Insurance Cover Extensions: Are They Really Free?

You know that policy exclusions are a valid way to negotiate with insurers to get better premiums. Most insurance buyers know that.

However, few seem to know that insurance policy extensions are an equally valid negotiating tool. Most people seem to think insurance extensions are freebies, and insurers certainly want you to continue thinking that way.

But insurance extensions are just added insurance, the only real difference is that you’re not using extensions as leverage. At least, not yet.

Keep reading to find out how extensions might be affecting your premiums and what to do about it.

What Are Policy Extensions?

Also known as “freebies”, extensions are any parts of an insurance policy that you didn’t request and aren’t strictly required to protect your balance sheet.

These additional covers are presented as free and ostensibly don’t increase premiums. So insurers use them as clear-cut benefits to entice insurance buyers to purchase their coverage.

However, they tend to be less-than-beneficial to policyholders. A lot of the time these additional covers don’t present a real added value and even when they do, they’re couched in language that makes them work for insurers more than policyholders.

Let’s look at some examples.

Coverage Extension for Reputational Damage

Employer’s liability and product liability claims can obviously carry a substantial expense and are often worth insuring for. But they may also carry an associated reputational risk.

In other words, they could result in damage to an organisation’s brand and image. Some insurers offer coverage extensions to protect against this reputational damage.

Here’s the problem:

Claims that result in public litigation, and therefore result in reputational damage, are exceedingly rare. And even when they do occur, how would you quantify the damage to a brand’s reputation?

On top of that, insurers typically require sole control of the claim! When all is said and done, this extended coverage is often actually more hassle than it is a benefit.

Compensation for Employee Court Attendance

Another example is coverage to pay for the expenses related to an employee’s appearance in court in connection with an EL or PL claim.

For an expensive insurance policy, this “freebie” might look something like this:

£500 per employee per day, at 200 workdays per year, this is the equivalent of £100k per employee annual insurance.

That’s how it appears to the insurer. And it may seem like a good deal to you. After all, why not cover lost workdays?

But take a few things into account.

For starters, as mentioned above, litigated claims are very rare. So the odds of an employee having to appear in court are small to begin with.

Additionally, insurers normally reserve the right to request an employee’s attendance in court. If paying for this extension doesn’t add up for the insurer in terms of the overall claim, there’s no incentive for them to ever use the right.

Moreover, what are the odds that you’ll really need £100k per employee per annum to cover staff costs? Not very likely.

So it may seem like added value when in reality it does precious little to actually help protect you.

You End Up Paying One Way or Another

Here’s the most important part. You might think to yourself those cover extensions aren’t all that useful but it doesn’t hurt to have them.

Actually, it does.

In the post-Solvency II world, nothing is free; all cover extensions increase premiums. Under Solvency II, insurers must hold enough capital to cover market-consistent losses and anything that affects those losses needs to be accounted for, including cover extensions.

So next time you find yourself thinking you’re not really paying for those “freebies,” think again.

How You Can Use This Information

Now that you know your freebies aren’t really free, get rid of them! The same way you can choose cover exclusions to raise or lower your premium, you can do the same with cover extensions.

Take the time to analyse whether or not you really need each of the cover extensions your insurer is offering. And you must do this with a critical eye and in-depth knowledge of the policy wording: how much extra is every one of the extensions costing you?

In other words, think about whether you’ll ever need the extensions. And whether you’ve ever used them in the past.

And don’t blindly assume that all advisors will point this out. They’ll tend to recommend the widest possible insurance to be safe rather than the best value for your organisation.

We Can Help

Our InsuranceInspect Services consultancy product can help you to identify unnecessary covers in your policies.

Unnecessary covers are costing you money and we can help you design more cost-effective solutions for your unwanted risks.