The General Insurance Ombudsman expresses concern that workers in the industry do not always understand the policies they sell. LMI has the tool to help.

LMI PolicyComparison. The site can be accessed at www.policycomparison.com

This is the headline from ABC News on the 23rd February 2012. To read the entire article please go to http://www.abc.net.au/news/2012-02-23/insurance-ombudsman-urges-staff-training/3847102.

In a nutshell Ombudsman John Price told AM there must be a greater focus on training and communication in the industry to ensure frontline staff provide customers with clear information.

Policies do not clearly inform individuals, and it’s not only the consumer that’s confused – it’s also the salespeople that are confused,” Mr Price  said.

And if the salespeople trained by the industry are confused as to what the  cover offers then how do you expect the consumer to understand?”

The industry is trying to head off tougher regulation of policies and payouts after complaints that some claims were either unpaid or unresolved.

It is for exactly this reason that LMI developed and maintain the on line product comparitor website www.policycomparison.com . The site compares over 3,000 policies, providing a link to each wording and tens of thousands dating back to 1900.

The focus on the site is understanding policy coverage not price. In addition to the comparisons, the site has a Points to Consider section which explains the relevance of each section of the policy and trips to be careful of. There is also a library of insurance related articles and papers.

It takes a dedicated team of 16 staff to keep the site constantly up to date. Only 1 insurer is known not to subscribe. All insurance brokers in Australia subscribe as does the Financial Ombudsmen Service themselves.

While I do not wish to contradict the General Insurance Ombudsmen, I can give him comfort that the problem is not universal with over 250,000 comparisions done on the site each year and the usage rates increasing every month.  As a subscriber themselves, it must be disheartening to FOS to know that the training and comparison site is available to the sellers of insurance and yet not all make the most of it. This is a feeling, as the inventor of the site, naturally share.

On a positive note, the value of the service has been appreciated in other jurisdictions. It is already available in New Zealand and this year will be available in the UK, South Africa and the United States.

To take a tour of the services provided by the site go to http://www.policycomparison.com/taketour.aspx .

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Local v absent claims departments and other claim service considerations.

Claims Service - Are they there when you need them?

There is a cost to an insurer to have claims departments in each state and or territory in Australia. To reduce costs many insurers have centralised their claims department in one or two states while some insurers have elected to use a Third Party Administrator or Claims Management provider. (Claims Management should not be confused with Claims Preparation or Loss Management).

After 40 years of claims I have come to the realisation that as a general rule of thumb, the further the Insured is from the Insurer’s cheque book the harder it is to get the money out of the Insurer. This is particularly the case with off shore or absentee claims departments/managers.

With the natural disasters the claims that took longest for us to settle were without doubt the ones through Lloyd’s or other overseas offices where they did not have a local claims expert. I know that this will disappoint and even horrify senior managers within Lloyd’s etc but I am happy to provide example after example to demonstrate my position.

When it comes to a natural disaster, if the claims personnell are in the same community they feel for their customers more. This even goes for major disasters in the same country or even between countries that are close to each other like Australia or New Zealand. But when the claims department is in London, elsewhere in Europe, the US or Asia they do not have the same feeling or sense of urgency. Further they either do not know the local legislation such as Australia’s Insurance Contracts Act (1984) or Code of Practice. I do not know how many times I sent a link to the Insurance Council of Australia’s website to an overseas insurer/claims manager. No one thanked me nor did they accept they were bound by it even when like Lloyd’s they were a signatory.

With centralised claim departments we can see the same thing happen particularly during natural disasters where there are simply not enough resources.

As I say there is a cost for an insurer to have local claims teams and if these insurers are not supported and people only buy insurance on price (a foolish strategy at the best of times) then to compete we will see even more centralisation and the loss of more claims departments.

The location of the claims department is only one thing. The other is the level of service they provide. I would like to give a couple of examples where making a decision on price alone has come back to bite the Insured and the broker on the rear end.

