntary liquidations were at the highest level since Q1 2012, with these comprising over 71% of all company insolvencies.
What this case does highlight, whatever the final verdict, is that bankruptcy is a status which must be declared to an insurer, as failure to do so could result in a claim being declined. Hiding bankrupt directors behind-the-scenes as shadow directors will make no difference. Insurers will often refuse to insure a business run by an undischarged bankrupt and may take the same view when it comes to those with County Court judgements, High Court judgements and/or criminal convictions to their name. Failing to declare such matters can be a huge financial mistake which will probably result in a declinature, should an insurance claim have to be made.
Whilst the Rehabilitation of Offenders Act 1974 is more lenient in deeming when a crime is “spent”, a status of bankruptcy lasts ‘forever’ in the eyes of many insurers. A broker should not assume a client has no history of bankruptcy. The specific question needs to be asked and an honest answer provided on the insurance proposal form.
Bankruptcy of individuals has risen, as Individual Voluntary Arrangements to pay off debts have declined. If the company sector follows the same trend, there could be many businesses jeopardising their ability to find insurance and then receive pay-outs on such insurance, if a claims scenario emerges.
This issue is extremely pertinent at present. In Q3 2018 there were 4308 companies entering into insolvency and voluntary liquidations were at the highest level since Q1 2012, with these comprising over 71% of all company insolvencies. Particularly hard-hit were the construction industry, wholesale and retail and businesses involved with motor repairs.
Whilst a good broker will ask the question about bankruptcy and listen carefully to how it is answered, all clients should ensure they probe the backgrounds of their directors and shadow directors extremely thoroughly. Leaving things to chance, or assuming insurers will not launch investigations into a director’s background could be a costly mistake to make. Transparency is key.
We are here to help you ensure you do declare all material facts and to source insurance that will protect you. If you are ever uncertain whether something is a material fact or not, please do get in touch with us to discuss it further.