Welcome to Edition 24 of the Claim Solutions’ Newsletter. This Edition touches on the enormity of Global Warming – What’s covered and what’s not.
In addition it includes our ongoing list of possible insured events on page 4. These focus attention on some of the types of commercial risks which have actually occurred since 1 January 2007. These include fires, cyclones, a mini tornado, gas leaks, evacuations, power surges as well as blackouts.
Physical loss, destruction or damage and associated financial losses occur to ordinary businesses every day.
Unless risk is managed it can paralyze daily personal and commercial activities. Insurance is an integral and vital tool used to manage risks such as those listed on page 4.
For all those who have sustained a loss we wish you: -
- A speedy recovery.
- An appropriate insurance policy.
- A responsive insurer.
- Bigger and better times ahead.
The Winter 2006 edition advised that the Bureau of Meteorology reports 2005 was Australia’s warmest year since reliable widespread temperature observations began in 1910. In 2005, Australia’s mean temperature was 1.09% above the 1961-1990 average. In 2006 it was 0.47% above average. The Bureau’s annual report also indicates rainfall distribution last year resulted in the third driest year on record for Victoria and Tasmania and the second driest on record for the broader south-eastern region of Australia.
Many experts suggest this is a component of rapid global climate change. They also suggest global warming, while a natural phenomenon is accelerated by human activity including the emission of greenhouse gases.
The consequences of climate change are being felt and some suggest may be experienced on a larger & accelerating scale in the future. These consequences may be considered under three risk categories; fire, wind and water.
Hot, dry conditions increase the risk of fire. In 2006 and 2007 devastating bushfires occurred throughout Australia. Southern California, southern France, Malaysia and Indonesia are also particularly fire prone and reports of forest fires threatening life and property are common.
Wind Some experts suggest increased temperatures cause more extreme wind events such as cyclones, hurricanes, tornadoes and severe windstorms. Was Hurricane Katrina, with its catastrophic impact on New Orleans in August 2005, a result of climate change? Events such as these often also involve the risk of damage or loss by water.
Dams supplying water to country areas are drying up and those providing water to major cities are approaching record low levels. Advanced water usage restrictions apply across much of Australia.
Rising sea levels from glacial or ice cap melt is also attributed to global warming. These are some of the consequences of Climate Change. A common commercial property insurance policy in Australia is the Industrial Special Risks Policy. It often forms the basis for many other types of property cover. How do current Insurance Policies respond to these risks?
In general terms an Industrial Special Risks Policy covers physical loss destruction or damage and the loss of profit associated with this damage unless the peril or property is excluded.
Fire is not an excluded peril and provided the affected property is not excluded the physical loss from fire is covered. The Business Interruption loss which flows from the damage to insured property may also be covered.
Business Interruption may occur even though there has been no property damage owned by the Insured.
Access to areas may be restricted, services such as water and power may be unavailable, and suppliers may be unable to provide products or raw materials.
The insurance cover may be extended to respond to the loss of profit which flows from property damage to these risks.
As with fire, an Industrial Special Risks Policy does not exclude”wind” and physical loss, damage or destruction to insured property and any consequent Business Interruption from this risk is covered.
Cyclones can cause significant damage to growing crops. This was painfully obvious to banana farmers in Innisfail and Tully in Queensland in March 2006 when Cyclone Larry flattened crops severing a large portion of the supply of bananas throughout Australia.
An Industrial Special Risks Policy excludes “growing crops” and specialist Crop Insurance cover is necessary. This may be difficult to obtain in Cyclone prone regions and if available may not extend to Business Interruption flowing from cyclone damage.
Damage from rainwater, hailstorms, flood, tsunami, tidal wave, rising sea levels and even subsidence may all fall into this category.
A typical Industrial Special Risks Policy excludes physical loss, destruction or damage from flood, water from or action by the sea, tidal wave or high water.
The rainwater and hailstorm risk is not caught within this exclusion. This was fortunate for the businesses in Canberra which were subjected to severe hailstorms in early March 2007. Car yards often suffer significant damage in these events. Other countries are far from immune. News reports indicate the space shuttle Atlantis sustained hundreds of dings from hailstones the size of golf balls at Cape Canaveral in Florida, USA, in late February 2007.
Flood is often defined as the inundation of dry land by water overflowing from the confines of any natural watercourse (whether modified or not), reservoir or dam.
Much of the damage from Hurricane Katrina was not caused by wind velocity but resulted from flood when protective water levees were breached. Problems such as this may only become exaggerated if the link between severe weather and accelerating global warming is correct.
The devastating tsunami which hit Indonesia on 26 December 2004 caused widespread damage. This would not be covered under a typical Industrial Special Risks Policy.
Cover is also unavailable for rising sea water. Whilst this may not cause significant damage to major commercial centres its impact is being felt. News reports attribute the increased incidence of flooding in countries including Hungary and Bangladesh to rising sea levels. They also report the tiny low lying Pacific Island of Tuvalu may be uninhabitable in decades due to climate change including rising sea waters. New Zealand began accepting what may be the first “climate refugees” from this Island in 2001. There is also the well known and long ongoing issues for the gradually sinking Venice, Italy.
