Insurers are increasingly offering financial loss coverage as extensions to traditional liability policies – but the term is poorly understood and part of a confusing range of expressions with no legal definition, a new study by the International Underwriting Association has revealed. The report, Financial Loss. What is it and when is it covered?, was produced after the association’s Liability Underwriters’ Group identified a lack of detailed guidance for the market in the UK.

“Financial loss extensions are becoming an increasingly common feature of UK general liability wordings, but the phrase has no technical legal meaning. It can also be easily mixed up with other expressions used by insurers and lawyers," says Chris Jones, director of market services at the IUA. "We wanted to explain the subject, so that underwriters and brokers have a clearer understanding of the law and what the implications are of giving this extension of cover.”

UK policies do not cover liability for financial loss as standard but insurers often offer it as an optional extension, though the scope of such extensions can vary widely.

The report is predominantly focused on the position of UK law, but also touches on how financial loss is treated in several other countries.

Commenting on the report, Neville White, of Tokio Marine Europe, who headed up the working party preparing the report, said, “Our comprehensive guide addresses all relevant legal questions and explains how insurance policies interact with financial loss extensions.

“It is important for insurers to understand liability for financial loss and how much or how little cover a policy extension may offer. A broker must also understand the business of his client and think about the exposures that arise from that."

Stuart White, a partner at City law firm RPC who worked closely with the IUA’s working party on the report, said: “The IUA’s new publication provides a valuable guide for market professionals. It will help both insurers and brokers better appreciate the risks surrounding Financial Loss and the forms of cover that are available.”

Copies of Financial Loss. What is it and when is it covered?’ are available as a free electronic download from the IUA’s website: www.iua.com/financialloss

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