The first is a claim involving a restaurant on land zoned as rural but with a special dispensation. The restaurant was destroyed by fire and the council have decided to tear up the special dispensation and will not allow the Insured to rebuild. It will take some time to sort this out. The Insured will fight this through the relevant court and does not want to rebuild elsewhere. Any honourable insurer would pay out the claim on the damage on the building and contents on an Indemnity Basis and hold final payment until the repairs are reinstated. This approach is taken all around the world. Not with this insurer. They refused make any payment other than in full and final settlement. The Insured can have a ridiculously low indemnity value on any test (just over 50 per cent on a very well maintained building of massive construction mostly less than 30 years old) or their estimate (again clearly under-priced) reinstatement value when the client actually gets permission to rebuild. To me this borders on unconscionable behaviour where a large Insurers is using their economic muscle in an attempt to force a small Insured in taking a settlement much lower than they deserve. Luckily in this case the client has the financial security and means to take this to court. I support this position as it will embarrass the Insurer with the broker cluster group and provide a precedent for this Insurer and others like them not to act this way. As an aside, I rang our sister company in the Insurer’s head office to discuss this company’s approach to claims in that country and they could not believe it. They have offered to take the claim to the CEO of the Insurer to have the decision overturned. This is certainly an advantage for us building our global network and it is my intention to visit the Sydney based claims manager and have one last go at getting this claim resolved without the need for expensive litigation or having a busy CEO of an international insurer becoming involved. If not I will pass it on to lawyers and our sister company with a clear conscience. Having to go to Sydney is frustrating, costly for both the broker and I as well as being time consuming. All of this would never have occurred with a quality underwriter and claims manager.

The second example comes from late last year. I was asked to provide a day’s training to a broker in central Victoria and at the end of the day, the claims manager for the brokerage asked if she could discuss a few problem claims with me. I agreed as I always do, time permitting. After the 7th claim in a row where I pointed out where in the Policy cover was afforded for the incident, I asked if she had picked the common denominator. She could see no link until I pointed out that all the claims involved the one insurer! On examination it was confirmed what I had already surmised. The brokers had placed cover with this company because they were cheaper but at what cost now to their Insured’s who needed payment desperately for legitimate claims and what of the brand reputation of the broker with so many clients not to mention the additional operating costs and stress in trying to get valid claims paid.

The thing about this particular Insurer, brokers and our staff rate them very highly in Queensland, Western Australia and New Zealand, acceptable in South Australia and at or near the bottom in New South Wales and Victoria. Clearly it is not a company instruction to be difficult or uncompromising but rather either the level of training or the personality of the claims manager in each state/region.

The lesson for an Insured here is to ask your broker to comment on the claims service of the Insurer(s) they are recommending while for brokers, think twice about putting business with a company whose claims service is only going to make your client’s life and your hell.

LMI Claims Services have 8 offices in Australia and New Zealand so that we can help brokers and their clients with claims that fall foul of poor claims departments although we much prefer to be appointed early to get the claim set up correctly from the start.

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The importance of contract review and product recall cover

Insect larvae found in food product

I received a call early in the week from a business owner (the Insured) who was being sued for failure of their product and had been told their insurance program would not respond.

The background of the case was that the Insured was a company that mixed food stuffs under contract for a major manufacturer. They entered into a long term contract for this work which gave the business some security or so they thought. The Insured was to source the ingredients from a third party who was on a list provided by the customer. The Insured did this and things went along fine for a few years. The ingredients, subject to a seperate contact to which the Insured is not part, were to be treated for a number of things by the suppliers before it was delivered to the Insured’s premises for blending and packaging. The Insured was to either sieve or filter the ingredients as part of the blending process. The Insured found that there normal filter for the process was damaged and so to keep inside the requirements of the service agreement/contract they used a filter with smaller holes. This immediately detected that there was some living organisms in the supplied product and production immediately stopped and the customer and supplier were immediately notified.

The Insured’s customer was horrified at the discovery and on testing of their own found that product had been received by them with the same infestation which had not been detected. Product had to be withdrawn from supermarkets. The cost of any recall including the cost of the product, the loss of profits, the collection and dumping costs, the testing costs not to mention legal fees always adds up to a minimum of 6 figures and often much more.

