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Welcome to our Summer 2014 Edition and 46th Claim Solutions’ Newsletter.
We have been presented with claim problems daily since the 1980’s and with almost 30 years of claims history this places us in a unique position to identify claim solutions.
In this newsletter we explore the most common pitfalls we see on claims. Our aim is to focus on positive claim outcomes. Only by understanding claim problems can solutions be found.
The recurring issues have been considered under two headings; the technical issues and the management issues.
While the technical issues can be problematic it is claims management issues which often cause the most trouble. The good news is that with understanding and planning these can be easily avoided.
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.
For a fully searchable history of our newsletters check out Insuropedia at
www.insuropedia.com
Technical Issues - Would You Board the Titanic?
Underinsurance
Would you drive a car with its tyres half inflated?
Many commercial insurance policies, whether they be an Industrial Special Risks policy or a Business Pack wording, contain one or more underinsurance clauses.
If the value specified for property or profit is insufficient a penalty may apply to the claim and the Insured may not be fully reimbursed. This creates unnecessary pressure on cash flow at the very time when ample cash flow is paramount.
Underinsurance may occur for many reasons including but not limited to: -
- Lack of understanding of the policy.
- Absence of valuations.
- A desire to minimise the insurance premium.
- Substantial business growth post renewal.
- New business.
If you believe your Declared Values or Sums Insured are insufficient we urge you to revisit them.
Don’t wait until the next renewal date.
As this is one of the key issues which continues to arise we have included a specific article on underinsurance in relation to Business Interruption on page 3 of this newsletter.
Insufficient Sub-limits
Would you try and spend $10,000 on your credit card which only has a limit of $5,000?
Many insurance schedules contain sub-limits which provide a cap to a specific category of costs e.g. Removal of Debris, Extra Cost of Reinstatement, Claim Preparation Costs, etc. Once the cap is reached no further claims for that category of costs can be made. We encourage you to ensure your sub-limits are sufficient.
If you are unsure of appropriate sub-limits seek professional advice.
Indemnity Period
Would you board the Titanic knowing there is an iceberg ahead?
The maximum indemnity period on the Business Interruption Policy is too short.
Over the past twelve months we have prepared several claims for Business Interruption where the maximum indemnity period of 12 months specified was inadequate. The results of the business were adversely affected beyond 12 months and the Loss of Profit over the extended period was not covered.
This may arise because reinstatement times take much longer than anticipated often due to substantial upgrades necessary to comply with building regulations or because competitors encroach on market share reducing sales long term. The following businesses may need a longer rather than shorter indemnity periods.
Businesses which:
- operate from leased premises as they may have no control over the actions taken by the landlord.
- operate from older or historic buildings as substantial upgrading may be required to comply with building regulations.
- rely on specialised equipment with substantial lead times associated with reinstatement.
- operate in highly competitive markets as competitors may encroach on market share.
Make sure your indemnity period fully reflects the time required to restore the results of your business.
The Schedule & Policy
Would you leap from a plane on your first tandem jump without clear directions from the instructor?
If you are the Insurance Policy then the instructor is the Schedule of Insurance!
Both the policy and the schedule are an integral part of the insurance cover.
On occasions additional items may be included on the Schedule which have no corresponding Basis of Settlement in the policy wording. The ambiguity which may arise often causes trouble and protracted claim settlements.
The Schedule and the Policy work in tandem and must be structured correctly.
Management Issues - Would You Perform Hamlet?
Failure To Involve Key Decision Makers
Would you see Game of Thrones without consulting your teenager?
The key decision makers must be involved in the claim process from the outset.
For example, decisions cannot be made on the reinstatement of a building without the involvement of the owners or their delegated representative.
If they are not involved disagreements and inefficiencies may result.
Late Involvement of Specialists
Would you tightrope walk across the Grand Canyon and not ask someone to check the rope until after you reached the other side?
If they are necessary specialists need to be appointed on a timely basis.
For example it is no use calling a fire investigator to inspect the cause of the fire once the evidence has been removed. It’s no use calling a restoration company once the property has been dumped. Specialists need to be involved on a timely basis. This includes the appointment of Claim Preparers. Often we are appointed after a claim has become problematic, lines have been drawn and positions taken. While we have no objection to becoming involved at this stage, it is preferable to be involved from the outset so we have the opportunity to assist the claim process.
Involving the Wrong Specialists.
Would you employ a car mechanic to build your house?
Not only is it important to involve specialists on a timely basis it is critical to involve the right specialists.
For example, reinstatement of fire damaged property is a specialist field involving make safe, identification of contaminants such as asbestos and recognition of upgrades required to satisfy building regulations. Builders experienced in fire reinstatement should be appointed.
