Fire Service Levies in Victoria hit new levels of madness

Due to a combination of a last grab for cash by including $250 million of captial expenditure in the CFA budget over the past 3 years and the ridiculous way that the Baillieu Government has transitioned the move of Fire Service Levy from the Insurance Industry to property rates, insurers were expected to have to increase the FSL rate that they charged their customers.

The first major insurer announced that as from today, the following rates would apply from today 27th April 2012:

So what does this all mean for business in Victoria? Well it is simple! The overall cost of insurance will go up significantly. The following table shows the huge amount of tax that a business has to pay. If we start with a $1,000 base premium and we add the 11.76% higher rate of 95% the total premium comes to $2,359.50. With the triple taxation effect of the GST and State Government Stamp Duty the tax on tax is $209.50.

 

It needs to be kept in mind that:

  1. Insurers have had to increase premiums due to the over $5 billion in catastrophe payouts during 2011.
  2. Business owners need to increase their property and business interruption insurance covers due to the increase cost of reinstating damaged buildings, machinery and plant due to the introduction of the carbon tax. If they fail to do so they will be caught with penalties for under insurance and in the case of a major loss find they do not have enough to replace their assets.
  3. The $1,000 premium that the insurer collects includes a Federal Terrorism levy.
  4. Out of the $1,000 premium Insurers have to pay rents, wagers, reinsurance costs, taxes and the biggest expense, insurance claims.
  5. The pure tax the Government is charging is 139.50% of the premium.

Both the Liberal and National Parties campaigned heavily at the last election on this issue and we now find that through their greed and incompetence adequate insurance is now less affordable than ever.

We all know that people lost their lives in the Victorian bush fires where people who were not insured stayed back to protect their property and perished.

It is the role of any good government to a) protect its citizens and b) the economy. The Bailliue/Ryan Government with its handing of the fire service levy forcing people to go un or under insured combined with their pillaging of WorkCover have demonstrated that it does not support small, medium or big business.

The Victorian Government has justed stated that it will have a $100 million surplus. The real question is at what cost to our economy?

What should have happened is not rocket science. Every other state that has removed Fire Service Levy did it smoothly and without this need for an increase or extra administration.

Knowing that the cost of insurance must go up due to the spike in natural disasters, even if it wanted to sneak in the massive capital expenditure which would not pass the accounting standard in a third world country, all they had to do was pro rata the FSL down each month for the insurance industry and pro rata it up at the same rate on property rates. To expect an Insured to pay a full year’s FSL when their insurance falls due next April, May or June 2013 is just plain dumb.

The problem we all face is that we have come to accept dumb incompetent government as the norm. Or have we? The Queensland election showed that the electorate is not as gullible as our politicians believe.

While we wait for the next Victorian election to show our displeasure it is not going to help business and home owners. I really urge you to seriously consider what you risk when you do not insure. The question I ask you, if something does happen to your home or business, if you are not fully insured, who is going to get what is left? You and your family or your bank/finance company?

If your business is like mine, it is your sole source of income,  your major investment, the mortage over your home and your superannuation. It is far too much to risk to not be fully insured!

 

 

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Let me know what you think

I can find blogging a little frustrating in that you do not know if your message is getting across  or the effort you put into it is worth it.

I have run an internal blog for my staff which I do every day and have over 4,500 postings but with only a few hundred responses. Having said that the LMI team volunteer that they really appreciate my keeping them informed of what I am thinking, doing etc and that it aids communication within the business.

With this external blog it is much the same. I get questions but very few written comments that give me feedback one way or the other on the content, frequency or quantity of postings.

Having said this, at two recent conferences I have had people come up to me and say that they appreciate and get a lot out of the blog and that they pass it on to colleagues and clients.

Today I received several notes via LinkedIn and Facebook (none by the comments section of the blog) saying thanks for the posts. Thanks, these two second responses show that the effort is worth it. It is particularly rewarding to hear when a broker or insurer has passed a particular post to one of their customers.

So my request to you is that if you like what you read, do not like what you read,  want a question answered, want to offer a different point of view or simply want to say hi, please use the comments section. Any feedback is appreciated.

 

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Extra Cost of Reinstatement v Additional Extra Cost of Reinstatement

The removal of asbestos sheeting from undamaged building is only one exposure that is addressed by the Additional Extra Cost of Reinstatement extension.

I received the following question which is often asked of me:

Can you please explain this clause and how it differs from the Extra Cost of Reinstatement (provision 5) under a Mark IV ISR?

