Rising Insurance Costs – it is not really surprising

A link to http://backpackertradenews.com.au/insurance-rip-off-17642 was sent to me by a frustrated insurance broker. The following is an the article which criticises the insurance industry in Queensland for the rising cost of insurance.

Insurance rip-off…

Queensland hostel operator Brent Gemmell is unimpressed with the constant rise of insurance premiums…

What is happening with our insurance? As an industry we have been stung well over the top for a long time now. But this year we have reached new heights.

We have been operating as a Backpackers/Hostel in Queensland for 15 years now, with not 1 claim! But still, due to being refused renewals for no valid reasons, we have had policies with 3 different insurance companies/underwriters in the last 5 years and with each one the premiums get higher and higher.

I heard through the grapevine we would have difficulties getting a reasonable deal this year, plus I got an email from our current broker warning of a major hike in the prices. So for the past 2 months I have had 4 brokers search the insurance world for affordable policies.

Result… The cheapest with the same cover as last year… 110% INCREASE in premiums.

Saying that, the most common response was a flat refusal. The most expensive you may be asking yourself… 230% INCREASE!!!!

I keep asking myself why?? I keep asking the brokers and insurance companies why?

Problem here is I can’t get any reasonable answers.

As a Backpackers/Hostel we are the most heavily regulated form of accommodation providers in the industry. We are scrutinised on an annual basis by the Fire Department and local council and the measures we have in place to comply with all the rules and regulations are thorough, to say the least…

I believe because we have become the lepers of the insurance world the underwriters/companies that will touch us have us over a barrel and think they can charge us what they like. And guess what… they are right. They do have us over a barrel. We can’t afford not to be insured and we can’t afford to be insured.

Please, any information on this most frustrating topic would be much appreciated.”

The earliest evidence of insurance dates back over 5,000 years where groups of people pooled the risk between themselves so that the entire community bore a small proportion of the losses, but no one who participated in the pooling was completely wiped out. While the Chinese are believed to be the first to embrace this concept of pooling the risk and paying losses out of the pool other cultures such as the Babylonians, Egyptians, Greeks and many other cultures developed or expanded on the pooling concept against risk.

Modern insurance continues this principle of pooling the risk but when catastrophes hit an area, it is possible that pool is not large enough to cover all the losses that arise. AMI Insurance in Christchurch is a recent example of this. AMI (no relation to Australia’s AAMI) was a Christchurch-based insurer that had a huge market share in that town. When the Canterbury area was devastated by a series of earthquakes, the insurer did not have enough reserves (a big enough pool) to meet all the claims and remain vialbe should another catastrophic event hit. Most insurers now spread their risk internationally to obtain as wide a pool as they can and if one area gets hit, it does not wipe out the entire pool.

Like any business is not a charity, it generates revenue and incurs costs to operate with the plan to make enough profit to attract shareholders to provide capital.

In simplest terms, the revenue streams for an insurer come from two sources; insurance premiums and investment returns.

When investment returns are high, insurers reduce their premiums in a free enterprise system and make up any underwriting losses with investment returns. The first problem for the insurance industry, and all of us that insure, is that investment returns have gone down considerably. Look at your own superannuation and you will see that the investment returns have gone down enormously.

This has put pressure on premiums. Adding to this pressure is the operating costs of insurance. The biggest single cost to general insurance industry is claims. Australia and the rest of the world has been hit by a spate of natural disasters. Let me run through just a few.


Queensland Floods $2,400 million

Victoria Floods $122 million

Cyclone Yasi $1,330 million

Victorian Storms $412 million

Cyclone Carlos (NT) $15 million

WA Bush Fires $35 million

Margaret River Bush Fires $52 million

Christmas day storms (Melbourne) $772 million

This is over $5 billion in one year on top of the normal day to day claims of house fires, burglaries, car accidents and liability claims etc.

But it is not just Australia. I have already mentioned the New Zealand earthquakes at around $20 billion, but they also had bad snow storms and Auckland had a tornado. (Townsville got hit with one only last week). We had Hurricane Irene in the US, the Mississippi Floods, 43 major tornados and an earthquake. The losses in Japan have been horrific; both in human life and insurance payouts. The Thai floods are also estimated at over $35 billion in insured losses. Europe has had floods and storms and flooding and earthquakes in South America.

These catastrophic losses have been some of the worst in recorded history and the insurance industry has paid out billions of dollars to indemnify business and home owners in all industries including, but not limited to, backpackers.

Lloyd’s of London, one of the world’s major reinsurers, has just reported a loss of £516 million after paying out £12.9 billion in claims, £4.6 billion of which were catastrophe claims,  the largest amount in Lloyd’s 324 year history.

In some classes of insurance in Queensland, insurers were paying out more than $115 in claims for $100 in premium received. It must be remembered that insurers also have to pay rent, salaries, electricity, meet compliance costs etc. as does every business. This, of course, is not sustainable and if insurers and reinsurers did not increase premiums, then insurers would not have the funds to meet ongoing valid claims, and, in the worst cases, go into liquidation.

Every home owner and business will feel the effect of having to pay higher premiums. The backpacker industry is not being singled out.