At common law the Insured has done nothing wrong. It has followed the terms of its contract to the letter and when they discovered the infestation in the product being supplied to them they advised their customer. They did not choose the supplier of the product. Their own processes were within or more stringent that the contact required and I repeat they discovered the problem. Allegedly the supplier of the food product started to outsource the treatment for the insects to an outside contractor and allegedly they have not done it correctly.

Under these circumstances you would expect the Customer to be thanking the Insured and singing their praises. Unfortuneately big business does not always work this way. It has gone to the Customer’s legal department who have already looked to recover their losses from the Insured (not to my knowledge from the supplier of the product where the infestation arose and who outside the scope of their agreement outsourced the part of the process which should have removed/prevented the infestation). The Customer is relying on the contract to protect them.

More and more we see large corporations with their risk management and legal teams, often with the help of external law firms, draft contacts which transfers the risk to their contractors and sub-contractors. More and more contractor do the same and transfer it down to sub-contractors and sub-sub-contractors. Often the small business owners and sole traders do not have the expertise to understand the contacts they enter into. They often only look at the revenue stream and “sign the bottom line”.

Finding out too late that contractually they are liable for the loss of the product and the product recall, the Insured has turned to their products liablity policy and their product contamination cover and found, I have since confirmed, that the loss is not covered. At several million dollars this loss has the potential to destroy the business.

In reality there should be a right or recovery back from the party (ies) that released product that was out of specification and not fit for its use. The trouble is to fund the legal action necessary at the same time fulfil the obligations of the contact with the Customer and still keep operating knowing that this could happen at any time again and they do not have the correct insurance.

This is where the broker can bring real value to their client. Understanding all the contracts a client has entered into is an important part of the role of a broker. Ideally this review should be taken before the contract can be signed as often harsh and unfair conditions can be removed by negotiation.

The quality of the product liability policy and product recall and product contamination covers can then be reviewed to ensure that they are not “Clayton’s” covers. Cover when you have no cover. The scary thing is that some of the premiums charged for product recall and contamination are significant but when I read them I struggle to see when they would ever cover anything, particularly where the Insured product goes to form part of a larger more complex product and the failure of the Insured’s product damages the finished combined product.

In summary, it is far too late after the loss to find a contractual obligation to make good something that normally a business would not be held responsible for under any current legislation or the common law. Remember big companies are for every transferring their risk to smaller companies under the guise of risk management. Secondly, products liability does not cover the product itself. Only physical loss or damage, and personal injury arising from the use of the product. Thirdly, most product liability and product recall/contamination policies exclude contractual liability unless the Insured would have been found negligent or legally liable outside the contract anyway. Finally, many product liabilty and product recall or contamination policies exclude damage to property into which the insured product forms part. Ridiculous situations arise where a tradesman fits say a wood burning metal fire box into a house and through his negligence the house burns down. The claim fails in the first instance as the insurer argues that with the incorporation of the fire place/fire box into the house, the house has become the product and there is no cover.

I often say that you get what you pay for but with this sort of cover, a client can by tens of thousands of dollars and still have no cover. This whole area is of grave concern to me and it certainly is to the Insureds I am attempting to assist in both case studies (the food manufacturer and the installer of the fire box).

LMI PolicyComparison can assist brokers with this while the site has a large data base of policies available in the market. Peter O’Brien in LMI’s Sydney office also heads a comprehensive contract review service which many brokers and clients avail themselves of.

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Insuring wages – Why is it so important

Roof damage in Cooroy - Photo Geoff Potter / Noosa News

My wife has 6 brothers and a sister all of whom along with their families mean the world to us. One of my brother-in-laws rang yesterday to wish my wife a happy birthday and during the course of the conversation it came out that his wife, the sole breadwinner for the family had lost her job due to damage to the shop in which she worked along with a number of others in the Queensland town losing its roof during the recent storms.

Putting family bias aside, I have known my sister-in-law for 40 years and know that she is very hard working and was a long standing, valuable employee for her employer. Despite all of this she now finds that through absolutely no fault of her own she is out of work.

