The staying power of bankruptcy and its insurance implications

Q1 2019 has seen the highest underlying level of company insolvencies of any quarter since Q1 2014, with 4187 company insolvencies – a rise of 6.3% since Q4 2018 and an increase of 5.1% on the same quarter last year. Meanwhile, Q1 2019 has seen 31,257 individual insolvencies – up 15.9% on Q1 2018. But what does insolvency – corporate or individual – mean in insurance terms?

The answer is to be found in the area of material facts – those things of which you should make your insurance provider aware at the time of taking out cover. Whilst crimes spent under the Rehabilitation of Offenders Act 1974 do not need to be mentioned to your insurer, bankruptcy, CCJs and insolvencies – whether of the individual(s) seeking the cover or of a business of which they were an owner or a director – do need to be declared and are never wiped off the slate so far as insurance is concerned.

Whilst this may seem unfair, the thinking behind it is that a fraudulent claim could be made by someone seeking to pay off debts. However, insurance – in the form of employer and public liability insurance – is either legally required or an essential form or protection for an employer, or those conducting their work in the public domain.

Tradesmen also need to have relevant covers, in case they damage a customer’s property and many need to protect valuable tools as well. Many professions require professional indemnity protection. And there are many other covers that may be required, according to the business being run.

In this scenario, it might be tempting to conveniently forget a bankruptcy, an insolvency, or a CCJ. Some people may, alternatively, try to hide behind a business as a shadow or de-facto director, registering their new business in a relative or friend’s name, to gloss over their financial past. Neither will work. Should a claim be made, the insurer is more than likely to discover the individual or previous company’s past, given the ease of access that is available to financial records. This will, in all probability, lead to them declining the claim, on the basis of failure to declare a material fact.

Yet, go without the cover and the financial ramifications are huge, particularly if the business’s actions harm, or cause the death of, another person. So, what is the answer?

The best way forward is to be honest and frank about the financial past. From there, the person or business concerned should work with an insurance broker that has wide access to the insurance market and who can present their client’s case sympathetically to an insurer.

Many insolvencies occur through no real fault of the company or individual suffering them. We have recently seen this with the liquidation of The Good Food Chain, cleared in the NHS sandwich listeria case, but still forced into liquidation, due to the business interruption and negative publicity that surrounded the outbreak. Insurers do often listen to brokers who can put forward reasons for a bankruptcy, or who can demonstrate that their client is committed to not experiencing déjà vu and going down the same road again.

If you need to insure your business but are struggling to do so because of your financial history, please get in touch and allow us to discuss the options with you. Cover may be available, if you get the right broking assistance.