Now to the false logic of “I have had no claims so my premium should not go up”. This means that the insurer should collect the entire cost of increased claims costs from only those that made a claim. On that logic, you make a claim of $1,000,000 and the Insurer is required to recover that loss from that Insured alone. This destroys the whole 7,000 year old concept of everyone pooling the risk.

During the 1990s and early 2000s, we all had the benefit of cheaper premiums. We quickly forget that fact. The price of insurance has become unsustainable and regretably, it has to go up by large percentages. This is all based on actuarial advice. There is still enough competition in Australia to stop price gouging.

Governments do not help the situation by the highest level of taxation on insurance premiums in the world. As premiums go up the State and Federal Governments have an immediate win fall with higher GST and Stamp Duty collections. It is worse in NSW, Victoria and Tasmania (commercial insurance only) where they still have the draconian Fire Service Levy which in rural Victoria is a staggering 85% which means with the tax on tax on tax compounding effect, insureds are paying over 120% tax on their premiums.

So what can be done? First work on reducing the risk in your business. Insurers will always reward better quality risks with lower premiums. A competent insurance broker can assist here.

Secondly, write to your state politician about the level of insurance taxes.

Last but not least, please understand that the insurance premiums are not the cost of risk. It is the cost of transferring risk from you and your family to an insurance company. The cost of risk is much more and includes policy excesses, under-insurance and self-insurance. Ask yourself, if you are not fully insured and you do have a fire, storm damage or the like, who is going to get what is left –  you and your family or the bank?

What you should not do is reduce your coverage or sum insured. Murphy’s Law is alive and well. The next home or business owner that needs to make a claim could be you and during these tough economic times you need the best possible protection available for the full value of your assests and business income. 265,997  people claimed due to the catastrophes in 2011 alone.

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Question on the Correct Complaint Procedure for General Insurance and Policy Excess

In response to my article posted on this blog on 26 February 2012 regarding a comment made by the Financial Services Ombudsmen (http://www.allanmanning.com/?p=630), I received the following question:
We are trying to put a complaint in about our General Business insurance which is the best way of getting this done. Our complaint is about work never completed after storm damage but the company requires us to pay. CGU are trying to railroad us for the excess amount.
Vicki [surname and email provided”
I replied as follows:
Hi Vicki,
The process is that if you are not getting satisfaction for the claim is to ask the claims officer to escalate the matter to the internal disputes area and then if you are still not satisfied you can go to the Financial Ombudsmen Service.
You must however in the first instance seek the internal disputes area to answer your specific question.
When it comes to a policy excess, I do not have your wording in front of me, but as a general rule the policy states that you as the Insured are to pay the first amount of any loss. This means the Insurer is within their rights to seek payment of the policy excess before they instruct a builder to complete the repairs.
From my experience, CGU are a very reputable insurer and I am sure that having paid any excess the repairs should be authorised.
I hope this helps.

I would add the following for readers of the blog in respect of disputes. It is an extract of a chapter entitled “Your Rights and Remedies from my book: “It May Happen to Me! – A Guide To General Insurance” [http://www.lmigroup.com/content.aspx?artId=491], which covers this area in more detail. It is in both your and the insurers interests to have any dispute resolved as quickly and amicably as possible. A dispute can be over a number of issues ranging from price increases, refusal to renew and claims disputes.

With claim disputes the first point to realise is that insurance is a contract in which the insurer agrees to indemnify you for losses covered in the policy. I know of no policy in existence that is going to cover every single thing that can go wrong in life. It is of paramount importance for every Insured to understand what you are insured for and equally important to know what you are not covered for.  It is for this reason that I recommend that everyone use the services of a competent insurance adviser.

It may sound harsh, but Insurance is not and cannot be considered a charity. After a claim, the insurer will only pay what you are entitled. It is too late now to realise that for a small extra premium you could have had the correct sum insured or more appropriate cover. Having had a claim and believing you have not received your entitlement, you do have rights open to you. Remember that your insurance adviser will assist you through the process, but this is of course conditional on their agreeing that you do in fact have a valid claim. A Claims Preparer will also provide assistance with a disputed claim if one has been appointed.

Disputes also arise with insurance advisers and the same approach should be taken with them as you would with an insurer. The first step is to contact your financial service provider (the insurer or insurance adviser). You are encouraged to contact your insurer (or insurance adviser’s complaints area) first to discuss the issue and see if it can be resolved quickly. If this fails you are entitled to take the matter to a lawyer; for many claims you can use a far less expensive option. As the process is different in both Australia and New Zealand, I split the remainder of the blog entry in two to cover the position in both countries.  If this does not work, or you are not entitled to use the service, please review the Section at the end of the Blog titled “Going Legal” for some sound advice. Before I go on, I would repeat the advice that, in any dispute, the first step is always to speak with your insurer or insurance adviser.


Insurance Code of Practice

On 1 May 2010, the general insurance industry launched a revised version of the General Insurance Code of Practice. This Code covers all general insurance products except: workers compensation; marine insurance; medical indemnity insurance; and compulsory third party insurance including where there is linked driver protection cover. It does not cover reinsurance. Nor does it apply to life insurance or registered health insurance. This is a voluntary code and it is prudent for you to always check that the insurer you select has agreed to be bound by the code. You can check which insurers are signatories of this code by visiting http://www.codeofpractice.com.au/Default.aspx?tabid=56. This code has been updated again since the Brisbane Floods of 2011 and I am sure will continue to be refined as the insurance industry look for ways to improve their service. The cynics among you may suggest that this is due to public and political pressure. I do not share this view entirely.

