The importance of declaring past insolvencies

Directors of companies that have become insolvent may find it’s tempting to omit this information when applying for insurance.

As this article will demonstrate, declaring key pieces of information when requested could lead to a policy being voided by an insurer.

Insurers want to know about past insolvencies

Insurers need to accurately assess risks before agreeing on the terms of a policy. And they need to know all the facts to be able to do that, including any information related to past financial difficulty.

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.

The impact of not declaring past insolvencies

If you need to make a claim but haven’t declared past financial difficulties, your insurer may void your policy. This is because, had previous insolvencies been disclosed, they would not have accepted the risk in the first place.

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

In some cases insolvency may not impact your insurance, but you will need to explain with justification the reasons why the situation arose and declare all incidences of insolvency to your insurer. They may be able to agree cover at normal or amended terms. Be warned: an insurer isn’t likely to be so flexible after a claim has been submitted.

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

Discover the full history of each director

You must fully investigate all directors to find out their full history. This is because an insurer may still void your policy if a director is found to have been involved in a past insolvency in a previous directorship.

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

Any County Court Judgements (CCJ) and 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.

You must share any information related to these judgements with your insurance broker or insurer. This ensures you make a fair presentation of risk. Insurers must be able to make an informed decision on whether to accept the risk.

When to declare insolvencies

Different insurers will provide a variety of questions or statements. In some cases poorly-worded statements can be left open to interpretation. When presented with the opportunity to avoid admitting to insolvency, directors may choose not to volunteer the information. It’s important all directors understand the impact and potential ramifications of not declaring all relevant information.

An insurance broker like NDML will help to cut through the jargon, helping you to 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.

If you have any questions about your policy, please get in touch.