In contrast, reinstatement of a property in an earthquake zone such as Christchurch, New Zealand, requires a builder abreast of the changing earthquake building standards.
Failure to Respond in a Timely Manner
Would you arrive late with front row seats at The Australia Open?
The time to respond to claim queries is immediately. The time to respond to claim issues is straight away. The time to support the claim is as soon as possible.
We appreciate that business commitments, insufficient staff and lack of co-operation from suppliers and the like can all cause delays in the claim process. These delays can result in the loss of information, inadequate explanations and confusion.
If additional resources are required to attend to the claim determine if the insurance policy covers the cost.
Failure to Communicate
Would you perform Hamlet without a script?
Many of the difficulties associated with claim resolution arise from a failure to communicate.
Recently we were contacted by an Insured who had been presented with a weekly loss of rent associated with a building which was destroyed. The insured had not been supplied with any explanations and queried the value of the weekly loss of rent which had been identified. The absence of supporting calculations is inexcusable.
Fortunately when we were presented with the source data we were able to confirm that the weekly loss of rent was correct and the insured understood the position.
In the interests of efficiency and professionalism full communication is necessary.
CONCLUSION
Solutions are impossible without understanding the problem. In this article we have shared some of the problems we encounter in our claims experience to encourage you to find positive claim outcomes.
Underinsurance & Business Interruption
In November 2013 Claim Solutions presented to the Annual ANZIIF Regional Conference. Our topic was Underinsurance and Business Interruption. The following article includes a few pointers from our session.
The Gross Profit section of a Business Interruption policy covers Loss of Future Profit. To avoid underinsurance penalties the terms “Future” and “Profit” need to be understood.
Future
Most insurance policies refer to the term “future” as the “indemnity period”. This is the period from the date of loss to the date the results of the business return to normal. The time it takes for the results of the business to return to normal must be nominated after considering factors such as the period required to rebuild, reinstate contents, relocate to alternative premises, re-employ & train staff, win business back from competitors, etc. In our experience it usually takes longer for the results of the business to return to normal than originally anticipated. Most claims prepared by us have an indemnity period of 12 months or more.
If an “Indemnity Period” of 12 months is selected it is important to recognise an insured event may occur on the last day of the period of insurance. If so the indemnity period commences on this date and the cover may respond over the following 12 months. As a result it is not only necessary to consider the results of the business over the period of insurance but over the following twelve months. If an indemnity period in excess of 12 months is required the results of the business need to be considered further into the future.
Profit
A Business Interruption policy most commonly insures Gross Profit. The insurable Gross Profit may differ from the accounting Gross Profit. The insurable Gross Profit is defined in the policy. The Gross Profit used to determine the Declared Value must be consistent with this definition. Many Industrial Special Risks policies define Gross Profit as the Sales (net of discounts) plus Closing Stock less Opening Stock less Uninsured Working Expenses. You need to review the most recent annual Profit & Loss Statement prior to renewal of the cover and extract the Sales (net of discounts), Closing Stock & Opening Stock. Uninsured Working Expenses also need to be extracted. These are the expenses which do not need to be insured. They should only include those expenses which vary directly with the level of sales. They differ from one business to the next but may include purchases, freight, energy, etc. Remember, the longer the list of uninsured working expenses the greater the risk of underinsurance.
Once the historical, insurable Gross Profit is determined this should be expressed as a ratio to sales to determine the insurable Rate of Gross Profit. You need to consider whether a similar rate will be incurred in the “future”. If so, it may be used to determine the Declared Value. If not, it needs to be adjusted to reflect the rate which you expect to achieve in the “future”.
The Declared Value on Gross Profit.
The Declared Value on Gross Profit is determined by applying the adjusted Rate of Gross Profit to the maximum annual sales over the renewal period and beyond, depending on the selected indemnity period.
CONCLUSION
Underinsurance on the Gross Profit section of a Business Interruption policy is common but can be avoided with proper consideration and explanation.
While the majority of insurance policies for Property and Business Interruption cover most aspects of financial loss arising from an insured event, part of the loss may be uninsured. The uninsured loss may not only include the underinsured portion of the claim because the Declared Values are inadequate as described in the article above but they may also include costs and losses such as: -
- The deductible. This may be significant.
- Amounts excluded from the settlement due to the application of sub-limits.
- Interest costs on funding cash flow.
When preparing a claim it is important to track uninsured losses particularly when the loss has been caused by a negligent third party. If so, the Insurer may mount a recovery action against the third party which may include the uninsured losses.
Under these circumstances every effort should be made to keep abreast of any actions being made by the Insurer. It may be appropriate to appoint independent legal advisers.
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.
