What a time we have had! Our Spring 2005 newsletter expands on previous articles about tornadoes and cyclones and considers some of the insurance implications of Hurricane Katrina & Rita.
We have also provided an explanation of the elusive departmental clause which features in many Business Interruption policies.
Page 4 contains our list of possible insured events tracked nationally over the past quarter. There have been a surprisingly large number of fires in hotels, plenty of storms and the occasional burst pipe, product recall or chemical spill.
If you are affected by these or similar incidents please do not hesitate to contact us for claims assistance.
We wish all those who have suffered loss a speedy recovery.
In May 2003 a freak tornado, which left a trail of destruction through the suburbs of Bendigo, prompted an article on tornadoes in the Winter 2003 edition of our newsletter. We explained a tornado is a violent rotating column of air extending from a thunderstorm to the ground. It is capable of producing wind speeds up to 400kph although wind speeds in the Bendigo incident were limited to 150kph.
In March 2005 Cyclone Ingrid toyed with the northern Australian coast initiating a report on cyclones in our Autumn 2005 newsletter. Ingrid was a severe tropical cyclone with wind speeds in excess of 117kph which denuded trees, caused significant storm tides and flattened an echo tourist resort, “Faraway Bay”.
We have all since been witness to news reports on the devastation of Hurricane Katrina and Rita which followed.
The sight of mass evacuations of millions of people across a wide area of south eastern America seems more the stuff of fiction than fact.
So what is the difference between a hurricane and a cyclone? Our research suggests the answer is location. Severe tropical storms such as these are referred to as hurricanes when they occur near the Americas in the Atlantic or eastern Pacific Oceans and cyclones when they form in the South Pacific and Indian Oceans. Nations in East Asia like Japan and China call them typhoons.
They spin clockwise in the southern hemisphere and anticlockwise in the northern hemisphere.
Katrina’s winds at landfall were clocked at 225kph. It was classified as a category 5 hurricane whilst in the Gulf of Mexico and was downgraded to a category 4 before it hit the coast.
It will be some time before the full financial cost is known but Risk Management Solutions recently raised its estimate of total damages caused by the hurricane to $A164.24 billion and expects insured losses of $A52.56 - $A78.83 billion.
Previously, the most expensive hurricane had been Andrew which hit Florida and Miami, with $A27.59 billion of insured losses in 1992.
Rita’s winds at landfall were recorded at 190kph. Like Katrina it entered the Gulf of Mexico as a category 5 hurricane. In fact, it is recorded as the severest cyclone ever to have entered the Gulf with winds peeking at 280kph. Thankfully it downgraded to a category 3 by landfall. It had a significant impact on oil refineries and delayed the re-occupation of New Orleans.
The Mark IV Industrial Special Risks policy covers all risks unless excluded. Wind destruction is certainly not excluded. However, as pointed out in our Autumn 2005 edition it excludes damage from action of sea, tidal wave or high water. We asked the question, “ If property escapes damage from the destructive wind and rainfall but is inundated with water from an associated storm tide or high water would the damage be covered?” We hoped this was a dilemma we would never have to solve. It seems this problem is now being addressed in the USA.
The Insurance Information Institute in the USA reports that a typical business policy covers damage due to wind but flood damage is usually excluded (or very limited) unless a separate policy has been taken.
We hope that flood cover was high on the agenda in New Orleans.
Not only will complications arise in property losses. Business Interruption policies generally cover the loss of profit as a direct result of the insured property loss. Business Interruption losses will be sustained due to hurricane damage but, particularly in New Orleans, the period of interruption may become extended due to (a) flood damage and (b) the depopulation of the area. The ongoing loss of profit from both these causes may not be considered to be a direct result of the insured property damage i.e. the wind and rain damage. Other complications will also arise as some businesses may have temporarily shutdown during the evacuation but may have escaped damage. Without property damage the Business Interruption policy may not respond.
So much devastation, so much to consider.
Some of you may remember our article concerning the candle which was suspected to have started a fire on the film set of “The House of Wax” which appeared in our Spring 2004 newsletter. If not, it is available in the archive section of our website.
July 2005 provided another example of the danger of the naked flame.
Hollywood actor Michael Chiklis reportedly saved Lady McMahon when she leaned back and a candle ignited her boa. On being alerted to the fire Chiklis grabbed the boa, ripped it off her and beat the fire out.
Thankfully Lady McMahon was unhurt. Press reports indicate that on asking her whether she was OK Chiklis advised she was unphased and informed him that it was only her boa that was on fire, not her.
Keep your boas away from candles.
Suits 2 Suit Pty Ltd is a retailer of mens’ suits established by Mr Renzo Farfalla. Renzo has successfully captured a broad demographic by segmenting his store into three departments: -
(a) The lower priced, hard wearing suit for every day work wear.
(b) The medium priced suit for those important meetings.
(c) The high fashion, expensive, imported suit for that really special occasion.
During the early hours of Sunday 24 July 2005 thieves broke into the store and made away with a large quantity of stock.
Renzo suspects the thieves wear Armani as they had stolen all the high fashion numbers.
After gathering himself together Renzo supervised a stocktake of the remaining garments. As expected his premier stock was gone.
This created two problems: -
(a) It was his high margin stock.
(b) The current season stock could not be replaced as suppliers were now making garments for the next season.
Renzo replaced the stolen suits with the stock available from suppliers but this was limited to lower margin product. A Business Interruption loss was inevitable.
Renzo supplied the loss adjuster with a history of monthly sales figures and ongoing monthly results as these became available. He also supplied a detailed Profit & Loss Statement for the financial year to 30 June 2005.
The loss adjuster calculated the Reduction in Turnover and applied the Rate of Gross Profit to the shortage. The Rate of Gross Profit was determined from the Profit & Loss Statement for the financial year to 30 June 2005.
Renzo was unhappy with the result. He felt it did not reflect the Loss of Gross Profit associated with the loss of sales of his high fashion, high margin suits.
A review of the figures revealed that the Loss of Gross Profit did not reflect the margin for the high end product. The Profit & Loss Statement for the 30 June 2005 covered all departments and only reflected an average profit margin.
The Industrial Special Risks policy contains a departmental clause which indicates that if the independent trading results of each department are ascertainable the Loss of Gross Profit can be identified on a departmental basis.
Fortunately we were able to work through the history of sales and purchases for the fashion suits to ascertain the true Rate of Gross Profit applicable to this claim.
Like Renzo’s suits the insurance policy was made to fit the client!
Risk of the Wheelie Bin
Watch where you put those wheelie bins! We have been preparing claims and compiling our list of insurable events such as that on the next page of this newsletter for many years. A recurring thread is arson commencing from a fire in a wheelie bin or dumpster. It is impossible to control the actions of others but it is important to keep wheelie bins and dumpsters away from buildings to help prevent a fire from spreading.
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.
The Articles which appear in this Newsletter are not intended to be a substitute for specific technical advice.