Welcome
Welcome to the Claim Solutions’ Newsletter for Spring 2003.
With the substantial power outages across North America, Canada and Italy perhaps the last quarter should be known as the “Blackout Quarter”.
In addition to these international losses, local losses have been dominated by factory fires a list of which is included on page 4.
As always, we hope all those who sustained a loss experience a speedy recovery.
This newsletter contains articles on the Terrorism Insurance Act, the Italian blackout, building reinstatement, progress payments and guidelines on determining an appropriate declared value for Gross Profit.
If we can assist you in relation to any claims please do not hesitate to contact us.
Your enquiries are always welcome.
Terrorism cover was withdrawn from many insurance policies in the wake of the tragedy of September 11, 2001.
On 1 July 2003 the Commonwealth Government introduced the Terrorism Insurance Act 2003. This requires Insurers to provide cover for terrorist events in eligible commercial property, business interruption and public liability policies.
The Act also establishes a reinsurer, the Australian Reinsurance Pool Corporation (APRC), which will provide reinsurance cover to insurers for a declared terrorist event. The APRC is to have a premium pool of $10.3billion funded by a cash pool of $300 million collected from premiums, a commercial line of credit of $1 billion and a Government indemnity of $9 billion.
Between 1 July 2003 and 30 September 2003 the APRC reinsured insurers for a declared terrorist incident free i.e. without charging a reinsurance premium. Fortunately a terrorist event was not experienced.
From 1 October 2003 APRC commenced charging reinsurance premiums on eligible contracts. These premium charges are expected to be passed on to the insured.
A ‘terrorist act’ is deemed to have occurred if it is declared by the Treasurer after consultation with the Attorney General. The Treasurer cannot declare an act to be a terrorist incident if he is satisfied it is an act of war.
Let’s hope the pool of funds collected by the APRC never has to be used.
Odd Spot - Break Out the Candles!
On 28 September 2003 a storm-tossed tree branch hit Swiss power lines causing another line to overload knocking out all French transmission of power to Italy. Almost the whole country, other than Sardinia, was plummeted into darkness.
Some 110 trains containing 30,000 passengers were brought to a halt, flights were delayed and operating theatres, including one conducting a six hour liver transplant operation in Turin, were forced to rely on temporary generators. Even the Vatican had to amplify Pope John Paul II’s announcement of new cardinals using temporary generators.
Reinstatement - "Do & Charge" or "Tender"?
Consider the following case study.
Mr Bradbury is a manufacturer of fine chocolates. He operates his business from a building west of Melbourne which he purchased several years ago. On 3 September 2003 a fire significantly damaged plant and building.
He has insurance cover for property and business interruption and is adequately insured. He is losing $10,000 Gross Profit for each week he is out of business.
Builders are available to commence work immediately but it has been suggested a tender process is required to ensure the reinstatement value of the building remains competitive. A period of 3 weeks is required to prepare and agree specifications, invite tenders, prepare quotations, analyse them and select the successful tenderer. Mr Bradbury’s business will sustain a Loss of Gross Profit of $30,000 over this period.
Should building reinstatement be conducted on a “do & charge” or “tender” basis?
If the builder is experienced in fire reinstatement it may be best to abandon the tender process and allow the work to proceed on a “do & charge” basis with a condition that the work is fully documented allowing it to be checked for reasonableness.
Promptness of Progress Payments
It is critical for progress payments to be made on a timely basis following insured events such as a fire.
The absence of timely progress payments may severely curtail an Insured’s ability to reinstate. The longer the business is out of action the more difficult it will be to retain market share. Customers may be permanently lost. 
The standard Mark IV Industrial Special Risks policy contains a clause requiring the Insurer to make progress payments on the production of a report by the loss adjuster.
An insured can encourage prompt progress payments by providing the loss adjuster with all reasonable information in relation to the circumstances surrounding the loss and the extent of damage.
It is important to supply all reasonable information regarding the cause of the loss and obtain a formal admission of indemnity from the Insurer as soon as possible. It is also important to present fully documented progress claims consistent with the policy to facilitate prompt verification allowing the loss adjuster to report to the Insurer.
Underinsurance and Business Interruption
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 including the standard Mark IV Industrial Special Risks policy 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.
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 in relation to any of the above incidents or similar losses.
The Articles which appear in this Newsletter are not intended to be a substitute for specific technical advice.
