Welcome to our 35th Claim Solutions’ Newsletter.
This Newsletter features earthquakes, tsunami, the importance of counting stock and highlights the risk of not insuring Business Interruption.
A list of other possible insured events over the past quarter is contained on page 4. This includes a number of fires in hotels, schools, manufacturing and retail outlets. The eerie dust storm in Sydney in September 2009 is also not easily forgotten.
Claim Solutions believes the key to claims is communication and whether you are an insurer, insured or insurance broker we hope this newsletter assists the understanding of loss, damage and claims.
Please do not hesitate to contact us with your claim queries.
For a fully searchable history of our newsletters check out Insuropedia at www.insuropedia.com
The largest earthquake for 2009 to date occurred on 29 September in the Samoan Islands. It measured 8.0 mms (moment magnitude scale) and generated a tsunami, or several according to media reports, causing damage in Samoa, American Samoa and Tonga. The death toll is around 200 persons.
Large waves with no major damage extended to the coasts of Fiji, the northern coast of New Zealand and Rarotonga in the Cook Islands.
A further earthquake off the southern coast of Sumatra, Indonesia followed on 30 September, measuring 7.6 mms. After shocks and a tsunami damaged around 250,000 houses and the growing loss of life tally is around 1,000 persons.
Both earthquakes were along a single fault line known as the “Pacific Ring of Fire”.
Many countries in, and bordering, the Pacific Ocean issued several tsunami alerts, including Australia & New Zealand.
While international aid and support flows into these areas and discussion of early warning systems continues, it seems many were saved by church bells ringing, other warning systems and the lessons from Banda Aceh, Indonesia.
Inevitable comparisons have been made with the devastating Boxing Day Tsunami off the west coast of Sumatra, Indonesia, on 26 December 2004. With a magnitude between 9.1 and 9.3 mms, the combined death toll was approximately 230,000 with more than 1,000,000 people displaced.
Initial insurance estimates of the September losses are around US$20million.
Once again the devastation is not mirrored by the insured costs. We extend our sympathy to all those affected by these tragedies.
Australia is not immune to seismic activity.
Earthquakes, with devastating effects, have occurred in Australia and have been the subject of insurance claims e.g. a report by Emergency Management Australia advises the earthquake in Newcastle on 28 December 1989 left 13 dead, 160 insured, 200,000 affected and 1,000 people homeless. The insurance cost at the time was estimated at $1,124m.
News reports in September 2009 indicate a Melbourne University geologist Professor Joyce advised an Australian volcanic eruption is overdue!
If working in claims has taught us anything it is to expect the unexpected. Thankfully the events described above are infrequent but other events including fire, flood, storm, etc occur with seemingly increasing regularity. A well constructed insurance portfolio is a vital risk management tool to assist recovery from such disasters.
One of the major reasons for appointing claims preparers at the outset of a loss is to assist in restoring cash flow. Early quantification and settlement of claims for stock damage is integral to this goal.
Where stock is damaged but identifiable, quantities and descriptions should be recorded immediately after the loss.
Where stock is unidentifiable it is paramount that quantities and descriptions of undamaged items be recorded immediately after the loss to allow the destroyed stock balance to be reconstructed.
The Mark IV Industrial Special Risks Policy (ISR) Basis of Settlement provides:
“(b) On raw materials, supplies and other merchandise not manufactured by the Insured: the replacement cost at the time and the place of replacement or, if such property is not replaced, the value thereof at the time and place of the damage.
c) On material in process of manufacture: the replacement value of the raw materials and the value of labour and other overhead charges expended thereon at the time and the place of the damage.
(d) On finished goods: the replacement value of the raw materials and the value of labour and other overhead charges expended thereon before any allowance for profit or the cost of re-stocking such goods, whichever is the lesser”.
A list of damaged stock should be prepared, valued in accordance with the policy and a claim submitted for the purpose of a progress payment.
Stock, whether it is raw materials, work in process or finished goods, is not subject to the “Reinstatement or Replacement Memoranda”. This means damaged stock does not require repair or replacement for the claim to be settled.
It is paramount to include the loss adjuster/s in the process of identifying, counting and verifying damaged stock. This provides them with the opportunity of performing test counts and sampling that can be verified against the formal claim submission, which may be supplied some time later when appropriately valued.
If review and testing of stock is delayed, the stock may be in external storage or destroyed by council, health order or other regulatory requirement. This makes verification unnecessarily protracted and may impact on the provision of a timely progress payment.
One of the goals of our newsletters is to highlight the importance of communication by all parties to a claim. Payment for the replacement cost of stock as soon as it has been quantified should be the objective of all.
Don’t count your chickens but count your stock and... when you do... tell the loss adjuster about it!
Cash flow and profit is vital to business. If property such as buildings, contents or stock are destroyed a business may sustain a total or partial interruption to trade. This often results in a Reduction in Sales. It is from these sales the business pays wages, workcover, superannuation, rent, rates, taxes, advertising, etc. It is also from these sales the business earns its’ net profit and makes distributions to owners. If sales are reduced the company will be unable to fully fund ongoing costs and earn its normal level of net profit. A Business Interruption policy is designed to restore net profit and fund the ongoing charges as if the damage to property did not occur.
A Business Interruption policy may also respond as a result of damage to property which prevents access to the premises. For example many businesses in country Victoria did not sustain property damage as a result of the bushfires in February 2009 yet sales reduced because access to the business was hindered.
Cover can also be taken out to respond to the Business Interruption which flows from damage at a customers or suppliers premises.
For a business to survive an insured event such as a fire, storm, water damage, etc it is important a loss minimisation strategy be implemented. This costs money. A Business Interruption policy responds to the extra costs incurred to minimise the loss e.g. costs to relocate to a temporary premises while the permanent premises are reinstated, additional rent, legal costs associated with setting up an additional lease, extra marketing and, the cost to hire temporary equipment and advertising costs to inform customers when business resumes, etc.
An insured event places considerable time pressures on an insured. Time is required to liaise with investigators, loss adjusters, insurers, builders, etc. Time is required to collate documentation and substantiate a claim. A Business Interruption policy allows a business to insure Claim Preparation Costs. This allows a business to appoint Claim Solutions to assist with the preparation of the claim and it covers the associated cost.
If a business does not insure the Business Interruption risk and a loss is sustained it may be unable to:-
- Meet ongoing fixed costs.
- Earn its expected Net Profit.
- Make expected distributions to owners.
- Fund loss minimisation measures.
- Fund the appointment of a specialist to assist.
The Business Interruption risk is an integral component of an insurance portfolio. If this risk is not insured the lack of cash flow may prevent a business from reinstating promptly. Customers may make alternate arrangements while the business is unable to supply. Without customers the business may become unviable.
The importance of Business Interruption Insurance cannot be overemphasised.
Did you know that the first insurance companies in England in the 17th century established their own brigades to extinguish fires at their Insured’s premises? Insurance companies were commercial enterprises required to make a profit and the companies brigade could only extinguish its Insured’s fires. A brigade identified it’s Insured’s property by a brightly coloured Fire Mark, often made of cast iron, fixed in clear view at the front of their property. Even if a competing brigade was closer they often turned away. Thank goodness times have changed.
About Claim Solutions...
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.