Last week we set some questions relating to a case study of a commercial insurance proposition. How did you do? Our suggested analysis of the situation is set out here

Question 1: Identify any errors and inconsistencies in this study, explain what you think is wrong and state what action you will take. In particular, write down any questions you would ask to clarify the situation.David Henders and his brother John were the owners of the marchant House Engineering Company Ltd based in Gloucester. They have 20 employees and mainly produce sonic widgets for the American gas cooker market. Your immediate reaction should have been to have registered the fact that this product is being produced for the American market. The widgets are in effect safety valves which prevent domestic gas cookers from overheating and exploding. This is high risk. (1 mark even if you did not understand the risk). Knowing it is there and referring it to someone who does is just as important.The main raw material is titanium and there is only one supplier of the right grade of material which is IMF Titanium based in the midlands. The key technical point is that with only one supplier, a supplier's extension under a business interruption policy should be an important consideration. (1 mark).You are approached by the brothers to review the company's commercial insurance arrangements. This is not a satisfactory starting point for a relationship with this client. The question that needs to be asked is exactly what the demands are and of course there does need to be a suitable terms of business in place before any work begins. (Award yourself 1 mark if this sentence triggered a similar thought process).David tells you that they currently have a business combined insurance with the following sections covering the premises (which David and John own freehold) - The fact that David and John own the freehold should be a signal for a reasonably competent broker to check that the correct insurable interest is noted on the policy. This is a common mistake and insurer's do have the right to avoid a claim if there is no insurable interest in the property (2 marks) - the machinery and plant, the stock and finished goods and products liability. This does seem a very limited range of cover. You should have immediately thought of questioning the reasons for this. (1 mark).He is not sure who the insurer is because they have not been sent a policy document in two years and the broker has advised them that this is quite normal. If a member of the public does not know who they are insured with, alarm bells should ring. Even more so when it is said that the holding broker does not know either. (1 mark if at this point your suspicions were aroused). The premiums are very competitive and in particular the products liability insurance is about one fifith of the premium that they had paid five years ago when they had last been able to arrange such cover. By now you should have been gravely concerned.(1 mark if you spotted the inconsistency). Surely all liability premiums have increased in the past past years? The existing broker who produced the quote two years previously advised them that liability premiums had improved drastically from five years ago hence the ease with which the cover had been arranged. (1 mark if at this stage you recognise that this statement is totally inconsistent with the reality of insuring American products liability risks).The company pays all premiums via a direct debit mandate payable to the broker who finances the deal. In itself this fact may cause no real concern but added to the behaviour of and statements alleged to have been made by the holding broker concerns about the security of the current arrangements must be serious. (1 mark).They are particularly pleased that they have been advised that there are no warranties on the policy as the previous company that David and John had been directors of had gone into liquidation when the previous insurer had avoided the insurance due to the non-compliance with a waste warranty at the time of a substantial fire which had destroyed the premises. You ask to see a copy of the proposal which is a generic form used by the existing broker for all commercial insurance. It is in the name of the Marchant House Engineering Ltd and is clean giving no account of any prior losses. Remember that earlier on you heard that the freehold was not in the name of the company. Did you make a note to check if the buildings were insured? (1 mark). The directors have not disclosed that they had been directors of a company which had gone into liquidation. This may or may not be material but readers should know that underwriters are more commonly using this as an excuse to avoid policies these days. (1 mark). Despite the fact that the previous loss was not paid, its existence may be material and should be disclosed. (1 mark).Question 2: A reasonably competent broker might be suspicious of the circumstances in this case. Indeed, something nefarious is quite possible. Consider the evidence presented, state your suspicions and list the evidence that brings you to these conclusions. There are two key suspicions:1. There is a fraud being perpetrated -

  • Who is the insurer
  • Inconsistencies about the ease with which such a high risk has been placed
  • The premium is unbelievable cheap
  • Money seems to be being collected without the involvement of any other party. (Award yourself up to 4 marks)
  • 2. The broker is incompetent. (2 marks for considering this as a possibility) Award yourself a further two marks if you considered that the customer could have been telling you a load of nonsense. It is very important not to jump to conclusions. The laws of defamation and libel do exist.Question 3: Your suspicions are shared by a competing broker in the same town. Your firm is a member of GISC, what should you do.In our opinion, the circumstances are such that regulators should be notified, (1 mark) but that this is a decision that should be made by the officers of your firm (1 mark) and that you firm should have a laid down procedure for all staff to follow when something like this arises. (1 mark). You should also have considered whether the circumstances should be reported under the Proceeds of Crime Act, (1 mark) but we do not have space to explore the arguments.So, a possible 25 marks. How did you get on? The key learning point is to make sure that when you are offered a new instruction, make sure that you look at what has gone before. Ask questions and resolve any queries and worries that you have. Good insurance broking is not just about record keeping and what is in black and white. It is also about experience and intuition. This page is edited by RW Associates, specialists in training, compliance and competence. Email: ruy.lopez@brokercompliance.co.uk To download a PDF of this article as it appears in the magazine click here .

    Using this CPD pageFor the vast majority of practitioners and indeed support and supervisory staff in our industry, CPD is about regular learning and study that is planned, recorded, timed and evaluated. If you are a member of a professional body with a CPD requirement then there will be certain rules regarding the quality and nature of study material, and the way in which it is recorded.For staff of GISC members this means recording on your individual training file what the learning was, who provided it and when.It might be structured, such as a course, a learning programme or exam study. But it can be unstructured. This form of study encompasses reading the trade press, technical material or taking part in activities to support your professional body. Some CPD requirements are points related (a little antiquated) and others require a time value to be allocated. For example, it might take one hour to read Insurance Times each week. Most of that could be put as a time value but, in reality, perhaps only an half hour was devoted to learning something. The rule is to be honest with yourself and record the time that is relevant. Always take time to make a note of what you felt you gained from the activity. This is useful information for anyone else considering the same activity.In response to the popularity of our CPD programme each week's CPD page can now be downloaded from our website.