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Welcome to our Winter 2014 Edition and 48th Claim Solutions’ Newsletter.
We are very pleased to announce that 48 newsletters over 14 years have been indexed to provide you with an online compendium of our claims experience. Browse our Index here to find articles which interest you.
In this newsletter we introduce several DIY tips to assist you to determine if you or your clients have an adequate Declared Value on Gross Profit and sufficient Sub-limits on Additional Increase in Cost of Working and Claim Preparation Costs.
We also consider the property cover and, in particular, the Reinstatement and Replacement Memoranda, what it means and how it can be improved.
As an exercise in policy interpretation and the application of policy exclusions we consider damage by falling space junk!
If you, or your clients, have suffered loss or damage we wish you a speedy recovery.
We are available to assist you and welcome any claim enquiries.
Declared Value on Gross Profit - DIY Tips
In our previous Newsletter we explained Gross Profit and how accounting Gross Profit may differ from insurance Gross Profit.
Head over to the online index to our newsletters and you will find many articles on the underinsurance of Gross Profit.
Underinsurance is a common problem and it is one which is best avoided.
An insured event such as a fire can be physically and emotionally demanding. News that you or your client is underinsured can not only be devastating but can substantially increase financial risk.
Assessing whether you or your clients’ Gross Profit needs a review is not difficult.
Should the Declared Value on Gross Profit in your or your client’s insurance portfolio be reviewed?
Here are some DIY tips which you may wish to use to determine if a review is necessary.
- Dig out the most recent Profit and Loss Statement.
- Identify the accounting Gross Profit figure.
- If full payroll cover is required add back any labour recorded above the Gross Profit line.
- Add any growth in Gross Profit expected to the end of the renewal period plus the maximum indemnity period.
- Locate the current Schedule of Insurance.
- Identify the Declared Value on Gross Profit.
- If this is lower than value determined from your review of the Profit and Loss Statement the Declared Value may be insufficient and a thorough review may be required.
We encourage you to seek proper professional advice if you believe you or your clients are inadequately insured.
Sub-limit On Additional Costs - DIY Tips
Once Gross Profit has been insured by declaring a value on the Schedule of Insurance, the Business Interruption cover responds to a Loss of Gross Profit associated with (a) a Reduction in Sales and (b) Increased Costs.
However, limitations apply to the amount of Increased Costs which can be claimed. One of these limitations is that the extra cost must be economic. For example if additional overtime of $10,000 is paid but it only produces goods containing a Gross Profit of $7,000 the claim may be limited to $7,000. The increased cost is uneconomic. Without the overtime the claim for Loss of Gross Profit would have been $7,000.
This is one of the areas where the cover for Additional Increase in Cost of Working comes to the rescue. The word “Additional” has been underlined as it is in addition to the cover for Increase in Cost of Working contained within the Gross Profit item.
In our example the cover for Additional Increase in Cost of Working may respond to the uneconomic portion of the overtime i.e. $3,000.
There are other benefits to the cover for Additional Increase in Cost of Working which we will save for another article.
To take out cover for Additional Increase in Cost of Working a sub-limit is usually required. Here are some tips you may wish to consider to determine if the sub-limit on Additional Increase in Cost of Working is sufficient?
- If you or your client’s business is in a low margin industry the economic limit may be quickly exhausted. A higher sub-limit is required.
- If the industry is aggressively competitive a higher sub-limit is required. Competitors may easily encroach on your market share which once lost may be difficult to recover, if at all. Aggressive, expensive and uneconomic loss minimisation measures may be necessary.
- The indemnity period selected should be sufficient to cover the time necessary for the results of the business to return to normal. If, for whatever reason, a shorter indemnity period has been selected a higher sub-limit for Additional Increase in Cost of Working may be critical. It may be necessary to incur costly extra costs beyond the economic limit to ensure business returns to normal before the indemnity period expires. Please also see our article called “The Anatomy of an Indemnity Period”.
The best measure of potential additional costs is a thorough Business Continuity Plan.
Sub-limit on Claim Preparation Costs - DIY Tips
Many insurance policies cover the reasonable professional fees and expenses to prepare Material Damage and Business Interruption claims. Many require a sub-limit to be specified.
As claim preparers we are often asked what value should be recorded as a sub-limit for Claim Preparation Costs.
Here are some tips for you or your clients’ to consider an appropriate sub-limit.
- How much time do you have to prepare the claim? If you are time poor a higher sub-limit may be required.
- What is the maximum indemnity period? A higher sub-limit may be required for business with a longer indemnity period.
- Liquidity. A higher sub-limit may be required for businesses with tight cash flow. It may be necessary to prepare several Business Interruption claims over the period of interruption to encourage progress payments to replace cash flow.
- What is the nature of the business? A higher sub-limit may be required where a high degree of complexity prevails.
- Geography. Where is the business located? Businesses in remote locations may require a higher sub-limit to allow for travel time associated with site visits.
- Quality of documentation. All reasonable proof must be supplied to substantiate a claim. If documentation is insufficient, time devoted to claim preparation may be longer and a higher sub-limit may be warranted.
- Volatility. Preparation of Business Interruption claims often involves forecasting the results which should have been obtained but for the loss. This is more time consuming for businesses which experience a high degree of volatility. A higher sub-limit for Claim Preparation Costs may be necessary.
These are just a few pointers to consider when determining a sub-limit for Claim Preparation Costs.
At about 9.45pm on 10 July 2014 shocked observers in NSW and Victoria saw a fireball rocket across the night sky. Initial reactions attributed it to a meteor which some likened to Halley’s comet.
News reports advised NASA suggested it could be a seven-metre, three-tonne piece of space junk. Other reports suggested it could be an ejected piece of Russian Rocket used to launch a weather satellite.