Regards

Chris” (full name and email provided)

I share my answer to Chris with followers of the blog:

Under and ISR policy my recommendation is that you sub-limit Extra Cost of Reinstatement to cover the cost of any upgrade to a building that a council or statutory authority may impose on the insured
in the event of insured damage.

In the case of the building being less than 50% damaged the ISR pays the greater of (not the lesser) the upgrade to the area damaged or the sub-limit under a policy.

Why Additional Extra Costs of Reinstatement was developed is due to the fact that authorities are increasingly likely to insist that premises be substantially upgraded not only the damaged building but other
buildings or insured property at the situation that is not damaged by the incident. Eg remove all asbestos from the situation across all buildings.

The Additional Extra Cost Memorandum gives greater protection to undamaged, separate property at the site. Another example is to provide extra off-street parking space.

This endorsement extends the policy but the standard endorsement has an embedded sub-limit of $250,000. This sub-limit was set way back in the late 1980’s and is not often insufficient.

You can ask for more if this is insufficient. If you need more I would recommend you use the following endorsement I drafted a few years back. The Endorsement Code is “ADDECPC4”. I reproduce the endorsement for your convenience below:

ADDITIONAL EXTRA COST OF REINSTATEMENT (B)

(Applicable to buildings, machinery, plant and all other property and contents other than those specified in items (b) to (i) under Basis of Settlement).

The policy extends to cover the additional extra cost of reinstatement including demolition or dismantling of the insured property damaged, necessarily incurred by the Insured to comply with the requirements of any Act of Parliament or regulation made thereunder or any by-law or regulation of any municipal or other statutory authority and not otherwise recoverable under the terms and conditions of the policy.

Provided that the indemnity afforded by this clause:

(a)   shall be limited in respect of each loss or series of losses arising out of any one event to the amount shown in the Policy Schedule against Additional Extra Cost of Reinstatement (B), which amount shall
be separate from and additional to the Limit of Liability expressed in the Schedule of the policy in respect of buildings, machinery, plant and all other property and contents other than those specified in items (b) to (i) under Basis of Settlement;

(b)   shall not include the additional cost incurred in complying with any such Act, regulation, by-law or requirement with which the Insured has been duly required to comply prior to the happening of the damage; and

(c)   shall not be subject to the  Co-insurance Memorandum contained in Section 1 of the policy.

The work of reinstatement (which may be carried out wholly or partially upon another site or sites if the aforesaid Act, by-law or regulation so necessitates subject to the liability of the Insurer(s) not being thereby increased) must be  commenced and carried out with reasonable despatch, failing which the Insurer(s) shall not be liable to make any payment beyond the amount that would have been payable under the policy if this Memorandum had not been incorporated therein.

I trust this explains the difference in sufficient detail.

Regards

Allan

 

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Question on Metropolitan Fire Service Levy – Charge out Fees despite paying Fire Service Levy

I recieved this question overnight:

Hi Allan,

I was wondering if you could assist and advise whether you could review the attached and advise whether you have come across this before ?  In particular the last paragraph.

My client let off some non toxic gas so there is no material damage or third party property damage or bodily injury.

Hopefully you may be able to shed some light on this.

Thanks in advance.

Cheers,

Grant” (full name provided)

S28C-112042606430
I replied as follows:

Hi Grant,

Yes unfortunately, I see it quite regularly. On top of ridiculously high Fire Service Levies, the highest in the world, the legislation to which the MFB refer states that the FSL only covers the fighting of fires.

If it is a chemical clean-up they are permitted to charge.

To me the whole thing is a swindle. The fixed cost of the fire service such as the trucks, the base salary of the fire offices etc are already funded by the FSL, Local and State Government payments. Any charge for this is simply double dipping. We all should be used of government doing this as the FSL paid with the premium is also triple taxed with GST and State Government Stamp Duty being applied to the FSL.

This is the same government that just announced that they would be taking  $471.5 million in dividends out of the Victorian WorkCover Authority over the next?four years.

Governments then wonder why business move interstate or worse still overseas! They usually just blame other governments and overseas factors and do not look in the mirror and realise the huge costs of doing business in this state with new taxes on the horizon.

The Victorian State Government chose not to charge those who were no insured during the Victorian Black Saturday bush fires but once this politically sensitive period passed it was back to normal, particularly businesses who they believe do not vote.

Depending on the cause of the spill and the type of policy in force and what was done by the MFB, there may be some cover afforded by your client’s insurance policy for removal of debris, fire service attendance and or loss
mitigation. Having said that, from the brief description you have provided there does not appear much hope.

You may wish to try the fixed v variable cost argument as the bulk of the costs are fixed with only small costs for splash suits, the refilling of the BA cylinder appearing on the face of it to be variable costs. Your client may also wish to speak to their state government member but if they live in a different electroate I doubt he/she will take much interest.

