Welcome to our Spring 2014 Edition and 49th Claim Solutions’ Newsletter.
It is hard to imagine that our next Newsletter will be our 50th!
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.
In this newsletter we take you on a journey of some of the key claims issues and solutions we have seen in over 30 years of claims experience.
We hope that it offers some insight into our insurance world and perhaps some useful solutions for yours.
If you, or your clients, have suffered loss or damage we wish you a speedy recovery.
We are available to assist you and welcome any claim enquiries.
“There are no problems, there are only solutions.” – John Lennon.
After thirty years of managing insurance claims what are the most common claims issues we have encountered and most importantly what are the most effective solutions?
As questions go, this is a big one. Some boundaries are necessary.
Let’s restrict the landscape to the Mark IV Industrial Special Risks Policy. After all it has been an industry benchmark for decades and is the basis for many Business Pack/Composite wordings.
Let’s also dissect “The Claim” into three landmarks: -
We need to map all three to identify the issues and find the solutions.
By indemnity we mean does the policy (Mark IV) respond to the loss. Is the insurer liable? Is the loss covered? It is the first question which must be addressed when faced with an insurance claim.
It is the first opportunity for problems to arise.
Quantum is the amount of the claim. Assuming the loss falls for consideration under the insurance policy the value of the claim is the next question to be answered on our journey.
Attitude is the manner in which the various parties approach the claim. Claims are about people and attitude can have a significant impact on claim problems and solutions.
Now that we have spotted our three “must see” landmarks let’s begin our journey and explore the most common issues and solutions which may occur at each of them.
“Indemnity” is the geographical equivalent of the Simpson Desert. It is a huge landmark, an enormous wilderness of shifting sands. Some boundaries are required. Let’s fence it off into three parts: -
• Material Damage Proviso
The Mark IV Industrial Special Risks Policy is an “All Risks” policy. It covers all risks unless they are excluded. We are often asked, “Is the loss covered?” The question should be, “Is it excluded?”
The Mark IV ISR contains a number of perils and property exclusions. We deal with the perils exclusions first, then the property exclusions.
Often the application of exclusion is clear. A fire destroys a building. The perils exclusions do not delete cover for fire damage and the property cover does not delete cover for buildings. The loss is not excluded.
Sometimes the application of exclusions is unclear. For example a conveyor belt rips apart, damaging machinery. Several minutes later, friction from the now misaligned components, result in fire destroying machinery further down the line.
Consider the Perils Exclusions first. Why did the conveyor belt fail? We don’t know. Solution – commission a cause report. Let’s say this concludes it failed due to faulty design. Perils exclusion 4(c) deletes cover for loss from errors in design. The damage caused by the design error is excluded. What about the fire damage? A proviso to the exclusion restores cover if the excluded peril is subsequently followed by a peril which is not otherwise excluded. Wordy? Yes, but it means that the fire damage to the machinery further down the line is covered.
Consider the Property Exclusions next. The machinery is not excluded and a claim for the fire damage proceeds.
Careful consideration of policy exclusions is vital to address Indemnity. A cause report often provides the solution to navigate the way.
Material Damage Proviso
Unless the Material Damage Proviso is satisfied a claim for Business Interruption cannot proceed. Where and what is this proviso?
The first clause of the Business Interruption section of the policy states that if property used by the Insured at the premises is damaged and the business is interrupted in consequence of this damage, the Consequential Loss which flows from the damage is covered.
This is the Material Damage proviso.
The corollary of this is that if no property used by the Insured is damaged there can be no claim for Consequential Loss. For example Cyclone Tracy flattened Darwin in 1974. Many residents left the city. The Consequential Loss which flowed from depopulation was not a consequence of the property damage and was not covered under the policy.
Consider another example. An electricity sub-station neighbouring an insured property is struck by lightning. Power to the Insured Property is cut and an interruption to business is sustained. There is no damage to property used by the Insured and accordingly the Material Damage Proviso has not been satisfied. It appears a claim for Consequential Loss cannot proceed.
However, the ISR policy contains a Public Utilities Extension. This states that the damage to the neighbouring sub-station is deemed to be loss resulting from damage to property used by the Insured at the premises. By virtue of this extension the Consequential Loss is covered. Similar extensions/endorsements exist for damage at customers/suppliers premises and damage to property which prevents or hinders access.
It is important to be aware of the Material Damage Proviso, in addition to Exclusions, when considering Indemnity for Consequential Loss claims.