She has been told it will be at least 6 weeks before the building can be repaired. Knowing local authorities and builders after a natural catastrophe this is in all likelihood an optimistic estimate. She has two options. She can wait till the building is reinstated and go back to her old job. She will probably have to wait 4 to 6 weeks to get any social security and I know the loss of wages will hurt her family. Her second option is to try and find a new job. This may help her in the short term but where does that leave the employer. He will have lost a key staff member, one he has been able to trust implicitly, one who does not quibble about working an extra shift when someone else does not turn up, one who trains the new staff etc etc. Will he find someone as reliable, trustworthy and until now loyal.

All this could have been overcome if the business owner had insured business interruption correctly and included 100% wages cover. The cost (a tax deduction) compared to the losses suffered both by the business owners and their employees would have been negligible. This storm in Cooroy Queensland is not an isolated incident nor is the adverse effect it will have on staff. Following the flooding in Newcastle in 2007, the Hunter Valley Research Foundation reported in a research paper titled: An Assessment of the Economic and Social Impacts of the 2007 Pasha Storm, that 1,170 lost their job due to their employer being incorrectly insured or not insured at all.

I would again urge business owners to consider the perceived cost saving compared to the risk to their business and to the lives of their employees when they elect not to insure correctly.

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Australian Industry Stats on Natural Disasters and Claims – what it means.

Cost of Australian Natural Disasters

I spoke at a conference and several professional development days in the last week and shared with the group the latest industry statistics on the cost to the insurance industry arising from the natural disasters in Australia during 2011. I share them with you in the attached slide. Presentation2

I also attach a page from the ICA’s latest statistics on premiums and claims incurred to 30 September 2011 which are the latest available. GI%20Quarterly%20Performance%2020110930

Of course Australia has not been the only country to be effected by massive natural disasters. Our cousins in New Zealand have had more than their fair share with earthquake, snow storms and tornados. North America had a terrible 2011 with an earthquake, 43 tornados, as well and floods and hurricanes. Japan was struck with a massive earthquake and tsunamia but it only was front page news for a few weeks after which the focus of the world’s press moved to Libya. Chile had an earthquake, Pakistan had some of the worst flooding in its history while smaller floods were reported in Europe. Major insured losses have also come out of Thailand which has had downstream supply chain losses in many other countries. I and my colleagues at LMI have been appointed to assist on many large claims from this source.

All of this will cause and has already caused increases in premiums in property classes. With the reinsurance programs of Japanese insurers falling due at the beginning of April, further rate increases are expected due to the Japanese Insurers losses in both Japan and Thailand where the later is expected to be greater than the insured losses in Japan itself.

So what does all this mean to insureds and their brokers. Simple insurance premiums will increase. In a recent survey by Vero reported in InsuranceNEWS.com.au (5th December 2011) two thirds of businesses surveyed expected their premiums to increase and will no doubt have budgeted accordingly.

The important thing for everyone to keep in mind is that the premium is not the total cost of risk. Premiums are the cost of transferring risk from the Insured and its shareholders (and the company’s staff) to an insurer.

The total cost of risk is the cost of premiums, fees and commissions, risk evaluation and analysis, the cost of implementing and maintaining risk controls, policy deductibles and the two huge contingent liabilities that sits over most companies are the cost of uninsured and self insured losses and that proportion of insurance claims not paid to under insurance. If you are not sure what any of these are please drop me an email (or use the contact me feature on the blog) and I will let you know.

I strongly urge every business owner to think what is at stake if a loss occurs and you are not insured adequately. Not only for you, your family and your staff. For most business owners the business represents the shareholders and staff sole source of income, it is their major investment, it is their life’s work, it represents their major investment (often foregoing a better current lifestyle for their future), is often their superannuation and the mortgage over their home(s).

I will post a couple of case studies to show what can go wrong and the effect it has on the business as seperate postings rather than continue on here.

The point I want to leave you with, whether you be a broker or business owner is that what matters when the loss occurs is not the premium you have paid (0r think you have saved) but the quality of the policy coverage, the financial strength rating of the insurer, and most important the quality and speed of the claims service.

 

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Postings revisited

Earlier postings revisited

One of the LMI team, Max Salveson wrote to me in relation to two of my recent blogs suggesting some advice in addition to that which I provided and I share them with you in view of their importance.

