Overcoming the stigma of past insolvencies

Why do insurers want to know about past insolvencies?

Essentially, insurers need to accurately assess risks before agreeing on the terms of a policy.

Some insurers might be concerned by even the slightest past financial difficulty. Brokers must therefore make sure they fully disclose their client’s financial status to the insurer.

If full information isn’t declared, such as insolvency or bankruptcy proceedings, the insurer can’t make a fair decision on whether to accept the risk.

For example, if a director had been involved in companies that had become insolvent, the insurer may choose not to insure the individual’s new company. If someone omitted that key information, it would be interpreted as being misrepresentation of the risk.

The impact of not declaring past insolvencies

If you need to make a claim but haven’t declared past financial difficulties, it’s probable your insurer will void your policy. This is because, had previous insolvencies been disclosed, they would not have accepted the risk at inception.

Policy Wordings should specify exactly what information needs to be declared to an insurer. However, that is not always the case. If you think it could be relevant – even if you haven’t been asked the question specifically – then always declare it. It’s also important not to be complacent at renewal, too. If anything has changed in your circumstances always declare it. While an insurance broker like us should alert you to any changes, all businesses need to make a fair presentation of risk. Take responsibility for fully reading the Statement of Fact wording and ensure you have declared all relevant information.

Despite having negative connotations, insolvency may not impact your insurance if you explain with justification the reasons why the situation arose. It’s still imperative you declare all incidences of insolvency to your insurer though. They may be able to agree cover at normal or amended terms. They won’t be so flexible after a claim has been submitted.

The case of Young V Royal and Sun Alliance Plc 2019 is a strong example. Mr Young made an insurance claim following a significant fire. The insurer discovered that Mr Young had not disclosed that he had previously held directorships in companies that had become insolvent. As the insurer could demonstrate it would not have accepted the risk if it has known about Mr Young’s previous directorship, it voided Mr Young’s policy and denied a multi- million-pound claim.

Find out the full history of each director

The person arranging insurance, or the person dealing with your business’s broker, might not know the full history of each director. Unfortunately, that’s no excuse. An insurer may still void your policy if a director is found to have been involved in a past insolvency in a previous directorship.

You should undertake a reasonable search within the business to establish material information. Fully investigate all directors to discover key information. For further reading on this, please view case law Inversiones Manria SA v. Sphere Drake Insurance Co. Plc [1989] (The Dora).

Declaring County Court Judgements or High Court Judgements

County Court Judgements (CCJ) or high court judgements should also be declared. CCJs occur when someone takes court action against you regarding money you owe them, and you don’t respond. If the court then formally decides you do owe the money, they will provide a deadline for paying the sum. Unless you pay the full amount within a month, records of judgements will be kept for six years. It is notoriously difficult to have CCJs removed from your record, and you must share the information of these judgements with your insurance broker / insurer. Again, it comes back to making a fair presentation of risk. Insurers must be able to make an informed decision on whether to accept the risk.

When to declare insolvencies

The questions or statements from insurers can vary. It can be argued that some insurers provide poorly-worded statements that can be left open to interpretation. When presented with the opportunity to avoid admitting to insolvency, many directors choose not to volunteer the information.

An insurance broker will help to cut through the jargon. They’ll make sure you’ve adequately and fairly presented your risks to an insurer. Even if an insurer’s wording is vague, a broker should make sure you have declared all insolvency events.

To discuss your policy with our award-winning team, please get in touch. We’re a chartered independent insurance broker, so you can trust us to arrange the right policy for your needs.