Retail Client Defined

Before I start, I should explain that the process is different for retail products and clients for non-retail or wholesale products. With a general insurance product, under the Corporations Act 2001, a retail product is one where the product or service is provided to the person as a retail client if:

(a) either:

(i) the person is an individual; or

(ii) the insurance product is or would be for use in connection with a small business; (under the terms of the Act this means a business employing less than:(a) 100 people if the business is or includes the manufacture of goods; or (b) otherwise -20 people.)

(b) the general insurance product is:

(i) a motor vehicle insurance product; or

(ii) a home building insurance product; or

(iii) a home contents insurance product; or

(iv) a sickness and accident insurance product; or

(v) a consumer credit insurance product; or

(vi) a travel insurance product; or

(vii) a personal and domestic property insurance product (as defined in the regulations).

Seeking a Remedy

A set of sample complaint letters are available on the consumer website of the Australian Securities and Investments Commission (“ASIC”). There are sample letters for complaints about insurance but also financial advice and savings accounts.

Before the Financial Services Ombudsmen can consider any dispute, the financial services provider must have been given an opportunity to resolve the dispute with you directly. In most cases, the insurer has up to 45 days to respond to your complaint.

Lodge a Complaint with FOS

If this fails to bring you satisfaction, you are entitled to lodge a dispute with the Financial Services Ombudsmen (“FOS”). FOS is approved to operate as an external dispute resolution (“EDR”) scheme under ASIC’s Regulatory Guide 139 (RG 139).

FOS may only consider a dispute if the dispute is between a Financial Services Provider and:

(a) an individual or individuals (including those acting as a trustee, legal personal representative or otherwise);

(b) a partnership comprising of individuals – if the partnership carries on a business, the business must be a Small Business;

(c) the corporate trustee of a self-managed superannuation fund or a family trust – if the trust carries on a business, the business must be a Small Business;

(d) a Small Business (whether a sole trader or constituted as a company, partnership, trust or otherwise);

(e) a club or incorporated association – if the club or incorporated association carries on a business, the business must be a Small Business;

(f) a body corporate of a strata title or company title building which is wholly occupied for residential or Small Business purposes; or

(g) the policy holder of a group life or group general insurance policy, where the dispute relates to the payment of benefits under that policy.[1]

You can lodge your appeal online at https://forms.fos.org.au/OnlineDispute.

The FOS Review of the Dispute Begins

The first thing FOS will consider is whether the dispute falls within our jurisdiction. There are certain types of issues that fall outside their jurisdiction. As at the date of writing, this was set out in the Financial Services Ombudsmen’s Terms of Reference 1 January 2010 (as amended 1 July 2010). The types of general insurance disputes that cannot be considered by FOS, include disputes in relation to:

(a) non-disclosure, misrepresentation or fraud; or

(b) the rating factors and weightings that the insurer applies to determine the Insured’s or proposed Insured’s base premium, which is commercially sensitive information.

FOS may refuse to consider, or continue to consider, a dispute, if FOS considers this course of action appropriate, for example, because:

(a) there is a more appropriate place to deal with the dispute, such as a court, tribunal or another dispute resolution scheme or the Privacy Commissioner;

(b) the Applicant is not a retail client as defined in the Corporations Act 2001;

(c) the dispute relates to a Financial Services Provider’s practice or policy and does not involve any allegation of either Maladministration or inappropriate application of the practice or policy

(d) the dispute being made is frivolous or vexatious or lacking in substance; or

(e) after the dispute is lodged with FOS, the Applicant commences legal proceedings against the insurer that are related to the dispute.

If you are not entitled to have FOS adjudicate on your dispute, they will advise you. If this occurs, you should seek legal advice on the merits of your case and determine if you should take the matter before the courts.

How Your Dispute will be Handled by FOS

If you meet the criteria, FOS will work with you and the financial services provider to try and resolve your dispute. FOS will act independently by not taking sides. Their aim is to get a fair outcome for both parties to a dispute. FOS communicates with both parties by phone, email and letters.

How Your Dispute will be Resolved by FOS

FOS dispute resolution methods may involve negotiation, conciliation, or reaching a decision. It is important that all information relating to your dispute is provided to assist in a timely resolution. Remember that insurance is based on utmost good faith and whether you end up going to trial, or is it before FOS, you should always tell the truth and provide all relevant information and or documentation.

There are a number of potential outcomes for a dispute that could result from our process. These are:

  • the dispute is resolved by agreement;
  • a decision on the merits is made; or
  • FOS decides that they cannot or should not deal with the dispute because it is outside their terms of

A dispute may also be withdrawn or closed because the Applicant (Insured) repeatedly fails to provide information/documentation requested by them. If a dispute is not resolved by agreement between the parties, then it will be resolved by a decision about the merits of the dispute. The decision will take into account all the information provided by the parties. All decisions will be based on what is fair in all the circumstances, taking into account the law, any applicable industry codes of practice, as well as good industry practice. There are two levels of decisions:

  • Recommendations; and
  • Determinations.