On the issue of Theft of Metals (5th February 2012) http://www.allanmanning.com/?p=484

This one suggests to me that there is a need to leave a further message as “Practice notes for brokers”

Brokers need to be very aware of this problem and make certain that the property coverage they arrange adequately caters for theft of parts of the building, building services and fixed plant in the openair”

The second comment was in respect of the article where the 9 months Indemnity Period chosen by the broker ran out. (12th February 2012) http://www.allanmanning.com/?p=504

Allan, It appears that the issue in the machinery claim arose due to the delay by the underwriter’s engineer in accepting liability and approving the method of settlement. Surely that delay arises from the insurer’s failure to honour the contract in a timely fashion and for the purposes of equity require the insurer to extend the indemnity period accordingly?

I agree wholeheartedly with both comments. With regard to the second, regretably while most insurers do act with Utmost Good Faith with their clients appreciating that as was articulated by Lord Justice Mansfield in Carter v Boehm (1766) 3 Burr 1905

“Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.”

Due to the actions of a few Insurers some countries like Australia have introduced legislation such as the Insurance Contracts Act (1984). Even then some say that this has not gone far enough and that insurance should be subjected to the same rules in respect of unconscionable behaviour as other industries.  Part of me would be disappointed to see this be introduced into our industry particularly when it was affirmed that an Insured could seek damages for breach of contract as with any other commercial contract in Brescia Furniture Pty Limited v QBE Insurance (Australia) Limited & anor [2007] NSWSC 598. Having said this, there are some cowboys out there as there are in all industries and I can see why some believe it is necessary.

The particular claim that I was asked to comment on originated out of India which does not have the protection of an Australian style Insurance Contracts Act. Here whether the Insurer has breached the principle of Utmost Good Faith will need to be considered under Indian common law.

Thanks for your valuable input Max. I have passed it on to the reader with some added advice.

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LMI Group turns 13 – a time for reflection

LMI turns 13

LMI turned 13 this weekend, having been founded by me and starting operations officially on 25 February 1999.

We have done a lot of growing up in that 13 years and we continue to do so bringing skilled people into our business not only to do our core businesses of claims services, risk management, business continuity, knowledge management, and training but also to support those that do the front line work. Significant investment has been made in the areas of Researchers, Finance, IT, Sales and HR. It is all part of any business growing up to provide meaningful, prompt and accurate service to our customers.

Having now reached our teenage years, like most teenagers we feel a bit rebellious, challenging the way things are done (both internally and in our industry) and now looking to take on the world in in the case of Knowledge Services, Learning and Development and ultimately Claims Services. Like teenagers and most companies that have grown rapidly we are also feeling against some growing pains, but these are nothing we cannot and will not manage.

The lessons we have learned in the school of life (perhaps that should read, “school of hard knocks”) and our investments in our team, our eServices, and our brand have resulted in a great many opportunities being laid before us as we enter our 14th year.

Like our past achievements, some of these we built and the people are coming, others we have raised a problem and a possible answer and we have been encouraged to implement the solution, while more and more, others are coming to us for a solution to a particular problem.

We have come a long way so far but getting to 13 is not the end. It is not even the beginning of the end. We certainly have had a good start and we have moved beyond being a start up business. After thinking about where we are up to as an organisation, I borrow a line from a speach Winston Churchill gave in November 1942, ” it is the end of the beginning” and the start of a new, exciting and challenging time in the life of LMI.

During this few moments of quiet reflection and looking back on our achievements, and the two internal conferences we held recently (Claims Services late 2011 and eServices/L&D early 2012) I am certain we have the team to take on every challenge put before us.

I sincerely thank all our customers and friends that have supported and assisted us and I congratulate the LMI team who have been part of the success and look forward to working with all of you during 2012 and beyond as we continue to turn dreams into reality.

