Welcome to 2007 and this, our 23rd edition, of the Claim Solutions Newsletter. We have now brought you claims and insurance news for over five years. All of our previous newsletters are available in our on-line archive. These include articles on many classes of insurance such as Property, Business Interruption, Machinery Breakdown, Product Liability, Product Recall and Fidelity Guarantee. These also cover events such as fires, earthquake, tsunami, cyclone, hurricane, tornado, SARS and Bird Flu.
They include case studies of claims across a wide variety of industries such as retail, hospitality, manufacturing, import, wholesale and distribution. They consider many insurance and claim issues such as underinsurance, cash flow, importance of progress payments, impact of GST, identifying an additional cost, insurance of payroll, etc.
For a light diversion each newsletter has included an Odd Spot ranging from claims resulting from broken noses and fires started by vermin from rabbits to mice.
This knowledge base is available to you. It is our contribution to the industry. Thank you to those many readers who have provided their valuable feedback including those who have suggested topics. Educational institutes have used many articles for study purposes. Our readers’ comments are always welcome.
Our archive also includes our lists of possible insured losses over a period in excess of five years. This is a valuable resource for insurance brokers, insurers, risk managers and others interested in loss events throughout Australia. In this edition we bring you information on bushfires and property damage. We hope you enjoy it.
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!
Many insurance policies cover the replacement value of property which has been destroyed and the reinstatement value of property which has been damaged. The replacement or reinstatement (R&R) value must not exceed the “as new” replacement value. This is where the term “New for Old” originates
To receive the full R&R value the Insured must satisfy five provisions: -
(a) The replacement or reinstatement must be carried out with reasonable despatch. If this provision is not satisfied the basis of settlement reverts to indemnity value. This is a value that reflects the age and condition of the damaged property. It is less than the “as new” replacement value. It may be a second hand value
The time frame that reflects “reasonable despatch” will vary depending upon the circumstances and complexity of each claim.
In over 20 years of claims experience we have not seen one case where the R&R conditions did not apply because the work was not performed with “reasonable despatch”.
(b) Where property is repaired the repair value cannot exceed the replacement value. This clause is also unlikely to create any problems in claim settlement.
(c) If the total replacement value of all property at the commencement of the period of insurance is less than 85% of the actual replacement value an underinsurance penalty may apply.
This provision often prevents an Insured from receiving the full R&R value. Information on property underinsurance can be found on-line in our very first newsletter in Winter 2001.
(d) The R&R cost must be incurred before the claim can be paid.
If the insured spends less than the R&R value they receive the amount spent.
Occasionally this provision prevents payment of the full replacement value. However, this does not create a problem as the Insured is usually satisfied that the replaced property is an equivalent substitute for the destroyed property
(e) All other property cover must be insured on a similar R&R basis. As with provision (a) we have never seen a claim where this
Business can be interrupted for all sorts of reasons; some of which are insured and others that are not.
News reports indicate pesky pigeons in the Victoria Street Mall in Coburg are annoying customers and scaring them away from neighbouring shops.
This has resulted in a loss of trade.
This is an example of a Business Interruption loss that is not insured. This is because the Business Interruption loss must flow from damage to property and this has not occurred.
The Material Damage proviso has not been satisfied.
Sounds like someone needs to stop feeding the birds. It’s costing more than Tuppence a Day!