What is an FOS Recommendation?

A “Recommendation” is a decision on the merits of a dispute. It is made by one of our case workers who are authorised by the Chief Ombudsman to make Recommendations. This may be the case worker who handled the dispute in case management. The Recommendation will be in writing and will set out the case worker’s views on the merits of the dispute. A Recommendation will provide an outcome to the dispute. If the dispute is decided in favour of the Applicant
it will identify the action and/or the amount of any monetary compensation the

Financial Service Provider must provide to the Applicant, or the method for calculating that compensation. It may also outline any action the Applicant is required to take.

Will the Dispute always go to a Recommendation if it cannot be resolved by Agreement?

Normally, a dispute will be dealt with by Recommendation. However, in some circumstances, a dispute will be referred straight to Determination, without going to Recommendation first. This is called an “Expedited Determination”. When considering whether to expedite a dispute directly to Determination, we take into account the circumstances of the dispute, including:

  • any urgency (for example, if
    the Applicant is experiencing ill health);
  • the type of product or service;
  • the size of the loss involved;
  • the age of the matter; and
  • technical complexity.

If there is any urgency, or if the Financial Services Provider has gone into administration or liquidation, has ceased to trade, or has not responded to the dispute, then we will probably proceed to an expedited determination.

An FOS Recommendation is not Necessarily Binding

A Recommendation is only binding if both parties accept it within 30 days of receiving the Recommendation (or within any additional time allowed by FOS).

If the Parties Accept the Recommendation

If both parties accept the Recommendation, the dispute will be resolved on the basis outlined in the Recommendation. FOS will ask the Applicant to sign a “Confirmation of Settlement” to accept the Recommendation in full and final settlement of the dispute. The Financial Service Provider will then be bound by the outcome. The Financial Service Provider can ask the Applicant to sign a Deed of Release in addition to the Confirmation of Settlement, but only if it provides us with a copy of the Deed within 14 days of being told the Applicant has accepted the decision. The Deed must be consistent with the Recommendation.

Where the Recommendation is Not Accepted

If either party does not accept the Recommendation, then it is not binding. Either party can ask for a Determination, provided they do this within 30 days of receiving the Recommendation. If the Financial Services Provider does not accept the Recommendation, then the dispute will automatically proceed to a Determination. FOS can extend the 30 day time limit for either party to accept a Recommendation or to ask for a Determination.

FOS Determination

A Determination is a final decision on the merits of a dispute, made by:

  • the Ombudsman; or
  • a Panel of three decision-makers chaired by the Ombudsman.

A Determination is a final decision on the merits of a dispute. There is no further “appeal” or review process within the Financial Ombudsman Service. An Applicant has the right to accept or reject the Determination within 30 days of receiving it (or within any additional time we have allowed).
If the Applicant accepts the Determination, then it is binding on both parties.

If the Applicant does not accept the Determination, it is not binding on the Financial Services Provider and the Applicant may take any other available action against the Financial Services Provide, including action in the courts. Importantly a Financial Services Provide cannot accept or reject a Determination.

Learn more about FOS

This has just been a precise of the process. To learn more about this organisation or to lodge a complaint, please visit http://www.fos.org.au.

Insurance Code of Practice on Catastrophe Response

Turning back to the Code of Practice for a minute, the code includes a section covering catastrophes and disasters resulting in a large number of claims. The code states that:

  1. Insurers will respond to catastrophes and disasters in a fast, professional and practical way and in a compassionate manner.
  2. Due to the large number of claims, Insurers advise that they may not be able to meet all standards of this Code following a catastrophe or disaster. This is only understandable.
  3. Insurers will establish their own internal processes for responding to catastrophes and disasters.
  4. If you have a property claim resulting from a catastrophe or disaster and the insurer has finalised your claim within one month of the catastrophe or disaster, you can request a review of your claim if you think the assessment of your loss was not complete or accurate, even though you may have signed a release. Under the Code, you have six months from the finalisation of your claim to ask for a review of your claim.  Insurers should inform you of:

(a) this entitlement when we finalise your claim; and

(b) their complaints handling procedures.

  1. Insurers will co-operate and work with the Insurance Council of Australia in its role of industry coordination and communications under the Insurance Council of Australia’s catastrophe coordination arrangements.

Please note that signatories of the Code of Practice have recently agreed to provide the same level of service to claimants following a catastrophe as they do during non-catastrophe times. In all honesty, I am not sure how this is possible when you have multiple large catastrophes as we had during 2011. There are simply not enough trained loss adjusters or claims officers available to draw on and bringing in international adjusters has not proved altogether successful.

To learn more on this section of the code, please visit: http://www.codeofpractice.com.au/LinkClick.aspx?fileticket=-XTcClWRFGo%3d&tabid=37

New Zealand

The following section addresses the remedies available in New Zealand.

Insurance & Savings Ombudsman Service

Members of the Insurance Council of New Zealand participate in the Insurance and Savings Ombudsman scheme. The Insurance and Savings Ombudsman is an independent authority. It considers complaints regarding all types of personal and domestic insurances, and savings services, provided that the amount claimed does not exceed NZ$100,000. The scheme is free of charge for insured people, and the Ombudsman’s decision is binding upon the insurance company involved in the dispute.