The third area that cannot be overlooked are the policy conditions. One of the most common problematic conditions is loss minimisation. It is a condition of the policy that the Insured uses due diligence and takes all reasonable actions to minimise the loss. Failure to comply with this condition means that the Consequential Loss claim may not be paid in full.
For example fire destroys a factory. Once the factory is reinstated capacity is available to work overtime to recoup some of the loss experienced during the rebuild time. The Insured fails to implement overtime hours. The claim may be reduced to the loss which would have been experienced had the overtime hours been introduced.
Part of the solution to a claim is being aware of, and understand, all relevant policy conditions.
If “Indemnity” is the geographical equivalent of the Simpson Desert then “Quantum” spans the Pacific Ocean, a seemingly endless expanse of unpredictability. The three most common issues we have set our sights on are: -
Substantiation of a claim is paramount. An Insured is sometimes under the misconception that very little documentation is required to substantiate a claim and may be surprised when extensive documentation is requested to confirm ownership and replacement of assets and/or proof of financials.
The quantum of claims can be considerable and it is reasonable for an Insurer to expect appropriate documentation to verify a claim. A request for documentation is a vital audit tool. It is a condition of the policy for all reasonable proofs to be supplied. The solution is communication and understanding.
Nothing can instil fear into an Insured who has just suffered a loss than the term “Underinsurance”.
It is important for an Insured to be given every opportunity of declaring adequate values for Property and Consequential Loss at renewal. If, for whatever reason, underinsurance exists it is critical that the Insured is made aware of it as soon as possible after the date of loss to allow fully informed decisions to be made in relation to reinstatement.
The third most common issue arising when addressing quantum is “Interpretation”. Sometimes the Basis of Settlement in policy wordings can be imprecise and terms are sometimes used that are undefined, e.g. debris, uninsured working expenses, or words which are out dated, e.g. “public utilities”. This can result in ambiguity and different interpretations affecting the quantum of a claim.
If there are clauses/terms which could cause disagreement of quantum they should be identified, tabled and discussed at the earliest opportunity.
So far our journey has taken us to the Simpson Desert and the Pacific Ocean. Our landscape is not just geographic. Time to consider the human psyche!
Claims issues are not always technical. While they do involve the dissection and understanding of the structure, clauses and terms in an insurance policy, importantly and centrally, they involve people.
The attitude of each party involved in the claim process should not be underestimated. Three of the most common issues we see in this category are: -
- Considering the insurance policy as an investment policy.
- Progress Payments.
“I paid my premium for all these years and now I have a loss the Insurer questions my claim!” All those involved in claims will have heard a statement like this at some stage. It is often an attitude borne of frustration and is a problem which needs to be addressed.
The reality is that the insurance contract is not a policy of investment where contributions are made over a number of years and a return is automatic. It is an annual contract. The annual premiums from all insured’s are collected and combined into a pool from which annual claims are paid in accordance with the terms and conditions of the contract.
The claimant’s specific premiums are not available for them to draw on when required.
The premium is paid for a contract for a defined time. Claims are paid in accordance with a Basis of Settlement within the contracts.
An Insured’s history with an Insurer is important and may need to be addressed between the insurance broker and insurer outside the scope of claim quantification.
Another common issue encountered in claims is the timeliness of processing. Months can sometimes elapse between the date a claim is submitted and the date a response is received. In catastrophe situations this may be understandable as the resources available to assess claims are finite.
It is important to regularly communicate claim processing times to an insured and if circumstances change, provide regular updates.
Nothing inflames a problem more than silence.
The attitude towards progress payments can significantly affect a claim.
A loss can severely affect cash flow. Without cash flow builders cannot be appointed, contents cannot be purchased and wages, suppliers and expenses cannot be paid. Without cash flow business survival can very quickly become precarious.
Provided indemnity has been granted and the extent of insurance cover is adequate progress payments should be encouraged and made on a timely and regular basis as a substitute for lost cash flow. An insured should not be expected to fund the claim.
We began this newsletter with a quote from one of John Lennon’s songs “There are no problems, there are only solutions”.
Perhaps this is naïve. Perhaps the challenge is to recognise that problems exist, consciously identify them and earnestly seek the solution.
Some of the issues are technical and the solution involves a detailed understanding of insurance policy wordings and their application.
In our world the issues and solutions are much more than this. They are about people and communication.
No matter where our journey takes us, without people and communication, it would be far from complete.
"The journey of thousand miles begins with a single step." - Lao Tzu.
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.