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Welcome to the Claim Solutions’ Newsletter for Winter 2002.
Avid readers of this quarterly publication will know it provides you with a claims update including breaking news on claims, interesting and sometimes unusual interpretations of insurance policies and a summary of recent events which may be the subject of insurance claims.
It has been an interesting quarter filled with claims for fires, train derailments, chemical spills, explosions, electricity blackouts, a rockslide, bombings and even an earthquake. Some of these are listed on page 4 of this newsletter.
This list highlights the importance of adequate insurance and risk management.
Claim Solutions appreciates your positive feedback to previous newsletters and the appointments received to prepare claims.
As always, we are committed to assist you.
The Importance of Being Earnest
In an article headed “Opportunity From Adversity” in the Winter 2001 edition of our newsletter we advised that our claims experience shows that many businesses turn adversity into opportunity. They insure their property with the intention of rebuilding a similar property if it is destroyed. However most elect to replace their property to a different design, layout, configuration or specification. This may require some contribution from the Insured but often results in a better business.
When replacing property to a different configuration than that which existed prior to the fire documentation is critical. A scope of works, tenders and a critical path of the rebuilding time of the new property will be required to allow the project to commence and demonstrate the property will be reinstated.
However, it is also important to obtain a scope of works, reinstatement cost of the pre-fire structure and a critical path of the rebuilding time which would have elapsed if the building was reinstated to its pre-fire configuration.
This information is critical to the claim. If the actual reinstatement cost exceeds the cost of the pre-fire structure the Insured needs to fund the difference. If the actual reinstatement time exceeds that which would have been incurred if the pre-fire structure had been rebuilt the Insured needs to fund any ongoing Business Interruption loss.
It is important to be earnest when documenting a claim.
Many years ago a well known national circus troupe was performing in Asia when a major earthquake hit.
The circus performers were considered national treasures and concerns for their safety increased with each after shock. They were evacuated to their home country as soon as flights could be arranged. Performances were cancelled and revenue lost.
Circus animals including horses, elephants, lions, etc remained in Asia and required ongoing care.
A claim proceeded for lost revenue and the increased cost of feeding animals until a safe passage home could be arranged.
We even need to know how much hay an elephant eats!
An additional interest expense is often incurred following an insured event such as a fire. This arises when it becomes necessary to extend loan facilities which can be caused by one or more reasons e.g: -
- The fire may adversely affect sales reducing the cash available to meet ongoing expenses and some time may elapse before progress payments are made.
- A multitude of contractors including builders, architects, engineers, plumbers, electricians may submit invoices for property reinstatement. A large volume of invoices from suppliers for replacement of contents may also be received. The time required to accumulate and verify the charges may exceed contractors and suppliers settlement terms.
- The unfunded GST component of invoices from contractors or suppliers may be paid up to one quarter before receiving a corresponding Income Tax Credit.
- Suspicious circumstances may surround the cause of the fire and lengthy investigations may be required to eliminate the Insured as a suspect.
- The risk may be heavily co-insured and the policy may not contain a lead insurer clause. Some time may elapse before all co-insurers are in a position to fund their portion of the risk.
- One of the co-insurers may have become unfinancial e.g. HIH, leaving the insured to fund a portion of the claim.
- The risk may be inadequately insured and the application of an under insurance penalty may also mean that the insured must fund a portion of the claim.
Claims for additional interest often meet with opposition – why?
Item 1(b) of Section 2 of the Industrial Special Risks policy covers additional costs necessarily and reasonably incurred for the sole purpose of minimising a Reduction in Turnover. Item 4 – Additional Increase in Cost of Working, extends this cover to respond to additional costs incurred to maintain normal business operations.
In some instances these clauses may respond to the additional interest cost of financing a loss until the insurance policy responds and a progress payment is made.
An additional interest expense is often a reality and should not be ignored.
Unfortunately underinsurance occurs all too often. So much so, that it is a regular feature of this newsletter.
Underinsurance arises when the declared value is inadequate to reflect the value of risk. Its intention is to ensure that claims paid by the Insurer do not exceed the premium pool collected from their customers.
But what about over insurance? In some instances the declared value may exceed the value of risk and the Insured may have paid too much premium.
Did you know that the declared values specified on property, gross profit and payroll under a Mark IV Industrial Special Risks Policy at the beginning of the renewal period are provisional?
Have a look under the “Memoranda” section of your policy. It may contain an “Adjustment of Premium Clause”.
This allows the declared values specified at the beginning of the renewal period to be reviewed at the end of the renewal period.
If the initial declared values are found to be understated an additional premium may need to be paid. However, if the declared values are found to be overstated a refund may be due.
With the high premiums which currently prevail perhaps it is time to determine whether your policy contains an “Adjustment of Premium” clause and determine whether a portion of the premium should be refunded.
Liability Claims and Economic Loss
One of our readers, impressed with the detailed list of possible insured events on page 4 of our newsletter asked whether we maintain a similar list of product recalls.
While not a regular feature a list of some of the recalls over the last quarter is enclosed in a separate leaflet.
This includes consumer, food, therapeutic goods and motor vehicle recalls.
In addition to property loss, product recalls may also result in significant economic loss.
Consider this case study. Spicy Products, is a food manufacturer which imports ingredients from overseas used in a variety of products including soy sauce.
A quantity of the spices contain undesirable bacteria fortunately detected before the product was released to customers but unfortunately detected after a large volume of the soy sauce was produced.
Not only must the contaminated finished product be destroyed but it may take several months to complete testing, identify the offending ingredient, source a fresh supply of unadulterated spices and manufacture a fresh batch for release to customers.
In the interim, a competitor, Traditional Flavours, undercuts Spicy Products and wins their customers. Spicy Products suffers a considerable, long-term economic loss.
This will need to be quantified and claimed against any insurance cover which may be held by Spicy Products or against the offending spice supplier and/or their insurers.
Will your policy respond?
Claim Solutions provides a specialist insurance claims service. Our firm is recognised as one of the leading practices in this field with both national and international companies featuring amongst our clients. Our aim is to provide an efficient, professional and complete claims service which responds to your needs in times of crisis.
The Articles which appear in this Newsletter are not intended to be a substitute for specific technical advice.
