Welcome to our Winter 2015 Edition and 52nd Claim Solutions’ Newsletter.
We at Claim Solutions have been involved in insurance claims for in excess of 30 years. Delving through this history highlights that one of the most important aspects of an insurance claim is time.
Time is often thought of as the fourth dimension, unseen but ever present. In this newsletter we explore how this elusive fourth dimension affects insurance claims. Come with us on our journey.
All our newsletters over the past 14 years have been indexed to provide you with an online compendium of our claims experience. Browse our Index here to find articles which interest you.
If you, or your clients, have suffered loss or damage we wish you a speedy recovery.
We are available to assist you. We welcome your enquiries.
What better way to begin our journey through time than in a time machine. The controls include the following four dials: -
1. Reasonable Dispatch
2. Due Diligence
3. Expected Results
4. The Time Thief
With an echo not dissimilar to the Tardis our time machine very conveniently transports us to an amalgamation of claims past. As we enter this familiar landscape we see a café appropriately called, The HG Wells. It operates from a rented building just 20 square metres in size but which generates an income much larger than its physical size suggests.
Sadly, it is painfully clear that The HG Wells Café has very recently been damaged by smoke from a fire next door. The damage is extensive. Nothing in the café, from the air conditioning ducts to the knives and forks, escaped the pervasive tendrils of the soot laden smoke. There are no customers, the glass doors are closed and water blackened by carbon deposits can be seen trickling down the street like an oil spill. A hastily written note taped inside the door screams
Our Tardis could have delivered us to a factory, a retail store, offices or any manner of business but today we need to deal with The HG Wells Café.
There are many elements of time that need to be addressed.
Back to the time machine. We set the date for three months later. What does the HG Wells Café look like?
Something has gone horribly wrong. The café remains shrouded in darkness, a stench hangs in the air and the doors remain firmly closed.
The damage is now much worse. Equipment has rusted, furniture has swelled after absorbing the fire water, insidious mould stains have grown and to make matters worse vermin now infest the premises. A letter from the Insurer left on the counter explains that they will not reimburse The HG Wells for its property loss in full because of a failure to reinstate the damage promptly.
Obviously this is an extreme scenario and one we can only imagine but it is useful to demonstrate the significance of time on the property damage claim.
Matt Lucas once said “The most useful form of time travel would be to go back a year or two and rectify the mistakes we made”. Let’s go back just three months and rectify the mistakes HG Wells made.
Time to hit the “Reasonable Dispatch” dial.
Seated opposite us are Mr & Mrs Wells the owners of the business.
We explain that The HG Wells is covered under an insurance policy which states that property must be reinstated within reasonable dispatch. Time is of the essence. If the HG Wells Café fails to reinstate its property within a reasonable time period the Insurers may not respond to the loss in full.
With the guidance of its claims consultants The HG Wells Café swings into action.
Contaminated stock is removed, contents are sorted into restorable and non-restorable categories. Non-restorable property is dumped. Restorable property is moved to an off-site location to allow it to be cleaned, repaired and reinstated as necessary. Metal components and property is sprayed with a rust inhibitor and the restoration work proceeds. Orders are lodged to replace non-restorable items.
The scene three months into the future is now quite different. The only thing spilling from the front door are the customers clambering for seats.
The Business Interruption section of the insurance policy is often referred to as the “Time Element” cover, and rightly so. It contains many references to time which Mr & Mrs Wells must also understand. It provides much opportunity for time travel.
Time to turn up the “Due Diligence” dial.
The Business Interruption section of the policy contains a due diligence clause similar to the reasonable dispatch clause introduced above.
It is a condition of the policy that Mr & Mrs Wells use due diligence and take all reasonable actions to minimise any interruption to the business.
We know from our earlier journey into the future that if Mr & Mrs Wells do nothing an unpleasant scene of devastation & destruction awaits. It is important to recognise that there is an invisible and growing loss behind the obvious property loss.
While the doors remain closed no income is being received, customers are finding new places to eat, competitors are encroaching on HG Wells market, key staff are resigning and bills are mounting. A failure to act exaggerates the Business Interruption loss and again the Insurer is unlikely to reimburse the loss in full.
Fortunately we know what the picture of the future could be.
It is critical for Mr & Mrs Wells to take all actions to minimise the loss immediately after the fire.
This may include: -
• Ensuring the clean-up commences without delay.
• Dumping contaminated stock.
• Ensuring contents are sorted and restored or replaced as soon as possible.
• Requesting an abatement of rent from the landlord.