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Take Care When Choosing Professional Indemnity Cover for Manufacturers

Professional Indemnity Insurance - Protecting the business

I was recently asked to review a Professional Indemnity claim that had been denied by the insurer. A lawyer had looked at the wording of the policy and had described the cover as a ‘Clayton’s Cover’. For those who cannot remember the advertisement from the 1960s to 1980s advertising non-alcoholic spirits, Claytons was the drink you had when you were ‘not having a drink’.

In this case the Insured operated one company that designed and manufactured electrical componentary. A claim arose due a failure in design.

At the request of the broker, I perused the documents along with one of the team from LMI, Max Salveson, and I now reproduce our comments to the broker below. As the matter is yet to be resolved, I have not provided copies of any documents nor do I list any of the parties involved as this would be unprofessional. Having said this, the issues are real and warrant discussion.

The comments and points raised were as follows:

1)  Organisations that employ specialist professionals in Engineering and IT work are often required to have Professional Indemnity (“PI”) insurance, or seek it in any case, on the recommendation of their broker because the standard professional exclusion in most Broadform Policies using the term ‘not for a fee’ is now being interpreted and applied more stringently by insurers. (On questioning several ‘Old School’ underwriters, they all advise that this new stringent approach was not the intention of the drafters of the exclusion.)

2)     Some PI insurers regard a manufacturing development charge associated with product development as a fee, will scrutinise the make up of invoices for evidence of any additional charges, and, if found, will reject a Broadform liability claim.

3)   The standard Professional Indemnity policy was originally designed for consulting professionals where an act, error or omission will see them fully responsible to their clients for damages arising from any error or omission in their professional work.

4)  Professionals do not manufacture. They provide the prescription, plan or design that others engaged in manufacturing, building or whatever follow. It is customary for PI insurers to incorporate a manufacturing and sale of goods exclusion in their PI policies.

5) ‘Damages’ claimable against the professional consultant by any client will include all loss relating to property and bodily injury including the client’s costs in recalling products etc.

6) That all sounds straight forward.

BUT

7) These days all firms employ in-house professionals, not only in specialist areas where qualifications are required to check processes and quality but also in relation to product development. These firms work in partnership with their customers and may also use the services now provided by many universities to industry and commerce.

8) For some time, insurers appeared to be accepting of the fact that the term ‘not for a fee’ in Broadform Liability Policies meant that the professional exclusion did not apply to negligence associated with the work of in-house professionals.

9) However, great care is now needed because of the matters raised in 1) and 2) above.

10) The information contained on the this paricular matter’s Policy Schedule indicates that the business of the firm is “Advice, design & specification in respect of Electrometric Applications” and the insurance was being predicated to cover the risk of the business in relation to its professional services.

11) We take the description of the business to mean that the Insured not only operated a consultancy business in their particular speciality but that they also designed, manufactured and/or installed equipment and that the claim which has arisen is either in respect of  their advice or their products meaning either equipment sold or constructed by them on site.

12) Where the business carries on these activities as a part of the same business entity, some important decisions are required and it is desirable that the PI and Broadform Policies are placed with the same insurer to avoid gaps in wordings.

13) To the best of our knowledge, all PI policies have a manufacturing exclusion as PI insurers say their policies are not a substitute for products liability insurance.

14) Similarly, many non-PI insurers say they do not want to cover Professional Risks relating to the design and specification of products.

15) Particular underwriting skills need to be applied to ensure that the Professional Indemnity policy is properly worded when covering professional activities that are part of the business of a single entity.

16) A quick solution to all of this that we have suggested in the past, where providing advice to brokers and their clients, is to recommend the client that they establish a separate legal entity in which all professional services are conducted.

17) Such separate entity will charge clients directly for their professional services and manufacturing costs will be billed to clients by the operating entity.

18) On the evidence of the documents the general purpose of the policy was to ensure that any claims for errors and omissions in the professional work of the business was to be covered.

19) Exclusion 7.18 refers to the “sale and supply of any good”. Good is not defined and whether the services or work provided is within the legal definition of  ‘Good’ is something for legal advisors and/or a court to determine based on the contract wording and the application of Australian Law.

20) Exclusion 7.18 has a write back in respect of “claims arising directly from the cost of correcting any act or error in design”, but this will not include the costs associated with product guarantee or recall.

