Blog Question – Act of God

I received this question  from an insurance broker:

Good morning Allan,

My question has to do with the following link to a New Zealand matter which appeared in Insurance Business online and read:

New Zealand man who had his car crushed when a hotel’s window blew out and fell on his vehicle has been informed by the hotel’s insurance broker there is no compensation due to an “Act of God”

Wellington-based Hayden Nelson had his car left ruined after a hotel’s window was dislodged by high winds and damaged the car, according to reports in New Zealand.

The 23-year-old teacher was reassured by hotel staff that the hotel’s insurance would cover the damage, however the hotel’s insurance brokers has since discovered that the accident is considered an act of God, and no damages need to be paid.

“I was a little bit dumbfounded, to be honest,” Nelson told stuff.co.nz. “Because on the day the manager said: ‘Our insurance will cover this, don’t worry we’ll clean your car up for you’.”

An email to Nelson from Aon Insurance Brokers said the hotel was not considered liable for the damage.

“This occurred due to a storm event, our client has not been negligent in any way nor have they done anything to cause the damage, unfortunately this has occurred in extremely high winds that are beyond our client’s control. Unfortunately this is classified as ‘an act of God’ for which our client is not responsible.”

After he questioned that decision further, the broker agreed to review the matter with the provider, Chartis Insurance. An outcome from that is still pending.

Was this the Broker or the insurer who advised this response? If it was the Insurer, the Broker should be arguing the matter with the insurer.  If it was the Broker, then why pre-empt the insurer?

Being agnostic, I hate hearing the term “Acts of God” ever being used and I thought that excuse was limited to old Marine policies. If I was the Broker, I would have definitely have taken the insurer to task on this.

Talk soon.

Regards

Robert [surname and email provided]

My reading of this is that it was the Insurer who advised that they did not believe the hotel was liable for the damage to the car.

My  first response to this issue is that most policies of insurance contain a condition that the Insured is not to admit liability. Most laymen do not know all the intricacies of the law and may for a range of reasons say that their insurer will meet a claim when in fact there is no legal liability. When someone does admit liability when they should not have done so,  it can create just the sort of messy situation that has arisen here. This is something the broker ought to educate their clients on so that a) their brand is not damaged by such poor publicity that this is creating and b) that it does not provide the insurer with a genuine reason to avoid the claim.

The hotel would only be able to claim under their public liability policy and they would have to be found legally liable for the damage. For the hotel to be found legally liable, the third party owner of the vehicle would need to show that the window was dangerous and that the hotel knew or ought to have known of the danger and that they did nothing about it.  If it was simply a severe gust of wind that blew out the window then the hotel is an innocent party to this as is the owner of the car.

I agree that the term “Act of God” is not technically correct but some people use it to describe an accident where no person is at fault.

Anyone with any valuable asset needs to consider taking out property insurance on that asset. In the case of a motor vehicle, it is motor insurance.  If the car was insured under a comprehensive policy, this loss would certainly be covered.

Without seeing the condition of the window and or knowing the strength of the wind at the time, I am not in a position to give an opinion on whether the insurer is correct in its decision. At the end of the day the case will be decided on the facts. There is also the question as to whether there were any disclaimers that the hotel can rely upon. I am not sure if it was a paid car park or a free one and if there were any conditions of parking which may offer some protection to the hotel. Finally we do not know if a policy exclusion due to faulty workmanship, design, or materials applies.

I appreciate that a broker has a duty to its client, but remember the broker’s client here is the hotel, not the car owner.

With the hotel claim, their loss is the damage to the building/window.  Depending on the severity and relevance of any faulty design, faulty workmanship, faulty materials exclusion, in the property section of the policy, then I would expect the claim to be met as a storm loss.

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Speaking on flood, mitigation and insurance

I was interviewed last Friday by the Alice Springs Centralian Advocate on flood mitigation in advance of a community talk I am to deliver today at the Crowne Plaza at 5:30pm.

The story made front page news and was picked up by ABC Radio and I am to be interviewed at 4:10pm in their studios here in Alice Springs.

My concern is that the lack of dredging and the number of tree stumps and limbs that are all along the Todd River will result in needless flooding.  The following photos are of just some of the trees along 100 metres of the river bed.