Sorry I do not have better news and you may appreciate why I fight so hard for the removal of the FSL and for fairness in this whole process.

It also shows the importance of good risk management practices to avoid this sort of event happening in the first place.

Regards

Allan

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Victoria elects not to follow the National Worksafety laws

Without any fanfare and very little press reaction, the Victorian Premier, Ted Baillieu announced on 12th of April that Victoria would not be proceeding with the adoption of the model Workplace Health and Safety put forward by the Federal Government.

Their decision was made following the release of a PwC report which found that the cost of implementing the new WHS legislation would be more than $3 billion over 5 years, with the majority of the cost borne by small businesses.

Mr Baillieu claimed that in addition, Victoria currently had the best health and safety system in Australia, and he did not want to lower standards while imposing extra costs.

As I understand it, much of the Federal Model was based on the existing Victorian legislation.

The PwC report predicts that the main reason for the anticipated costs to small business would come from:

  1. the changes to the definitions of confined spaces and “fall from height” (removal of the 2
    metre threshold);
  2. the change in definition of a worker;
  3. the extra due diligence requirements imposed on officers; and
  4. the requirement to establish emergency plans and test them.

The only areas where PwC predicted a positive impact from the proposed laws was in the introduction of the “consult, co-operate, and co-ordinate” requirements for Persons Conducting a Business or Undertaking (“PCBU”),  formerly known as the employer, the extra training required before health and safety representatives could issue notices to stop work or fix problems, and electrical safety in hostile environments.

Whether the Baillieu Government has done the right thing by Victorian business I am simply do not know. I certainly do not like what they have done on ripping out $450 million from Worksafe Victoria and their transition on Fire Service Levies (both subject to different postings.)

Some states have already signed up to the national Workplace Health and  Safety system. Those that have signed up are the Commonwealth, NSW, Queensland, ACT, and NT. All of these  passed the new Workplace Healthy Safety legislation making it law from 1st January 2012.

There are some exemptions to complete harmonisation. In New South Wales, their WHS Act does not apply to mines. Queensland was an enthusiastic early adopter of the uniform laws,
with extensive transitional arrangements.

The change in Queensland Government a few weeks back is unlikely to result in a reversion to their previous system. Mining and electrical safety are not covered by the new legislation.

With regards to the other states, the Western Australian Government has drafted the WHS legislation as it applies to non-mining employers, with departures from the uniform legislation
in the following areas:

  • penalty levels;
  • union rights of entry;
  • right of health and safety representatives to stop work,
  • and the reverse onus of proof in discrimination matters.

The timing of the bill into Western Australia parliament, while expected in 2012, will depend on finalising the associated bill which will apply to the mining industry which of course is so very important to the WA economy.

In South Australia, while the uniform WHS legislation was introduced into the SA parliament
in 2011, the Government did not have the numbers for it to pass in the Upper House, and the decision was adjourned until the next sitting of parliament in February 2012. The bill still has not been passed.

In Tasmania has passed the new legislation which is scheduled to commence
on 1 January 2013.

Eleven of the new Codes of Practice, which flesh out the requirements in the uniform legislation and regulations, have been released by SafeWork Australia and adopted by the “uniform” States and Territories.

Twelve more Codes (including First Aid and Construction) are awaiting endorsement, and five more draft Codes have been released for a 12 –week consultation period.

The penalties which are much greater than ever before and really should be of concern to SME owners are.:

New penalties under Harmonised WHS Legislation

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Victorian Fire Service Levy – The Good News – The Bad News

Everyone should contribute to the cost of the emergency services

The good news is that the Victorian Government has finally confirmed, that the inequitable Fire Service Levy imposed on the insurance industry causing triple taxation making insurance so expensive, is to be completely removed by 1 July 2013 ready for the 2013 State elections.

The bad news is that the Baillieu State Government has extracted a whopping 1/4 billion (not it is not a typo) in Capital Expenditure for the Country Fire Authority (CFA) out of those prudent enough to insure over the last 2 years since the Brumby Government said they would dump the tax.

Now we learn that unlike any other state that has removed the tax, namely Queensland, South Australia, and Western Australia, the Baillieu Government refuses to allow a transition between the new funding model and the current model. This is a complete nightmare for the insurance industry and just proves that the general view that this is one of most ineffectual out of touch state governments in the history of Victoria.