A recent report by the International Institute for Environment and Development in London advised one in eight city dwellers live in regions less than 10 metres above sea level.
The scope for property damage associated with this aspect of climate change is enormous and, as it is not insured now, it is unlikely to be insured in the future.
The absence of water can also create its own difficulties. The dry conditions currently being experienced in many urban centres remove moisture from the soil causing buildings to settle and crack. The Industrial Special Risks Policy deletes cover for the immediate damage caused by subsidence.
Water usage restrictions currently apply across much of Australia. Many industries rely on ample water supplies and the restriction of this utility may result in financial loss. The adverse impact on the swimming pool industry in Australia has been widely reported. And what about the water companies loss of profit when consumers are encouraged to use less water? In the absence of any physical damage losses such as these are unlikely to be insured.
CONCLUSION – Climate change may result in the increased magnitude and frequency of loss. A portion of this increased risk falls within current insurance wordings but some of it does not. If loss ratios increase it is inevitable premiums must follow. If the cost becomes prohibitive increased deductibles or restrictions to the cover is likely.
IT IS UNFORTUNATE BUT THIS MAY BE THE LEAST OF OUR PROBLEMS!
Aviva Insurance has posted its top 10 wacky 2006 claims on its website. They include: -
“A swarm of bees flew down my chimney causing clouds of soot to fly all over the living room”
“A deer dived through my closed kitchen window.”
“My young granddaughter accidentally fed my false teeth to the dog who promptly chewed them to shreds before I could retrieve them.”
The previous year’s list topped these. It relayed a claim for a broken car windscreen which occurred when a frozen squirrel dropped out of a tree.
We are pleased to report we could not find any similar events in Australia such as frozen koalas falling out of trees.
Bushfires are a regular feature of Australian life. Some say they are a natural, cyclical phenomenon which play a role in the clearing and rejuvenation of our land. No one can deny the devastation and destruction they cause.
Many of us remember the ferocity of the Ash Wednesday fires affecting Victoria and South Australia in 1983. Well known tourist destinations including the Dandenong and Macedon ranges were blackened.
Most of us are too young to remember Black Friday which occurred in Victoria on 13 January 1939, considered to be one of the worst natural bushfires in the world! Several towns were completely destroyed, and were not rebuilt. Ash from these fires fell on New Zealand.
This year, mature El Nino conditions, ongoing drought and record high temperatures have combined to produce tinder dry country that has again ignited into perilous fires.
Devastating bushfires have occurred in all States and Territories threatening both life and property. Most recently Victoria and Tasmania have been particularly hard hit.
At the time of writing smoke continues to shroud Melbourne. A constant reminder of the enormity of the fires raging throughout the State. A reminder also of the difficult defend or evacuate decision being made by so many.
We hope property losses are minimal and, if they do occur, recovery is swift.
Part of this recovery process is a contract, an insurance policy. A document that seems insignificant compared to the magnitude of the bushfire devastation.
There are many types of policies. The comments which follow relate to the Mark IV Industrial Special Risks policy designed for commercial risks.
Section 1 of the cover is headed Material Damage and responds to the replacement value of property which has been destroyed by bushfire or the reinstatement of property which has been damaged. Several conditions must be met before the replacement or reinstatement value is paid. These conditions are the subject of the article on page 3 of this newsletter.
Section 2 of the cover is headed Consequential Loss and aims to cover the loss of profit resulting from the property damage payable under Section 1.
This type of cover will respond to the loss of property and loss of profit for many of the commercial risks which may suffer damage from the bushfires.
However, there are risks that may not clearly fall within these Sections.
Imagine an hotel that does not sustain any property damage yet its trade is non-existent because the area has been evacuated and/or roads closed. Perhaps it has been closed by a public authority. Perhaps people have simply left. A loss of profit will be sustained but this is not due to fire damage to the hotel, it is due to the evacuation.
Even though there is no property damage the loss of profit sustained while the area is closed may be covered under a Prevention of Access clause. Careful consideration of this clause may be necessary.
Cast your mind forward several months. The fires are over, access restrictions have been lifted but the area remains devastated and it will take years before it rejuvenates. Visitors to the area slowly return but numbers are nowhere near pre fire levels. An ongoing loss of profit is sustained even though our imaginary hotel did not suffer any property damage.
This ongoing loss of profit may not be covered under the standard unendorsed Mark IV Industrial Special Risks policy.
Endorsements may extend the cover to include a portion of the ongoing loss of profit. These could include cover for “Loss of Attraction”, “Interference with Access to Premises of Others”, “Closure by Order of a Public Authority”, “General Area Damage” and the like.
This is a complex area of Business Interruption insurance and specialist advice is required.
An Insurance Policy is a vital risk management tool!
The Articles which appear in this Newsletter are not intended to be a substitute for specific technical advice.