Investigation Process

The process used by the Insurance and Savings Ombudsman for investigating a complaint is as follows:

  1. Insurance & Savings Ombudsman receives a complaint.
  2. The details of the complaint are sent to the insurance company involved. The insurance company is also sent a document signed by the complainant and any other relevant person(s) stating that:

(a) They are happy for the company to provide the Ombudsman with information; and

(b) They accept certain conditions relating to the non-provision of information in court proceedings.

  1. The insurance company must then provide any information it has in relation to the complaint and comment on any relevant issues.
  2. After having received and considered the necessary information, the Ombudsman will try to resolve the complaint by agreement between the parties.
  3. If this is not possible the Ombudsman may, at the request of either party, make a written recommendation as to how the complaint should be resolved. Each party is then given one month to make further comments.
  4. If the Ombudsman recommends the insurance company should make a payment to the complainant, the complainant may only accept the payment if they agree not to take any further action on the matter without the insurance company’s consent.
  5. If the complainant agrees to the Ombudsman’s recommendation within one month, the Ombudsman may make an award of money against the insurance company. The Ombudsman is able to make binding decisions on member companies up to NZ$100,000.

Complaints that cannot be Investigated by the Insurance & Savings Ombudsman

The Insurance and Savings Ombudsman may not consider complaints:

  • where an amount greater than NZ$100,000 is under dispute (unless the insurance company agrees);
  • that would be better dealt with by a court or other body;
  • that the complainant has not taken up with the company concerned;
  • that have been previously considered (unless new evidence is available);
  • that have been considered by a court or any other body;
  • that are pursued in a trivial,  frivolous or vexatious manner or in bad faith;
  • that relate to an insurance company’s commercial judgement, and methods or procedures for determining prices or premiums payable; or
  • that relate to an insurance company’s decision to impose conditions or limitations on a policy, or
    terminate or refuse cover under an existing policy or agreement, as a result of material non-disclosure.

Why use the Service?

The Insurance & Savings Ombudsman is a free and impartial service. While member companies must accept the Ombudsman’s ruling, you do retain your right to take your case through to the disputes tribunal or the courts, should the Ombudsman not rule in your favour.

Going Legal

If you need to go legal, the best advice I can give is to get yourself a specialist insurance lawyer. Insurance law is quite complex and insurers engage specialist lawyers to argue their position. Do not use a lawyer that just tells you what you want to hear. Understand the risks and the costs. Litigation is typically long and expensive.

Finally, I would remind you of the “clean hands” doctrine.  This is a rule of law that someone bringing a lawsuit or motion and asking the court for equitable relief must be innocent of wrongdoing or unfair conduct relating to the subject matter of his/her claim. In other words, do not bend the truth or exaggerate your claim.

[1] Section B, Clause 4.1 of the Financial  Services Ombudsmen’s Terms of Reference 1 January 2010 (as amended 1 July 2010).
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Time for the Annual Flu Shot

As part of my personal risk management, my family and I attended our doctor yesterday and got our annual flu shot.

With the upcoming flu season, you may wish to consider doing the same. I know that with all the travel I do, the amount of people I meet and the long hours I work, I need to give myself a fighting chance to avoid being laid up with the flu. I also know that it would hit me at the worst possible time.

I am sure your own usual health provider will now have stocks available.

In Melbourne it only cost $25 a person with the government funding those with concessions.

Finally, I would say that I know some people are frightened of needles but this one did not hurt at all and none of us had any side effects. Your own health is your most important asset.

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The Treatment of Solar Power Generation Under a Business Interruption Claim

Increased use of solar power may lead to a problem in a Business Interruption claim

The issue of revenue generated by, or reduced operating costs achieved by, an insured company generating some of its own power has not really been addressed by the Accounting Standards and can easily be overlooked in the calculation of the sum insured/declared value under a business interruption (consequential loss of profits policy/section).

When checking a business interruption calculation prepared by an external accountant, one of the LMI team had need to speak to the senior partner of the large accounting firm to determine how they accounted for the revenue generated by the solar power generation in the Insured’s accounts.

The accountant advised that they were treating this as an offset in the electricity cost centre. This, in effect, was reducing the level of expenses. We pointed out this had caused an error in the Business Interruption sum insured.

After explaining that any revenue generated, including rebates on purchase price or offset in any expenditure, should be treated as revenue. He immediately understood the situation and said he would put out an instruction to staff straight away and thanked us for bringing the matter to his attention.

Max Salveson of our Melbourne office asked him why accountants had not established an accounting practice standard for revenue earned from solar power generation in particular. His response was that, like him, he suspected nobody thought about the Business Interruption insurance aspect. He said his partner is on the professional body’s committee and he will ask him to raise this as a topic.

Hopefully the following spreadsheet explains the issue for readers.

