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Pecuniary insurance

This article was last updated by the author in October 2016.

A brief introduction to pecuniary insurance.

Contents

Overview

Pecuniary insurance provides cover for intangibles, such as income, revenue or value. There are a number of types of pecuniary insurance including:

  • legal expenses
  • credit insurance
  • fidelity guarantee

Each of these can be issued as a separate stand-alone policy. However, they are sometimes incorporated into a package or commercial combined policy.

Business interruption insurance is also a type of pecuniary insurance, which is detailed separately.

Typical cover provided

Legal expenses

The purpose of legal expenses insurance is to provide indemnity for costs arising out of the need to seek legal advice or to pursue or defend civil, but not criminal, actions (with one exception).

There are two main types of legal expenses policy:

  • group legal benefit policies
  • commercial legal protection policies

Each type offers a number of sections of cover, from which the proposer can select the cover they require. Cover is limited to an amount per claim.

Group legal benefit policies. This type of policy is designed to provide cover for a group of people, such as the employees of a company or the members of a club or society. The immediate family of each member can also be included in the cover. Some employers arrange the cover as an employee benefit.

Most insurers offer four sections of cover: Employment cover; Personal cover; Motor cover; and Conveyancing cover.

Commercial legal protection policies. These policies are taken out by a business to protect itself where the business activities may expose the company to litigation.

Cover is provided for the costs arising out of pursuing and defending civil actions, as well as the cost of the insured's time and their employees' time spent in court.

Typically there are five main sections of the policy from which to choose: Employment cover; Criminal prosecution defence cover (this is the one area where cover is provided for breach of criminal law, although any fines which are imposed are not covered); Property disputes cover; Motor cover; and Patents, registered designs, copyright and trademarks cover.

Credit insurance

Money owed to a business by its customers is often one of the largest single items on a balance sheet. If the money owed is not paid, the business suffers a loss. This potential loss through non-payment can be insured by means of a credit insurance policy.

Cover is provided for losses due to a debtor's inability to pay, usually because of going into liquidation or ceasing to exist or to trade. Credit insurance does not cover non-payment through unwillingness to pay, or through the insured's inability to collect.

There are two types of policy available:

  • a whole of turnover policy; insuring the whole of their turnover against the risk of debtors defaulting;
  • a specific account policy; insuring selective accounts that are felt to be at risk. Premiums are higher for this type of policy due to potential selection against insurers.

For whole turnover policies, there is usually a coinsurance clause ranging from 5% to 25%, depending on the volatility of the trade involved. This ensures that the insured always has a direct financial stake and incentive to get their credit accounts and their credit control procedures right.

Cover is subject to a policy limit of indemnity. It can be arranged for a fixed period of twelve months or for the length of a specific contract.

Fidelity guarantee

Cover indemnifies the insured in respect of loss of money or other goods and property caused by the fraud or dishonesty of an insured person. The cover provided applies during:

  • the currency of the policy, and
  • the 'discovery period'; a period during which a theft committed during the currency of the policy is discovered. It typically lasts for up to 24 months after termination of the policy or after the guilty party resigns, leaves the employment or dies.

Cover includes:

  • legal, auditors' and consultant's fees incurred in substantiating the amount of any loss
  • the cost of rewriting or amending computer programs to avoid future losses
  • fraud committed before the policy commenced but not discovered until the policy operates, provided there has been continuous fidelity insurance in force. The fraud must be discovered outside the discovery period of the previous policy.

There are a number of types of fidelity policy:

  • Named employee basis, which covers specified employees and has a limit of indemnity per named person
  • Blanket policy basis, which covers all employees, or all employees in a specific category or department or specific jobs, without naming the employees. A limit of indemnity for any one loss and often an aggregate limit over all losses will apply
  • A positions basis. This type of policy will usually be arranged by local authorities and guarantees the holders of specified positions within the authority, whoever they may be. These are often called government bonds. They tend to cover mistakes as well as dishonesty.