I am apolitical only seeking a change of government believing that Peter Ryan, as the leader of Victorian National Party got it when it came to the FSL. He is now the Deputy Premier of Victoria and holds the portfolios of Regional and Rural Development, Police and Emergency Services and Bushfire Response. He of all people should understand the problem but like so many politicians he is all talk and no meaningful action.

If we had our time over, I think a lot of us would have preferred Premier Brumby had been allowed to finish the job and see the end of the FSL while he was at the helm.

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Titanic – Part of the history of insurance

Logo for the 100th anniversary of the sinking of the Titanic

With the 100th anniversary of the RMS Titanic hitting an iceberg yesterday and it sinking today with the tragic loss of over 1,500 lives much has been said in the popular press.

What has not been mentioned is the part that insurance and in particular Lloyd’s had in the loss.
The first ship to pick up Titanic’s distress call was the Lloyd’s signal ship at Cape Race. The signal stations were set up in 1901 to help ships detect ‘floating derelicts, ice or other dangers to navigation’.The vessel was insured for £1,000,000 and Lloyd’s paid out the full sum insured within 30 days of the tragedy. To put this into perspective this amounted to just under 15% of the total amount paid out by Lloyd’s on all marine claims in 1912.

An interesting document in my insurance library is a copy of the schedule of co-insurers showing the signatures of the various underwriters concerned and the amount of the risk that they agreed to accept.

List of Underwriters on the Titanic

Based on a pay-out of £1,000,00o it appears that the White Star Line were grossly under insured.
Interesting to me, was the fact that Insurers continued to trade reinsurance on the Titanic even after she sank; following a message from the Exchange Telegraph in New York saying that Titanic was safe and being towed to Halifax, Nova Scotia.

In addition to the loss of the ship, many passengers were insured. The largest claim to my knowledge was a pay-out to the wife of John B. Thayer, a prominent Philadelphian businessman, who drowned when the Titanic went down – she received US$50,000. It is my understanding it was the largest claim paid out under a life insurance policy to that time. In one of those truth is stranger than fiction episodes Ms Thayer died herself on 32nd anniversary of the death of her husband, that is, 15th April 1944.

With the sinking of the Titanic brought the first ever claim for a car damaged in a collision with an iceberg. William Ernest Carter survived and claimed US$5,000 for his 25 horsepower Renault that went down with the ship.

And finally, for those who like a good conspiracy theory, some believe the Titanic never sank but rather it was her sister-ship the Olympic which had been badly damaged in an maritime  collision with the Royal Navy cruiser, HMS Hawke near Southampton accident On September 20, 1911. To scam insurers it has been suggested that the ships were switched and the vessel sunk where it could never be recovered. Like most conspiracy theories I treat this one with a grain of salt.

Violet Jessop in her Red Cross uniform aboard HRMS Britannic

Interestingly one lady,  Violet Jessop, was on board RMS Olympic when it hit the Navy Cruiser. She was also aboard the Titanic and was ordered aboard a life raft and at the last minute a baby was thrown into her arms having been left behind by the parents in the confusion. Both Violet and the baby survived with the mother of the baby rushing up and snatching the baby off Violet when she was rescued by the Cunard ship Carpathia.

Violet Jessop must have been a remarkable woman. These three events did not stop her going to sea and she returned to the Olympic as a stewardess after the war aboard the Olympic. She worked on board ships until she retired in 1950. Another case of truth being stranger than fiction.

But I digress. Back on the subject or risk and insurance. Like many tragedies much good came out of the sinking of the Titanic. First the legislation which had been lagging behind developments in technology required that all ships carry enough life rafts for all passengers and crew. The Britannic for instance had more than enough on board at the time of its sinking. The engine room was split in two so that if one area was flooded the other could continue to operate.

All large cruise ships were required to have at least two radio rooms as a further risk management provision and they were to be manned 24/7 to pick up distress signals. There were ships closer to the Titanic than the Carpathria but there radio rooms were not manned at the time of the incident.

Such measures do not stop large ships sinking as we saw only a few months back on 13 January 2012 with the sinking of the Italian cruise ship Costa Concordia,  which at 114,500 gross tonnes, was 2.4 times larger than the Titanic.

Costa Concordia

Costa Concordia passengers awaiting orders to enter a life boat

Thanks to the lessons learned from the Titanic far fewer lives were lost.

Of course insurance is there again with a expected loss of the ship is insured for  €405 million (US523 million).

It shows that we will continue to learn with every single event and that there is still a need for full insurance to the present day.
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What do you risk by being dishonest? – Case # 1 – stolen car

Fraudulent motor claims cost us all.

The theme that runs through four of the articles I post today centre around failed attempts to defraud an insurer. In each case the dishonesty has been uncovered during the last fortnight and in each case the question has to be asked: was it worth the risk?