Graph showing diffence in settlement if income from solar power generation treated as a expense rebate

The loss of the revenue may be treated as a increase in cost of working,but it is subject to all the tests that apply to such costs. To avoid any dispute at claim time I would recommend that a “Reduced Margin” extension be endorsed on to the Policy. The wording of this endorsement, which I believe should be a core endorsement on all business interruption policies,is shown below:


If, in consequence of Damage giving rise to a claim under this Policy, Turnover is maintained at a reduced Rate of Gross Profit, an equitable allowance shall be made for the loss of Gross Profit resulting from an increase in the ratio to Turnover of stock usage or purchases (adjusted for stock variations). No allowance shall be made for an increase in the ratio to Turnover of any other uninsured expenses.

This clause will not protect an insured where electricity/power is listed as an Uninsured Working Expense.

To my mind,it is far better to include the revenue from solar generation as revenue in the business’s Profit and Loss Statement and in the Bsiness Interruption sum insured/declared value calculation.

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Question on NSW Fire Service Levy

I received the following question recently:

Dear Campaigner,

Thanks for your great work & NoTaxOnInsurance website. GIO has billed me Fire Service Levy of $43.77 on a unit contents premium of $218.84. That’s 20%, but perhaps 40% as only one half of GIO’s premium income is counted for the levy. Do you know what the % of the insurer’s premium income is levied?

It looks like GIO may be making a profit out of the levy, by for example, charging 20% of actual premium to me as a levy but paying over as levy to Fire & Service NSW (State Gov’t) say 12%. It would be clear if I knew the billing calculation on GIO for the levy. Is it a simple % of one- half of the insurer’s premium income?

Many thanks.

Kevin H [name and email supplied]

I answered as follows:

The way this all works is that the State Government provides an estimate of the moneys that need to be collected to fund the Fire Services. This is operating costs and capital expenditure. In NSW 73.7% is by legislation to be funded by the Insurance industry. The State Government then advises the Insurance Council of Australia of the dollar amount that insurers have to pay.

The Insurance Council of Australia, in turn, engages actuaries to calculate based on expected sums insured and premium rates what rate needs to be charged based on a percentage of base premiums. The rate is different for commercial property, including business interruption and contract works, to home and contents.

The actuaries review their calculation each quarter to take into consideration any movements in the amount the State Government requires, premium rates and sums insured.

At the current time, the rate for Fire Service Levy in NSW is 21% of the base premium. This is down from 23% back in August 2011. The reason for the decrease in the rates is that insurance costs have risen due to all the natural
catastrophe payouts in addition to the normal day-to-day losses. With higher premium rates and the cost of funding the fire services not going up at the same rate for Fire Service Levy has decreased.

The published rate is distributed by the Insurance Council of Australia to all insurers and to my knowledge they all charge the same, but it is possible that some insurers charge more or less based on their own book of business.

I have personally not seen any evidence of any one insurer gouging their clients on the Fire Service Levy. Premiums are so competitive that an insurer would lose market share if they did have a higher rate in this area.

New South Wales, Victoria and Tasmania (commercial risks only) are the only states/territories that still impose a charge on the insurance industry. It is completely unfair and dangerous as it is a tax on the prudent and risk-averse. What happens is that the extra charge, which is made worse by triple taxation with 10% GST on the Fire Service Levy and the Premium, then a further 9% State Government Stamp Duty on the Premium, Fire Service Levy, and GST. The result of this is that is a disincentive for full insurance with some electing not to insure at all, which has a devastating effect in the event of a loss.

A full list of the current Fire Service Levies and Stamp Duties imposed by the various state governments can be found at Table of FSL_and_SD_Rates 10-2-12.

While the NSW rates are high, thank your lucky stars you do not have a business or residential property in rural Victoria. The rates there are obscene.

I believe that the Victorian Government will join the more enlightened states and phase out Fire Service Levies as from 1 July 2012, but we are awaiting anxiously for confirmation from the Baillieu Victorian government.

You can express your own dissatisfaction by writing to your local state member and or signing up on the petition at www.notaxoninsurance.com.

I hope this all explains it all.

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Blog Question on Landslip

Landslip is not a peril that all home and contents policies provide coverage for.

I received this short question regarding landslip yesterday.

Hi Allan,

Which Victorian insurers provide insurance against landslip resulting in loss of home or contents?


Rodney C [name and email supplied]

The easiest way for me to answer this question is to go to www.policycomparison.com and download a list of all the domestic policies I know after choosing two selection criteria, namely: “Earth Movement following a Storm” and “Erosion, Subsidence, Landslide, Earth Movement”, both of which are typically mentioned in the Exclusions section of home and contents policies.

The result for those interested is Landslip_Comparison.

Rodney, I trust this answers your question.

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BI Additions versus Difference Method – beware the difference

Different Policies means different methods of calculating insurable Gross Profit

When Business Interruption Insurance was developed in the early 20th Century, the method of calculating insurable Gross Profit was to start with the Net Profit and add to it the business expenses that were likely to continue should there be a disruption to the business. These listed insured expenses were known as Insured Standing Charges. This became known as the “Additions Method” for obvious reasons.

Two problems were identified over time. The first is that the list of Insured Standing Charges is long, or ought to be, to fully protect the business and secondly, if the broker or insured omitted on inadvertently, the insured was uninsured for that expense.