21) Exclusion 7.18 appears to be directed at:

a) Excluding claims for product liability;

b) Including coverage for the costs incurred in correcting faulty design. These costs would be excluded under a Broadform Policy and the Material Damage and Liability Sections of a Contract Works Policy. The material damage section of a contract works policy would normally pick up costs associated with subsequent damage arising from faulty design or workmanship.

22) The insurer has added a number of endorsements and the intention of these needs to be explored.

23) The Construction Exclusion deletes coverage for construction etc. and Supervision but then has a write back that says “unless such supervision is conducted as a specifically contracted construction manager, project manager, engineer etc.”.   Does the write back for supervision then apply to the first part in relation to construction? This is where the claims will come from if the supervision is defective. It is important to know how this clause was explained to the broker. The question arises as to whether this particular Insured was contracted to provide supervision.

24) The Faulty Manufacturing Exclusion is clearly aimed at mistakes in the actual manufacturing process at operator level, which would be covered as a Broadform Liability risk.

25) The Specific Activities Exclusion is of great interest. Added as an endorsement, it therefore takes precedence over the standard wording. This endorsement appears to be reinforcing the fact that regardless of anything else, the intention of the policy was to “Indemnify the Insured for all claims for which they became legally liable to pay for any civil liability incurred in the conduct of the business as described in the Schedule”. In the matter under review, this was described as:  “Advice. Design and/or specification in respect of elastometric (Electrometric – probably a typo) applications or devices”.

26) An insurance policy is subject to the Principle of ‘Utmost Good Faith’, which is enshrined in the Insurance Contracts Act 1984. This principle applies both to the Insured and the insurer and regardless of the interpretations now being placed on the wording by other parties, whether in Australia or London, the important issue is how the insurer’s underwriter explained the operation of the policy as being fit for the purpose of insuring the risk of the Insured’s professional risk to the broker as the insured’s representative.

27) Until this matter is resolved, it will reflect adversely on the reputation of the insurer to be able to offer appropriate professional indemnity coverage to companies operating under a single entity.

I hope the overview of this case points out the pitfalls that can arise where the cover for PI is not with the same insurer and/or closely reviewed against the Broadform liability coverage.

To obtain a comparison of Professional Indemnity covers and Broadform Liability Policies in Australia and New Zealand and/or to obtain copies of the wordings (more countries under development) please remember to use www.policycomparison.com.

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SME Businesses Should Consider Developing a Business Continuity Management Plan

Business Continuity - a way to increase profit and reduce risk

Just about every risk management journal has an article about the need for, and benefits of, a small to medium enterprise having a Business Continuity Management Plan.

From my own experience in managing insured losses for over 40 years, it is extremely clear to me that the exponents of risk management are correct. With an insured loss, the business owner has the benefit of an insurance policy to reimburse the cost of any repairs and with proper and adequate business interruption insurance, they also have financial losses caused by any disruption to the business reimbursed.

Such losses can be due to a reduction in turnover (lost or reduced sales) or increases in the cost of working. This could be working overtime, outsourcing all or part of the process, renting new premises, airfrieght and the like.

When it is an uninsured disruption to the business, a Business Continuity Management Plan (“BCP”) is even more important. My experience shows that the time taken to recover to a normal rate of business survival is much higher with one of these plans. This is not just a casual feeling that I have gained from working in insurance claims, but from the study I undertook for my doctorate. The title of this study was The Strategic Management of Crises in Small and Medium Enterprises. An extract of the study can be found at http://wallaby.vu.edu.au/adt-VVUT/uploads/approved/adt-VVUT20041223.120514/public/01front.pdf. Details of the book version can be found at http://www.lmigroup.com/content.aspx?artId=64.

The Federal Government in Australia appreciate the need for business continuity management and this is demonstrated in the fact that they require organisations in several industries, such as the financial services sector requiring a documented and exercised plan, to obtain a licence. In other industries/professions, such as with Pharmacists, the Australian Government has funded the preparation of BCPs  for each pharmacy. This was a voluntary program. Governments in many other countries support the development of such plans. Singapore through the Singapore Business Federation comes to mind.