• Continuing to pay key staff (e.g. chef) so they are available for the re-opening.
• Encouraging the landlord to reinstate the building promptly.
• Developing an advertising campaign for the grand re-opening.
With the right loss minimisation strategy The HG Wells Café will protect its market, retain its people, open its doors at the earliest possible opportunity, minimise the Business Interruption loss and protect its entitlement under its insurance policy. Loss minimisation cannot be underestimated.
Crank up the time machine! There is a further view of the future which we must explore and it is on the “Expected Results” dial.
Hit the “Expected Results” dial.
Even though an effective loss minimisation strategy has been implemented the extent of damage prevent the doors of the café from opening for some time. It is inevitable that customers will not be served. Revenue will be lost. We need to look into the future and determine how much.
The Insurance policy provides some guidance to determine the extent of the Reduction in Revenue. It states that the expected revenue should be estimated by examining the revenue earned over the corresponding period in the prior year and adjusting this for trends and special circumstances affecting the business. The past is used as a guide to the future. Historical revenue, budgets and an understanding of the market in which the business operates all provide guidance to determine the revenue which should have been earned over the period of interruption.
Once the expected revenue is determined actual revenue can be deducted and the reduction in revenue can be isolated. The policy responds to the gross profit contained in the reduction in revenue.
Not only must we estimate how revenue is expected to behave in the future we must also estimate how expenses may behave.
No-one will ever know the exact revenue which should have been earned or the exact expenses which should have been incurred in the future, over the period of interruption. The insurance policy allows for this unknown by stating that they should be estimated as far as reasonably practicable.
Quantifying the Business Interruption loss often requires assistance from specialists familiar with analysis of historical results and how to combine this with the insured’s knowledge of their market.
The final dial which we need to engage is the one marked “The Time Thief”.
Turn up “The Time Thief” Dial.
An insurance claim can be a time thief. Most businesses operate to the full extent of the labour capacity. While a loss can free up some of this capacity its demands on management time can be relentless. Many insurance policies contain cover for Claim Preparation Costs which entitle Mr & Mrs Wells to appoint a consultant to prepare the Property Damage and Business Interruption claim for the HG Wells Café. The claim preparer can provide valuable advice on loss minimisation, assist with decisions critical to the survival of the business, the documentation required to substantiate a claim and the preparation of regular claim submissions with requests for progress payments to provide vital cash flow. The appointment of a claim preparer restores some of the time which Mr & Mrs Wells may have otherwise lost allowing them to attend to the management and re-establishment of their business.
Conclusion - Time is of the Essence
Our journey through time highlights that when dealing with damage, loss and insurance claims time is of the essence. Property must be reinstated with reasonable dispatch, due diligence must be exercised and all reasonable actions taken to minimise the interruption to the business. Even with an effective loss minimisation strategy the nature of the loss may be such that a Loss of Gross Profit associated with a Reduction in Revenue is inevitable. Quantifying the Loss of Gross Profit involves estimating future expected results by using the past as a guide.
Specialist assistance may be required to allow management to devote its attention to re-establishing the business.
Let’s park the Tardis until another day.
Cash Flow – It’s all in the timing.
GST commenced on 1 July 2000. It continues to have a significant impact on property claims. Consider the following case study.
A severe fire razes a building owned and occupied by Stretch Plastics Pty Ltd. Stretch operates an overdraft at its limit prior to the fire. It is registered for GST, receives a 100% Input Tax Credit for all GST paid and submits quarterly Business Activity Statements (BAS).
Loss adjusters, insurers, claim preparers, project managers and builders swing into action.
A scope of works is agreed, tenders received and the contract awarded for a reinstatement value of $1,000,000 plus $100,000 GST making a total of $1,100,000.
Consultants advise the Insurer will reimburse the building cost of $1,000,000 ex GST once invoices are submitted. They explain Stretch must pay the GST component of $100,000 as invoices fall due. Don’t worry, they say, as this will be refunded by the Tax Office when Stretch submits their next BAS. The next BAS is not due to be lodged for 3 months.
Sales from the business have ceased, the bank will not extend the overdraft, Stretch has no spare funds. It cannot guarantee payment of the GST component of the builder’s invoices when they fall due.
The builder will not start work and the Business Interruption loss is continuing.
What do you do? Manage the claim carefully, encourage healthy progress payments from the Insurer, submit BAS monthly, discuss the matter with the insurer and the tax office. Stay calm!
Continuing with the theme of time we should also highlight the importance of timely progress payments.
The absence of prompt 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 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 recommending payment.
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.