There are two features which are peculiar to a fidelity guarantee policy:

  • it is a condition precedent to any claim that any dishonest employee be prosecuted
  • the employer will be indemnified by insurers who will retain the right to attempt recovery of their outlay from the wrongdoer

As an alternative to fidelity guarantee insurance, some specialist insurers offer 'Crime' policies. These provide much broader cover to reflect the range of risks to which businesses are increasingly exposed. Cover is provided against:

  • the criminal taking by both employees and third parties of money, securities or property to the deprivation of the insured or their clients, together with
  • the criminal destruction or disappearance of money or securities while on premises, in employee custody or in transit.

Optional extensions

Legal expenses

Optional extensions include:

  • libel and slander protection
  • cover against the costs of involvement in public enquiries
  • cover against the costs of investigations by professional bodies

Credit insurance

The following extensions to cover are available:

  • Pre-delivery work in progress. This covers the materials and labour costs incurred if work is carried out towards a contract but, because the customer goes into liquidation. the work is never finished, delivered and invoiced
  • Supplier default. This covers the additional costs involved in finding new suppliers, loss of payments made in advance and fines or damages for late delivery, if a supplier becomes insolvent and goes out of business.

Fidelity guarantee

Cover can be extended to include third party computer fraud. This provides cover for the loss of business assets resulting from fraudulent access to the business computer system by non-employees. 

Key exclusions

Legal expenses

The following exclusions usually apply:

  • legal action for which indemnity in respect of its costs is recoverable elsewhere (applicable to commercial legal protection policies)
  • losses incurred prior to written acceptance of the claim by the insurer
  • legal action pursued by the insured against the advice of the insurer's nominated solicitor, ensuring that only actions where there is a reasonable chance of success are pursued.

Credit insurance

The credit risk that is insured must have a direct link with an underlying trade transaction, i.e. the delivery of goods or services. If no such direct link exists, the outstanding amount is not insurable under a trade credit insurance policy.

To be insured, transactions must not be subject to disputes. Parties are usually requested to resolve any dispute, prior to involving the insurer.

Cover is usually subject to an excess.

Fidelity guarantee

The following exclusions usually apply:

  • loss caused by an employee committed prior to the date of acceptance of that employee
  • loss where the insured continues to trust an employee with money or goods after becoming aware of any material facts concerning the honesty of that employee
  • unexplained shortages

Rating factors

Legal expenses

Premiums vary depending on the limit of indemnity and sections of cover provided.

Where cover is included as an extension to a combined or package policy, a flat premium is usually charged.

Credit insurance

Premiums are calculated by applying a rate to turnover of the business (or the turnover relating to the selected accounts). The rate applied will take into account the make-up and spread of customer base; the proposer's credit control policy; and the creditworthiness of the accounts being insured.

Fidelity guarantee

When determining the premium for a fidelity guarantee risk, there are two main rating factors:

  • the employee risk. The insured person's (employee's) previous history relating to employment and dishonesty is of prime importance. Employers are required by the policy terms to obtain references for new employees from previous employers and to pay special attention to any apparent gaps in employment. The employee's financial standing is also of importance to try to see if there is potential for future dishonesty.

The insurer will also want to know about any convictions for dishonesty that the applicant has had (subject to the requirements of the Rehabilitation of Offenders Act 1974, as amended by the Legal Aid, Sentencing and Punishment of Offenders Act 2012).

the employer's responsibilities. This is concerned with the employer's cash handling and accounting systems. Information will be gathered from the proposal form to see what the systems are and to find out what checks are built into the systems to prevent fraud. The insurer will also want to know whether the employer has had previous losses through dishonesty and the actions taken to prevent any recurrences.

Product providers

Legal expenses, credit insurance and fidelity guarantee insurances are usually provided by specialist insurers or specialist divisions of the major general insurers, with cover varying between insurers. Legal expenses insurance is often included as an add on to another type of policy, such as commercial packages. Where this is the case insurers often outsource the provision of this cover to a specialist provider. 

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