A police officer in a small town in Victoria noticed a BMW was sitting on the side of the road with no plates. He pulled up and reading the vehicle identification number (“VIN”) radioed it through and found that the vehicle had been reported stolen a couple of years ago.

It turns out that the owner had reported it stolen but had in reality had it stored up at his country retreat in a locked shed. He had pulled it out on the street for the first time to clean out the shed of some other stuff.

Back when he reported the theft he also made an insurance claim and had received $23,000 in settlement.

The car was impounded and is now the property of the insurer. Fortunately for the insurer the car is in pristine condition. Any shortfall in the proceeds of the car after it is sold and the pay-out will be part of the restitution sought by the insurer.

In addition, the owner/thief is now facing a string of serious criminal charges including insurance fraud, making a false report to police. In addition his actions are going to make it extremely difficult for him to get insurance on his car, house, or business moving forward as insurance is based on the underlying principle of Utmost Good Faith. When anyone breaches that trust, like in most relationships it is very difficult if not impossible to regain it.

It is estimated that insurance fraud adds over $95 to everyone’s motor insurance premium each year. It is a serious problem but not one without risk to those that perpetrate it.

I really do not know what the owner expected to ever do with the car. With much greater coooperation between police departments and a common data base of stolen vehicles he could never have registered it again.

Anyone considering being dishonest in this way ought seriously to consider the very serious consequences of getting caught.

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What is at risk by being dishonest? – Case # 2 – changing the date of an accident?

A police officer had a single vehicle accident in a vehicle that he did not have insured.

After the accident, he insured the car failing to notify the insurer that the car had pre-existing damage.

A year to the day after the first accident he rang the insurer and reported the loss as if it were on this day. He changed the date on the towing invoice so that it matched the date he was now claiming the loss occurred. By being on the anniversary of the real accident date it meant he only had to change the date from 2011 to 2012.

The insurer elected to investigate the loss as it was a single vehicle accident at first concerned that alcohol may have been a contributing factor. The trained insurance investigator picked up the slight change on the invoice, rang the tow truck company and the true date of the accident came out.

The police officer is now, with some justification, worried about his reputation and his career.

The lessons here is that you should not drive any vehicle that is not insured. What if the police officer had hit another vehicle? You may recall the article I wrote on 4th March where I explained that someone thought they would save 2 days insurance and let one policy lapse on a Friday and started the new one on Monday because he was not going to drive the car and it was stolen out of his shed on Saturday night. Refer A lesson in going without insurance

Secondly, now that he has been found out, I am sure the police officer regrets ever coming up with the scheme to rip off the insurer. If you do not follow the life mantra of always acting with Utmost Good Faith, just picture yourself if you were caught out and what is at risk.

A lot of people are credited for the saying: “It takes a lifetime to build a reputation and only a few seconds to destroy one.”

 

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What is at risk by being dishonest? – Case 3 – broker advice

Make sure your answers are honest ones on any insurance form

In this case a business man’s son was driving his father’s car when he hit a kangaroo. The father rang to report the accident and in the discussion with the insurance broker the fact that a higher excess applied due to the fact that the son was under 21 years of age.

The business man, despite being quite well off, owning many profitable businesses was upset at having to pay the higher excess and the broker suggested that if he wanted to avoid the age excess he should say he was driving. The Insured took this advice.

Again being a single vehicle accident the insurer appointed an insurance investigator and during the course of his investigation the truth about who was driving slipped out. The Insured, now highly embarrassed and worried about his reputation, has withdrawn the claim and now will not only be paying the higher excess but rather the entire cost of repairs.

So where does the broker sit in all this. He has conspired to commit insurance fraud and his reputation is now effected. At this stage is it not known if the insurer intends taking action against the insured and or broker.

This is not the first time this sort of thing has happened. A few years ago, the news agent where I buy my papers came and saw me as he was having trouble sleeping at night. He had rung up and reported that he was driving his 4 wheel drive vehicle that had hit an animal but he was terrified that the tow truck operator or someone would state the truth that it was his daughter that was driving. At the time, he had not completed a claim form.

I explained to him the penalties and loss of reputation that he risked by going ahead with a fraudulent claim and so he completed the claim form honestly and his claim was paid less the correct age excess. After it was all over he came up and thanked me but it was really his own conscience that he should thank. I just explained the real penalties.

We all want to look after our customers but that should never extend to suggesting or doing anything that we know to be dishonest.

Abraham Lincoln is quoted as saying:  “Character is like a tree and reputation like a shadow. The shadow is what we think of it; the tree is the real thing.”

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