In one case with a pharmacy, the owner built the plan with Swine Flu in mind as the primary motivator. Only 1 day later, the chemist shop was devastated by a massive hail storm. The business was back up and running in only a few days as they had 1) phoned the tradesmen on their list, 2) contacted their insurance broker, 3) contacted their insurance claims preparer, and 4) downloaded the back- up of their data. Interestingly, the owner was way behind in backing up their data but she was urged to do it as part of the development of the BCP process.

I believe in the need for business continuity so much that we have a plan for each of our offices and further I worked with John Worthington, an expert in the field, to develop a low-cost solution available over the net, aptly called www.continuitycoach.com.

It was pleasing for the LMI Group and I that after extensive testing, both the Pharmacy Guild of Australia and the Singapore Business Federation choose ContinuityCoach as their preferred platform.

While I hope no business needs to activate their plan, the reality is that they do get called upon and the feedback from the business owners and my own observations confirm they are well worth the effort.

If you own a business or are a broker to business owners please keep this very modestly priced option in mind.

One final thing to keep in mind; there is arguably no better way of determining the insurance needs for a business than to actually go through the process of developing a BCP. Not only does it identify the risks to insure, it also assists in the business interruption area by determining the Indemnity Period, percentage of wages to insure, and Additional Increase in Cost of Working Sub-Limit to name but a few.

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Troubles with Insufficient Sum Insured

 

Protect your assets with good quality insurance

Here is the second question. Again it is from overseas, which makes it a bit more difficult to answer but the principles should be the same.

Good Day,

My wife and I purchased, in 2003, American Family’s best policy they offered.  A Form V, Gold Star Policy.  We have never denied coverage or failed to report any addition (which there were none).

Do we have any recourse?

American Family simply states that it is the Insured’s ultimate responsibility and that they bear no liability.

Derek

My response reads as follows:

Hi Derek,

Thanks for your note and I am genuinely sorry to hear of your problem.

I am based in Australia and while I know our laws and those of several other countries very well, I am not an expert in US law or insurance practice but am trying to learn fast. While the terminology is clearly different, the principles appear the same.

What I can say is that at the end of the day, the sum insured selected is yours as the Insured. Having said this, I find it difficult to understand why the insurer’s policy had a limit in their software capping the level of cover that was available unless the insurer only had a risk appetite for lower value properties and or did not have re-insurance in place to cover higher value properties.

From what I have been able to find out for you, it appears that you are not the first person to allegedly fall foul of this policy. Here is a link to a judgment involving what could be the same insurer and product:

http://www.propertyinsurancecoveragelaw.com/uploads/file/Complaint%20-%20State%20of%20Minn_%20v_%20Amer_%20Family%20Mutual%20Ins_%20Co_.pdf.

As for the agent, an insurance adviser is there to provide advice on your insurance needs. He/she should know what covers are available and should advise you of any shortfalls before any loss occurs.

I am aware that some US Insurers, Chubb come to mind, provide a valuation service and if you accept their valuation they will always
reinstate your home. I am not sure if this is available in all states/counties.

You need to obtain some local advice rather than rely on my general advice. The trouble is you need to find one that is not going to charge you a mountain of money and make your position worse. It has to be good, sound, accurate advice.

If you can advise me what city/town you are in and the state, I will make some enquires and see if I can find either an attorney or
public adjuster who can provide you with the answers you seek.

I look forward to hearing from you.

P.S.

The team at LMI Group is currently modifying one of our eServices LMI PolicyComparison to the US Market to assist insurance advisers with their decision-making process, but we are finding that the policies and regulations are different by state and in some cases by county. This makes the process much more difficult, but we are determined to get there in the end.

P.P.S.

A person’s home is one of their most important assets. The protection of this should not be left to chance or to the cheapest policy available. (I am not suggesting that Derek and his family choose this policy that way.) I cover this in the podcast found on the right-hand pane of this blog. All insurance needs to be considered on the coverage afforded by the Policy, the financial strength rating of the insurer, the claims service provided by the insurer with price coming in last.

My strong advice to anyone buying insurance is to use a competent insurance broker you trust.

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