Welcome
Welcome to this, our 29th Claim Solutions' Newsletter. It contains a summary of the Gas Crisis in Western Australia and possible insurance implications, the Business Interruption risk and the difference between Gross Profit and Gross Revenue, a fire in a Chinese coal mine that refused to go out and an unusual claim from Indiana Jones and the Temple of Doom.
Page 4 contains a list of possible insured events 
which occurred over the previous quarter. They include fires, chemical leaks, explosions and a tornado. These are the reasons we insure. Regardless of risk management external events may cause loss.
A speedy recovery to all those who have sustained loss.
Claim Solutions is available to assist. Your enquiries are welcome.
All of the articles contained in this and earlier newsletters are available on a fully searchable, insurance knowledge base for your convenience. This is available to all our readers at: - www.insuropedia.com
To see a list of recent losses, 
Gas Disruption - Western Australia
News reports indicate at 1.40 pm on 3 June 2008 a pipeline rupture and fire occurred at a gas processing and transportation hub operated by Apache Corporation on Varanus Island which is some 100 kms from Karatha in Western Australia. The facility is a major supplier to industry as well as satisfying approximately 30% of Western Australia's domestic needs.
At the time of writing full gas supplies had not been restored.
These events are reminiscent of the gas disruption which occurred in Victoria when, on 25 September 1998, a fire at the Esso/BHP Longford plant severely disrupted gas supplies causing considerable financial loss and a plethora of Business Interruption claims.
Property loss also occurred as some industries experienced uncontrolled plant shutdowns damaging plant.
Claim Solutions prepared and settled a large volume of these claims.
Similar losses are likely in Western Australia. Many WA companies including miners, smelters and refineries are reporting reduced production as a consequence of the interruption to gas supplies. News reports indicate scheduled maintenance is being brought forward where possible. Companies should ensure any additional costs or changes in market prices associated with rescheduling maintenance are quantified.
If the outage remains after maintenance is complete ongoing losses and further shutdowns are likely.
The possibility of shut downs and the magnitude of financial losses increase as each day passes. So too does the need to: -
- Secure alternate fuel (e.g. LPG, diesel, etc) and convert plant where possible.
- Utilise spare capacity in interstate or overseas operations.
- Purchase competitor product to satisfy local demand, if possible.
- Conserve energy when it is not required.
News reports suggest losses could run into the hundreds of millions of dollars.
Are these financial losses insured?
The cause of the rupture and fire at Varunus Island needs to be determined. If it is not an excluded peril, Industrial Special Risks policies may respond.
Insurance policies should be reviewed to determine if they include extensions for: -
- Public Utilities.
- Suppliers' Premises.
The Mark IV Industrial Special Risks policy contains a "Public Utilities Extension". Paraphrased this reads, "Any loss resulting from interruption of ... the Business in consequence of damage to property, caused by a peril damage as a result of which is insured hereunder, at any ... gas works ... situated on or immediately adjacent to the Premises shall be deemed to be loss resulting from Damage to Property used by the Insured at the Premises".
While specifically referring to "gas works," the application of this clause appears limited. The "gas works" must be adjacent to the business which sustained the loss. Broader Public Utility Extensions may exist under manuscript or endorsed covers.
The cover may also contain a Suppliers' Extension which may read, "Loss resulting from interruption ... with the business in consequence of Damage to property at Suppliers/Customers Premises shall be deemed to be loss resulting from Damage to property used by the Insured at the Premises for the purpose of the Business".
Apache Corporation may be a "Supplier" within the meaning of this clause and Business Interruption losses sustained by its customers may be covered. Its customers sustain the first tier of losses.
If those companies which have sustained loss purchase gas direct from Apache they may fall within the first tier. If they purchase gas from Apache via a retailer they may be a second tier customer i.e. a supplier of a supplier. Insurance covers need to be reviewed to determine if cover is provided for this further level of loss.
The Victorian Gas Crisis, almost 10 years ago, was the subject of a class action against the gas supplier. Even if financial losses are not insured they need to be quantified, documented and supported in the event that a similar experience occurs in Western Australia.
Fire in a Coal Mine - Not so Unusual!
The Spring 2007 Edition brought news that a fire in the Gregadoo Tip in southern NSW had finally been extinguished after burning for more than two years. Fire extinguishment costs were reportedly in the vicinity of $1.35m.
This record has been smashed!
Back in November 2007 news reports indicate a fire in an underground coal mine which had been burning in the Terak coalfields in China for the past 50 years had finally been put out after a mammoth extinguishment effort over three years!
The fire is thought to have consumed over 12.43m tonnes of coal and was responsible for emitting poisonous gases and causing roads and houses to subside in the Xinjiang Province.
Surprisingly, spontaneous combustion of underground coal deposits is not unusual and there are fires which have been burning for centuries!
Gross Profit Versus Gross Revenue
"The important thing is not to stop questioning"
Albert Einstein.
Should the Business Interruption risk be insured on a Gross Profit or Gross Revenue basis? We are often presented with this issue.
The answer requires an understanding of "Gross Profit " and "Gross Revenue".
Gross Profit is just a level of earnings. This level varies between accountants and industries. For insurance purposes only one level of Gross Profit is relevant.... that which is defined in the insurance policy.
Paraphrased the Mark IV Industrial Special Risks Policy defines Gross Profit as Turnover plus Closing Stock less Opening Stock and Uninsured Working Expenses. Turnover is sales, Stock is the goods available for sale and Uninsured Working Expenses are those costs which vary directly with the level of sales. While this sounds technical it is clear that Gross Profit is less than Sales value.
In contrast, Gross Revenue is essentially Sales value. There may be some deduction for variable costs such as commissions but these are usually minor.
Gross Profit cover is suited to businesses which need the ability to deduct expenses which vary directly with the level of sales. It is inappropriate to insure these expenses as they will decline with the level of sales in the event of a loss. Examples are purchases, energy, freight, packaging, etc. If variable costs such as these were not deducted premium dollars would be wasted. The insured would not receive compensation for these costs as they would be deducted from any settlement because they would not be incurred. They would reduce in proportion to any lost sales.
Gross Profit cover is suited to those businesses which have variable costs e.g. manufacturers, retailers, importers, wholesalers, etc.
Gross Revenue cover is suited to businesses where the expenses which generate the sales are largely fixed i.e. they do not vary directly with the level of sales.
Examples include consultants, insurance brokers, insurers, accountants, architects, solicitors, real-estate agents, etc.
Sometimes we are required to prepare a claim where the Basis of Settlement has been specified as Gross Revenue but it should have been declared as Gross Profit and visa versa. This can lead to unnecessary complications.
The cover should reflect the risk.
Odd Spot - Indiana Jones & The Temple of Doom
How do you value a one-off, designer dress sequined with beads from the 1920's and 1930's? Not only were insurers faced with this conundrum but they may also have been searching through the clauses in the policy when they learned this Haute Couture was eaten by an elephant!
Apparently "Dumbo" took a liking to the dress when it was left drying in a tree in one of the takes during the shooting of "Indiana Jones & the Temple of Doom".
No-one could have anticipated this claim "A Hungry Elephant Ate the Heroine's Dress for Lunch!"
The Articles which appear in this Newsletter are not intended to be a substitute for specific technical advice.