During the 1970s and 1980s much of the industry moved to what is known as the difference method for calculating Insurable Gross Profit. With this method, the basis of calculating Insurable Gross Proft was literally turned upside down with the starting point being the turnover of the business and then the Uninsured Working Expenses are listed and the amounts of these expenses deducted from turnover to arrive at Insurable Gross Profit. These Uninsured Working Expenses should be those expenses and only those expenses that vary in direct proportion to sales.

The advantages of the Difference Method is that the list of Uninsured Working Expenses is much shorter and if one is omitted, the business is over-insured thereby reducing Professional Indemntiy claims against the broker or accountant who may be assisting with the calculation. While I have a preference for the Difference Method for the reasons outlined, the result, if done correctly, should be exactly the same.

The purpose of this article is to stress the importance of understanding which method of calculation the policy you are considering uses. In Australia  the Industrial Special Risks (“ISR”), both Mark IV and Mark V versions, use the difference method as does CGU and most business pack policies although they may have slight variations in an attempt to assist the broker and or insured. For example, Zurich lists four Uninsured Working Expenses as standard, namely: purchases, freight, packaging and bad debts. Additional Uninsured Working Expenses can be added if required. In New Zealand, South Africa, and the United Kingdom the move to the Difference Method is almost universal as well.

I do see, from time to time, where a broker has listed the Insured Standing Charges on an ISR policy, for example, not realising that its Gross Profit is calculated using the Difference Method. The result of such an error can be catastrophic to the business owner in the event of a claim. While the Difference Method has almost replaced the Additions Method in most modern policies, it is not universal. For example, the SRS Compack Policy Wording (version 01.11) uses the Additions Method to calculate insurable Gross Profit. I would refer you to the Definitions section of the Business Interruption section on page 12 which states:


GROSS PROFIT: The sum produced by adding to the Net Profit the amount of the Insured Standing Charges or if there be no Net Profit the amount of the Insured Standing Charges bears to all the Standing Charges of the Business.

 [emphasis mine]

Please understand I am not criticising the SRS policy in any way. As I explained above, the answer you get and the coverage afforded by this policy in respect of a claim for insurable Gross Profit would be no different than if the same risk was protected by an ISR Policy — as long as the person calculating the insurable Gross Profit at the time the Policy was taken out was cognisant of the fact that this wording uses the Additions Method. I understand that SRS can offer the Difference Method by endorsement for those that prefer this basis of calculation.

Due to the marked differences between the business pack wordings on the market and the risk to brokers or an insured in not getting the sum insured correct, I developed www.bicalculator.com back in 2006 which has an individual calculator for a wide range of wordings. As soon as BIcalculator.com’s Manager became aware of the SRS Compack Policy Wording,  he commissioned a calculator for this particular Policy. It will be up on the site as soon as it is completed.

The site has proven very popular and is now available in 6 countries with 2 more under development. The satisfying result for me is that not one broker that has used the site has been successfully sued for wrong advice. In fact by using the site, several brokers have been able to successfully defend actions against them.

Summing up, please keep the following in mind: 1) the myriad of Business Interruption policies available do not have a uniform method of calculating insurable Gross Profit; 2) BIcalculator.com is a powerful tool to assist brokers and clients to get the declared value or sum insured correct; and 3) if you use a policy that is not up on either PolicyComparison.com or BIcalculator.com, let me have a copy and I will remedy the situation.

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Question on Removal of Debris

Pressure Pack Paint Can Factory Fire

I was asked this question on removal of debris during the week.

Hi Allan,

I am just looking for some advice.  We have a client who are manufacturer, fill and distribute spray paint cans and the like.  The largest asset value per location is $12,000,000 at Wacol, an industrial suburb [in Brisbane Australia], and we have the ROD [removal of debris] set at $1,000,000.

We have discussed this with client today and I suggested we seek guidance from yourself.  Can you please advise if you believe this limit to be adequate, or should we be considering a higher limit due to increased dumping costs of the product?



My response was as follows:

The Industrial Special Risks Policy covers the clean-up at the Situation and the premises, roadways, waterways, parks, rail lines etc. in the vicinity that are affected by the debris. The exact wording from the Mark IV version reads:

“Subject to the liability of the Insurer(s) not being increased beyond the Limit(s) of Liability already stated herein, the Insurer(s) will also indemnify the Insured for:…

(f)       Costs and expenses necessarily and reasonably incurred in respect of:…

(ii)      the lnsured’s legal liability in respect of removal, storage and/or disposal of debris, notwithstanding Excluded Peril 8 [the general exclusion for legal liability] in relation to premises, roadways, services, railway or waterways of others, consequent upon damage to the Property Insured by a peril hereby insured against for such costs together with the cost of cleaning provided that such liability was not assumed by the Insured under an agreement entered into after the commencement of the Period of Insurance or any renewal thereof unless liability would have attached in the absence of such agreement.

It is important to understand that this coverage insurance under this section does not extend to any liability that the Insured may incur as a consequence of pollution of any kind.

In the last pressure pack paint company I did a few years ago, the final cost for Removal of Debris was $1.6 million because of the contamination of nearby waterways. This is the big exposure.

I do not know how much stock is involved or what would be affected but I would be doubling the current figure and perhaps even going to $2.5 or $3 million to be safe. The Environment Protection Authority are getting stricter and costs have escalated since the claim to which I am referring.  It may well be prudent to obtain a quotation and or advice from a specialist demolition contractor who can look at the exposure at this site and give you a more accurate figure.

