This article was last updated by the author in October 2016.
A brief introduction to pecuniary insurance.
Pecuniary insurance provides cover for intangibles, such as
income, revenue or value. There are a number of types of pecuniary
- 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.
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
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.
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
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
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
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.
- legal, auditors' and consultant's fees incurred in
substantiating the amount of any loss
- the cost of rewriting or amending computer programs to avoid
- 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
There are two features which are peculiar to a fidelity
- 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
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
Optional extensions include:
- libel and slander protection
- cover against the costs of involvement in public enquiries
- cover against the costs of investigations by professional
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.
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
The following exclusions usually apply:
- legal action for which indemnity in respect of its costs is
recoverable elsewhere (applicable to commercial legal protection
- losses incurred prior to written acceptance of the claim by the
- 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.
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.
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
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.
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.
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.
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.