Welcome to our Summer 2012 Edition and 43rd Claim Solutions’ Newsletter.
With Summer now upon us this newsletter considers the seasonal nature of disasters and claims.
It then considers how to “get the cover right”. Is it sufficient? Is it adequate? Does it transfer the desired risks to an Insurer? Is the value declared too low? Are you or your clients exposed to an underinsurance penalty? Is the value declared too high? Are you or your clients entitled to a refund of premium?
We believe that the foundations of successful claims are: -
- Claims professionals who can communicate with accuracy, empathy, integrity and transparency.
- Appropriate and well structured insurance policies which are designed with absolute clarity where no word is wasted and where the right word is used on every occasion.
If you, or your clients, have suffered loss or damage we wish you a speedy recovery.
We are available to assist you or your clients and welcome any claim enquiries
For a fully searchable history of our newsletters check out Insuropedia at www.insuropedia.com
Natural disasters in Australia include bushfires, cyclones, floods, severe storms and earthquakes. All can cause significant financial hardship, and insurance claims professionals play an important role in recovery.
When do they occur? Are certain times of the year more prone to natural disasters than others?
On 7 February 1967, 110 bushfires were burning in Tasmania one of the worst being the Hobart fire which sadly resulted in significant loss of life and property. The 18th of February 1983 became known as “Ash Wednesday” and saw 180 bushfires burning in both Victoria and South Australia. On 7 February 2009 the Black Saturday bushfires in Victoria also resulted in lives lost and extensive property damage. Each of these significant bushfire disasters occurred in the month of February.
In January 1970 Tropical Cyclone Ada caused severe damage to resorts on the Whitsunday Islands in Queensland. On Christmas Eve in 1974, Cyclone Tracey struck Darwin. On 20 March 2006 Cyclone Larry caused major damage to homes, building and crops. In more recent times Severe Tropical Cyclone Yasi made landfall in Queensland on 30 January 2011 causing widespread damage.
On 23 December 2011 severe multiple storm cells hit Melbourne accompanied by hail the size of tennis balls, torrential rain, flash flooding and extensive power blackouts.
Our experience is that there is indeed a seasonal spike in bushfire and weather related claims in the months of December/January sometimes extending to March.
Unlike the weather related risks earthquakes can strike at any time. The most devastating Australian earthquake in our time occurred in Newcastle on 28 December 1989. It caused damage to over 35,000 homes, 147 schools and 3,000 commercial buildings.
At Claim Solutions we assist with insurance claims arising from events such as these. Adequate cover is essential. Perhaps now is a good time to ensure the cover is adequate.
Can you imagine a world without insurance? Perhaps it would be similar to the scene described by English commentator, Mr J Evelyn, after seeing the refugees from the Great Fire of London.
“The poor inhabitants were dispersed about St. George's Fields, and Moorfields, as far as Highgate, and several miles in circle, some under tents, some under miserable huts and hovels, many without a rag or any necessary utensils, bed or board, who from delicateness, riches, and easy accommodations in stately and well furnished houses, were now reduced to extremest misery and poverty.”1
Today we live in a world with an insurance industry which assists communities to avoid the “extremest misery and poverty” described by Evelyn. Perhaps this was exemplified in a media release from the Insurance Council of Australia, made on 19 March 2009, less than six weeks after the Victorian bushfires commenced. It stated, “The general insurance industry has made approximately $220 million in emergency payments to affected policyholders from their insurance policies. Cash settlements for some property and contents have been made following a decision by policyholders.” The response was prompt and efficient.
Today insurance policies are available to transfer risk from an Insured to an Insurer. They have evolved over centuries and respond to a multitude of risk scenarios. They should be regularly reviewed to ensure they will respond at a time of crisis.
Many of our readers will know that a large proportion of the claims we prepare are claims for Property Damage and/or Business Interruption under Industrial Special Risks or Composite Policies. There are many aspects of these policies which need to be reviewed to ensure they are both sufficient and adequate; far too many to encompass within this newsletter.
With the possibility of seasonal weather events approaching, a common issue which often arises is the difference between storm and flood damage. It is an important difference. Some insurance policies respond to damage from both storm and flood, others are limited to storm.
For example, if not endorsed, the standard Mark IV Industrial Special Risks policy contains the following exclusion: -
"The Insurer shall not be liable under Section 1 and/or 2 in respect of physical loss, destruction or damage occasioned by, or happening through flood, which shall mean the inundation of normally dry land by water overflowing from the normal confines of any natural watercourse or lake (whether or not altered or modified), reservoir, canal or dam; water from or action by sea, tidal wave or high water."
