Welcome to our 38th Claim Solutions’ Newsletter.
This newsletter focuses on Section 1, Material Damage, of the Industrial Special Risks (ISR) policy. Articles on Extra Cost of Reinstatement and Stock Salvage are discussed. All are current issues we have seen in recent claims.
Our work continues and the industry remains busy as a result of the hail storm catastrophes in Victoria and Perth in March along with the storms affecting QLD and NSW in March and May this year.
Our regular list of possible insured events over the past quarter is contained on page 4. Restaurants and hotel/motels make up the majority of reported losses.
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
The Insurance Council of Australia’s catastrophe disaster statistics currently record the 3 major losses in the last 18 months as the Perth and Melbourne storms in March and Victorian bushfires in February 2009. It is not surprising that clean up and claims continue.
The value of the 6 March hail storm in Melbourne is currently recorded as $1,044 million. The damage caused by the Perth storm only 2 weeks later on 22 March is $1,053 million and is reported as the most costly natural disaster in insurance terms in Western Australia. The Victorian bushfires around 7 February 2009 throughout the state caused damage estimated at $1,070 million.
The last of the commercial bushfire claims are finalising but this does not mean reinstatement has been achieved. Some businesses have accepted cash settlements. Ongoing issues include future rebuilding dates, rebuilding elsewhere, meeting bushfire attack level reinstatement requirements, rezoning, waiting for council development approval and waiting for trades people. These issues are not isolated to this disaster.
Notably motor vehicle hail damage repair dates of February 2011 and beyond, unmistakable evidence of temporary repairs including tarpaulined rooves, covered sky lights and the constant stream of trades‘ vehicles in affected areas signal that the actual costs of the storm disasters will not be known for some time. For businesses, latent damage includes swelling fixtures, carpets shrinking, machinery seizing and rooves leaking in subsequent rains. The resultant Loss of Gross Profit claims continue. Claim Solutions has been involved in a multitude of claims from all of these events. We welcome your enquiries
We often comment that Material Damage, Section 1 of an Industrial Special Risks (ISR) policy, is easier to understand than Section 2, Consequential Loss. This is largely because you can see or touch property which is physically damaged and obtain a quote to replace it.
Our previous newsletters have discussed the Basis of Settlement and Reinstatement or Replacement Memoranda to Section 1 including its 5 provisions (Summer 2007). Where property is destroyed the policy responds to the rebuilding or replacement of the damaged property and where property is damaged it responds to the repair of the damage. In both instances, reinstatement is to a condition substantially the same as, but not better or more extensive than, its condition when new.
How does the policy respond though when an Insured receives a letter outlining upgrades required on the damaged and undamaged portions of the property to comply with Building Codes?
Council requirements may not be considered to be “reinstatement of the damaged property insured” as the Basis of Settlement states. Such requirements may also be considered “better or more extensive”.
The Memoranda to Section 1 provides additional cover for Extra Cost of Reinstatement. This requires a sub limit be specified in the Schedule of Insurance.
Extra Cost of Reinstatement extends the cover to include “the extra cost of reinstatement (including demolition or dismantling) of damaged property necessarily incurred to comply with the requirements of any Act of Parliament or Regulation made thereunder or any By-Law or Regulation of any Municipal or other Statutory Authority;”
It is subject to 5 provisions:
- The work must be carried out within reasonable dispatch.
- It does not include the additional cost to comply with any such regulations etc which the Insured was required to comply with prior to the loss.
- The test for under insurance is not applied to this cover and any amount determined under this extension is not included in the adequacy test.
- All other similar insurance covers are on the same basis.
- If the cost of reinstatement is less than 50% of the cost of reinstatement if the property had been destroyed then it limits the amount recoverable.
It is often the last provision that is most scrutinised. Issues arising include:
- Disputes over the cost/s of reinstatement.
- Differences in determining the total reinstatement value.
- It is cheaper to replace the whole rather than just one section.
- Only one (small) part of the building is damaged but we are now required to sprinkler the entire facility.
- Risk Management versus statutory requirements.
Issues for Claims
Obtaining Council and other authorities requirements early in the claim process will assist its progression.
Quantity Surveyor reports and building quotes should separate the costs to meet Statutory requirements so that the correct sections and sub limits of the policy are utilised and under insurance of Declared Values determined appropriately.
In determining the sub limit for Extra Cost of Reinstatement, valuers would consider the age of the property, Building Codes of Australia, changes to property zones including bushfire areas.
The policy wording may also be endorsed for Additional Extra Cost of Reinstatement.
Claims are complex and policies should be considered in their entirety including the memoranda and endorsements.
Stock has been damaged by an insured peril, isolated, counted, costed in accordance with the Basis of Settlement and paid by Insurers. What happens next?
If the stock is not completely destroyed, loss adjusters will ask the Insured if the damaged stock has any value to them ie. for the purposes of a salvage sale. If it does not, then consideration of salvage merchants may be made by loss adjusters. Such salvage sales have potentially wide distribution with internet sale bases.
An Insured needs to consider any potential damage caused by such sales. For instance:
- returns to Insured of damaged goods;
- diluting sales if sold in the same sales area;
- liability issues depending on the type of damage;
- warranty claims; and
- infringement of Trade Marks and intellectual property.
Memoranda to Section 1 of the Industrial Special Risks Mark IV policy contains a Branded Goods clause. This states:
“Any salvage of branded goods and/or merchandise, the Insured's own or held by the Insured in trust or on commission, and/or goods sold but not delivered, shall not be disposed of by sale without the consent of the Insured. If such salvage is not disposed of by sale then the damage will be assessed at the value agreed between the Insured and the Insurer(s) after brands, labels or names have been removed by or on behalf of the Insured. “
This clause applies to the salvage of branded goods which are:
- “..... the insured’s own or
- held by the Insured in trust or
- on commission” and/or
- Goods sold but not delivered.
Firstly, the clause requires the approval of the Insured for disposal by sale. It is usually at this point that an Insured may agree to such a sale provided certain conditions are met such as all branding, barcodes or identifying features being removed prior to sale. It is important this be clearly conveyed to the loss adjuster and salvage merchant. It is also appropriate for the Insured to request details of sale(s) so they may inspect the merchandise to ensure their requirements are met.
If the Insured does not provide consent for the sale, the clause advises the “value” of the goods be determined “after brands, labels or names have been removed”. Historically this allows a salvage value to be identified which is then deducted from the value of the stock determined in accordance with the Basis of Settlement.
Similarly, the intention of this clause was to value the salvage and should not be read in isolation to the policy as a whole.
Cessation of a Business
A Victorian hotel destroyed in the bushfires has recently contested the issue of what constitutes cessation of a business and payment for ongoing Loss of Gross Profit. The Conditions to the Industrial Special Risks (ISR) policy contains a clause for termination of cover under Section 2, Consequential Loss. It advises cover ceases if:
- the Insured ceases to carry on the Business, or the Business is disposed of;
- the Insured (being a corporation) is placed in liquidation
- the Insured (being a natural person) becomes a bankrupt.
All the facts surrounding a loss and reinstatement need to be considered. In the case of the bushfires, rezoning, bushfire attack levels, and development applications have reasonably delayed reinstatement.
The Articles which appear in this Newsletter are not intended to be a substitute for specific technical advice.