A resident in Cobar reported hearing a large boom after a five minute delay which apparently suggests it disintegrated within a 100 kilometres of the town. An article from the Sydney Morning Herald reports that “Dr Alan Duffy, a research fellow at Swinburne University of Technology expects dozens of people to scour the surrounding areas of Cobar for bits of debris”.
Thankfully there were no reports of any damage.
Would damage from falling space junk be covered under the Mark IV Industrial Special Risks Policy?
Perils exclusion 4(a) deletes cover for “physical loss, destruction or damage occasioned by or happening through error or omission in design, plan or specification or failure of design.” Perhaps it may be argued that the falling space junk was never designed to re-enter the atmosphere and any physical loss from impact damage may be excluded. However, a proviso to the exclusion indicates it does not apply to any subsequent loss occasioned by a peril resulting from the impact. So if the impact caused a fire the physical damage from the fire damage would not be excluded.
Interpretation of policies can be complex. If you need any assistance with your claim please do not hesitate to contact us.
At about 9.45pm on 10 July 2014 shocked observers in NSW and Victoria saw a fireball rocket across the night sky. Initial reactions attributed it to a meteor which some likened to Halley’s comet.
News reports advised NASA suggested it could be a seven-metre, three-tonne piece of space junk. Other reports suggested it could be an ejected piece of Russian Rocket used to launch a weather satellite.
A resident in Cobar reported hearing a large boom after a five minute delay which apparently suggests it disintegrated within a 100 kilometres of the town. An article from the Sydney Morning Herald reports that “Dr Alan Duffy, a research fellow at Swinburne University of Technology expects dozens of people to scour the surrounding areas of Cobar for bits of debris”.
Thankfully there were no reports of any damage.
Would damage from falling space junk be covered under the Mark IV Industrial Special Risks Policy?
Perils exclusion 4(a) deletes cover for “physical loss, destruction or damage occasioned by or happening through error or omission in design, plan or specification or failure of design.” Perhaps it may be argued that the falling space junk was never designed to re-enter the atmosphere and any physical loss from impact damage may be excluded. However, a proviso to the exclusion indicates it does not apply to any subsequent loss occasioned by a peril resulting from the impact. So if the impact caused a fire the physical damage from the fire damage would not be excluded.
Interpretation of policies can be complex. If you need any assistance with your claim please do not hesitate to contact us.
Reinstatement - What does it mean?
We prepare many claims for property damage. Many are insured under Industrial Special Risks Policies. This article considers an endorsement to the property section of the Industrial Special Risks Policy which substantially increases its scope.
Consider the following case study.
On 1 July 2014 a substantial fire destroyed stock and the fit out belonging to Essential Oils in Prahran. Essential Oils is a retailer of beauty products which trades from some 20 stores around Australia. It leases the building at Prahran.
The cost to replace Essential Oils fire damaged fit out is $80,000.
As part of its marketing strategy it has a unique store fit out consisting of quality built counters, display cabinets, shelving, gondolas, finished in brand colours across all 20 stores.
The fit out is updated every two years to maintain a fresh, on trend, appearance. The next rejuvenation scheduled for Prahran is 1 January 2015, six months from the date of the fire. It cannot commence sooner as other stores must be completed first.
Basis of Settlement Clause (a) states that the Industrial Special Risks Policy responds to the cost of reinstatement or repair in accordance with the provisions of the Reinstatement and Replacement Memoranda.
Where property is destroyed, this memoranda responds to the replacement of the fit out with similar property to a condition equal to but not better than when new.
Essential Oils are entitled to a new fit out of similar property.
However, they do not want to install a new fit out now as the planned rejuvenation is less than six months away. They move second hand display equipment, at little cost, from their warehouse into the Prahran store which is adequate for trading to continue until the new branded fit out is available.
How does the policy respond?
There are a number of provisions to the Reinstatement or Replacement memoranda, failing which the Basis of Settlement reverts from Reinstatement Value to Indemnity Value (a reduced value considering the age and condition of the damaged property).
One is that the reinstatement must be carried out with reasonable dispatch. It may be disputed but, six months may constitute reasonable despatch.
Another provision indicates that the expenditure must actually be incurred. It won’t be incurred for another six months. Must we wait six months before the policy responds?
The standard provisos also indicate that the work may be carried out on another site.
An endorsement to the Reinstatement and Replacement Memoranda which we have seen in many Industrial Special Risks responds to the full reinstatement cost even if the destroyed property is replaced with dissimilar property.
Essential Oils fits out a new store in Hawthorn at a cost of $100,000. This exceeds the cost of reinstating the fit out in Prahran (i.e. $80,000).
We can use the cost of the fit out in Hawthorn as a substitute for the Prahran reinstatement up to an amount of $80,000. Even though the fit out at Hawthorn may be a vastly different configuration the policy responds to reinstatement on another location using dissimilar property.
The endorsement allows the claim to be resolved well before January 2015.
Claim Solutions prepares many claims for Property Damage and Business Interruption under Industrial Special Risks and Business Pack Policies.
Our services also extend to the preparation of many other types of commercial insurance claims.
Over the past 14 years we have also assisted with claims for economic loss, product recall, product liability, fidelity guarantee, etc.
We have assisted many clients to establish appropriate Declared Values and Sub-limits under Business Interruption Policies.
If you require any assistance please do not hesitate to contact us.
Testimonial
“We would like to continue with your services, even though the claim preparation cover has been exhausted. The job you have done has been fantastic.”
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. We are available to assist you and your clients.
The Articles which appear in this Newsletter are not intended to be a substitute for specific technical advice.