If water damage is caused by rainfall accompanying storms, a claim may succeed, but this may not be so if it was caused by an overflowing river or lake.
It is quite possible that neighbouring businesses located near a river, such as the Brisbane River which overflowed in January 2011, may each receive a different insurance response depending on the way the insurance policy has been structured. One business may be indemnified but the one next door may not!
A similar scenario arose in June 2007 when torrential rainfall filled the Gippsland rivers system and a king tide at Lakes Entrance prevented the water from escaping to the sea resulting in the flooding of many properties.
The media often pounce on these scenarios focusing on the injustice of opposing outcomes. The time to consider the appropriateness of insurance cover is when it is taken out not when a claim arises.
In addition to ensuring that an insurance policy responds to the required risks it is important to ensure that values declared on the policy are correct. If they are too low an underinsurance penalty may apply.
Many insureds believe that if the value they declare is insufficient they may claim up to the amount specified in their Schedule of Insurance. This may not be correct. An underinsurance penalty may mean that the insurance policy can only respond to a portion of the amount claimed.
At the risk of oversimplification the theory works like this. The Insurer insures a number of classes of business. For example, it insures the replacement value of property against fire. It accumulates the total replacement value of all the properties insured and based on its claims experience assesses the value of the probable claim payouts. It then calculates a loss ratio i.e. the proportion of the claim payouts to the value at risk. To this it adds an allowance for its operating costs and the required level of profit to determine the necessary insurance premium. Once collected, the premium provides a pool of funds from which claims can be paid.
If all insureds under declare the value at risk there will be insufficient funds in the pool to pay claims and the insurer will not survive. If one Insured under declares its value at risk it should not expect to receive the full value of its claim as this would leave insufficient funds in the pool to meet claims made by those insureds who have adequately declared. It may not be popular but the under insurance penalty is necessary. It protects the insurer’s cash flow to ensure it remains viable to meet its claims liability.
No doubt returns on invested funds and market competitiveness also influence the final insurance premium.
So now that we recognise that an under insurance penalty is necessary, how can the application of the penalty be avoided?
The only way to avoid under insurance is to adequately declare.
In relation to property insurance this usually means declaring the full replacement value of the property insured. This is not the written down value, nor is it the depreciated value. It is certainly not the market value.
Just this year we have been involved in a claim where the insured declared the written down value of its assets on the Schedule of Insurance.
In some instances it is appropriate to declare an indemnity value which is less than replacement value but this is uncommon.
In the event that you do not have the expertise to determine the full replacement value of the insured property it may be necessary to obtain a professional valuation.
In relation to Business Interruption insurance it is necessary to insure the insurable Gross Profit over the potential maximum indemnity period. The insurable Gross Profit is likely to be different than the accounting Gross Profit. The insurable Gross Profit definition may differ from one insurance policy to the next.
If you do not have the expertise to determine a Declared Value on Gross Profit it may be appropriate to obtain specialist assistance.
Claim Solutions provide specialist Declared Value review assistance.
In some instances the declared value may exceed the value of risk and a Policy holder may have paid too much premium.
The declared values specified on property, gross profit and payroll under a Mark IV Industrial Special Risks Policy at the beginning of the renewal period are provisional.
The "Memoranda" contains an "Adjustment of Premium” clause.
This allows the declared values specified at the beginning of the renewal period to be reviewed at the end of the renewal period.
If the initial declared values are found to be understated an additional premium may need to be paid. However, if the declared values are found to be overstated a refund may be due.
The foundation of a successful claim is the insurance policy.
The policy is often compiled by people with many years experience in the insurance industry and it reflects their intention of loss, damage and payment. It conveys the intention of the insurer, but no matter how well it is drafted and, while every effort may have been made to use the right words to convey clarity, there will always be room for interpretation.
The intention of the policy drafter, with all his/her experience, may not match the interpretation of the reader facing loss; the Insured. The policy results in the payment of money or reinstatement of property. This financial interest may exaggerate the disparity between intention and interpretation. This is not necessarily a reflection on the insurance industry but more a reflection of the limitations of the English language and the impact of financial interest.
There are two ways to minimise disagreement.
The first is, as far as possible, to ensure the policy is written with absolute clarity, where no word is wasted and where the right word is used on every occasion. The second is to accept there may remain scope for interpretation. Claims professionals need to recognise this grey area, and ensure all parties are aware of them.
It is vital to recognise it is not all about the payment but the manner in which the claim is paid. Timeliness needs to be accompanied by clear explanations from claim professionals communicated with accuracy, empathy, integrity, transparency and supported by a well constructed policy which minimises the scope for misunderstanding.
About Claim Solutions…
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.