Hope this helps.



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Can you insure against the disruption caused by a road upgrade by a main roads department?

I received the following question this morning.

Morning Allan,

I need your opinion please, I know you are extremely busy and I appreciate your time.

Contractors for the [Queensland| Main Roads Dept have torn up the Bruce Highway in my town for major oadworks (planned), and in so doing have denied access for my client’s customers.

As a result their cash flow is severely reduced, as it has been ongoing since approximately August 2011 and will continue until June 2012. I have checked the PDS’s [Product Disclosure Statements] of [Australian insurers] Vero, Calliden and Zurich and QBE I cannot find any way any of these policies can respond.

I have called claim departments and we cannot find a wording we could use for this situation.

I have checked on the LMI policy comparison and of course it lists B/I [business interruption] as covered, but only following an insured event.

None of my clients have approached me, I wanted to see if I could help them.

Have you ever had success with a similar case ?

Regards Rick.

My answer was along the following lines:

Regrettably, this is regarded as a business or political risk that is not something that the private Insurance industry can insure.

The Main Roads Department and their contractors do have some duty to the residents and business owners to minimise the disruption to everyone and even allowing for the slow pace of some contractors, from August 2011 to March 2012 does seem an inordinate length of time.

Had I got this question earlier, I would have suggested that the business owners contact their local State Government member, particularly with the election coming up, to put some pressure on him to speed up the works or to arrange some sort of compensation to assist the business owners. Perhaps a letter from a lawyer or a community action group may get things happening faster.

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The need to consider claims service and policy coverage, not just price, when purchasing insurance

In the last week I tried to hold discussions with an insurer who would not make a progress payment on business pack policy. This is the fifth claim I have had with this one insurer and it is the fifth time I have asked myself why anyone would ever want to insure with them.

In this latest incident, the fire happened over a year ago and the Insured is being delayed in getting council approval as the council have withdrawn the special purpose zoning for the area. This may take years to sort out and the Insurer refuses to make a progress payment based on the indemnity value, which I believe in any event is way below what it really is. They are saying you can have the Indemnity Value but once this is accepted, the claim is at an end. This is despite the policy saying that the insurer will not make any payment beyond the indemnity value until the money is expended. This, in anyone’s reading, clearly shows that they should be paying the indemnity value as a progress payment. To me, it is a breach of contract and also a breach of the Insurance Contracts Act 1984.

Another problem on this claim is that the broker was not aware that the policy was a GST-inclusive one and that therefore the Insurer will never pay out the sum insured but only 10/11ths. This, as I reported back in my posting in November 2011, catches a lot of people. In this case, the need to include GST in the sum insured is hidden on page 47 of a 49 page contract of insurance. It is not mentioned on page 4 where the policy provides an example of the test for under-insurance.

This insurer is also refusing to entertain a claim for loss of land value due to the re-zoning following the fire. The reduction is estimated at over $1 million whereas the cover is allegedly $100,000. If they do not want to pay such claims why put the cover in the policy?

This same insurer was heavily criticised by the media over their treatment of flood. At the time they were not a member of the Insurance Council of Australia, nor where they a signatory of the General Insurance Industry Code of Conduct. They and a few others have since signed up following the Trowbridge report in the hope of avoiding government regulation.

Very few of our claims go to court but virtually every one we have done has had to go legal to get any sort of result.

Other issues that brokers should be aware of is that under their Contract Works offering the test for co-insurance on existing structures is based on reinstatement and replacement conditions, whereas they will only ever pay out a claim on indemnity value even if the Insured wishes to reinstate.

In a crane claim, the matter had been going on for 2 years when the broker asked us to review the file. Through the discovery process we found a report on the Insurers file from their own engineer advising that the basis on which they were denying the claim was incorrect. Once we pointed it out, the claim was settled but the Insured had already spent $50,000+ in legals and had lost sleep for 2 years. As it was, there was  right of recovery from a third party in any event.

Whether you are an insured or a person advising on what insurance and/or which insurer to place coverage, the price should not be the primary consideration. In each of these cases the Insured would have gladly paid double to get the cover and fair go that they and I believe they and any insured should be entitled. The extent of policy coverage, the level of claims service and the financial rating of the insurer should all be carefully taken into account.

When my colleagues and I are looking after a claim, these issues come to the fore. When dealing with the likes of this company (I cannot name them at this stage as this matter will be going to court), it is always a fight and the broker loses sleep, often a client and the brand is damaged, they and the insurance industry suffer and all agree it was simply not worth any perceived saving.

I urge all readers to take each of these issues into account when you next make your buying decision. The total cost of risk is not the premium. Premium is the cost of transferring risk to an insurer. The total cost of risk includes the net loss to a business for uninsured losses (intentional and unintentional), policy excesses, the amount not paid due to penalties for under-insurance and the funding cost where an insurer does not pay a legitimate claim in a reasonable period.

As for the GST issue, you can quickly determine if the policy is GST-inclusive (dishonest to my way of thinking as the insurer never pays it without recovering it as a Input Tax Credit) or GST-exclusive the honourable way by using www.PolicyComparison.com.

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