The message seems to be getting through, as later in the day, I saw council workers clearing some minor litter from the river bed within 250 metres of the venue for tonight’s talk.

The river needs to be dredged regularly and the fallen trees removed. The issue is not only one of money but also of gaining the approval of the local indigenous leaders. The problem of course is the huge risk that a lack of preventative measures creates.

 

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Blog Question – Audio Books

Interesting Question today from Jarod.

Hi Allan,

Can you please advise as to whether your books are available as downloads?

I am looking for any Audio Books ossible so that I can use the 1h30min drive to work every morning to further m career than just another traffic jam.

I look forward to hearing from you.

Regards,

Jarod this is a great idea but it would take some work. I will have it started and keep you and the readers know when I have the first one up and running. I can see It May Happen to Me! and the Business Interruption book in this form but not sure of the others.

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Article on Business Resilence

In advance of a talk I am to give in Alice Springs and Katherine this week, the Centralian Advocate ran this story. I hope to see some of the readers of this blog at the events this Tuesday in Alice and Thursday in Katherine.

Any brokers who have clients in either town are welcome to send them along. The events start at 5:30pm at the Crowne Plaza Hotel  in Alice and the Knotts Crossing Resort in Katherine.

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Letter to Neil Mitchell on Fire Service Levy

In response to the talk back discussion on 3AW yesterday I wrote to Mr Neil Mitchell overnight.  Before I reproduce what I wrote I would offer the comment that most of us in the industry accepted that after we tried hard to explain the problem and ran into a brick wall, we were stuck with the legislation and while it is a very bitter pill to swallow it is worth the pain to finally have the terrible tax removed.

To now come out and start blaming the industry is going to backfire as too many people work in the industry and know the truth. Add to that the voters who work in insurance, the TAFE sector, nurses, police, teachers and everyone else this government has done over and you can kiss your slim electoral margin goodbye.

Here is what I said to Neil Mitchell.

======================

Good morning Neil,

Fire Service Levy

I heard from a number of sources that the topic of Fire Service Levies in Victoria was discussed on your program yesterday. While I did not hear the discussion first hand I have read the article in the Herald Sun which I understand was the catalyst for the discussion. I do not have my entire file with me I will do my best to explain what is going on.

From where I sit, I do not see that any insurance company is deliberately trying to rip off any of their insureds/clients. They are in the business of protecting clients, not collecting taxes. While I am sticking up for the industry on this point, I am not employed nor funded in any way by the industry.

My interest in the whole issue came about due to the fact that I was seeing much greater under insurance in Victoria than in other states, which was causing huge losses for home and business owners in the state following an insurable loss.

The problem that confronts the insurance industry and home and business owners that elect to insure is that the State Government advises the amount of Fire Service Levy to be collected by the insurance industry for the upcoming year in the May Budget each year.

For the financial year 2012 -2013 this is $580.5 million. Here is a copy of the taxation estimates from the 2012 budget papers.

 

 

 

 

 

 

 

 

 

As an aside, I would explain that the last few years have been abnormally high as the Victorian Government has pushed through well over $¼ billion of upfront capital expenditure costs over this period onto the insurance industry (and therefore those that insure) before the tax is transferred to property rates.

So with the government setting the tax one year in advance, it is up to the insurers to collect and pay the amount in arrears.

In the past, the insurance industry through the Insurance Council of Australia appointed independent actuaries to calculate the percentage to be added to insurance premiums so that this tax was fully collected at the same rate by all insurers for the government. Any shortfall would be met by the insurers themselves.

Insurers then charge the estimated rate as an additional fee to the insurance premium on all renewals or new business and this is paid one year in advance. The tax component is collected and paid to the government.

The impost has got so high, particularly due to the fact that GST was payable on the Fire Service Levy and then State government Stamp Duty charged on the premium, Fire Service Levy and GST (triple taxation) that there was a great deal of under and non-insurance.  Basic economics dictates that if you more than double the cost of any good or service, people buy less. That is why the Henry Report, the Victorian Bushfire Royal Commission and every enquiry on the subject has recommended the removal of the tax.

But back to the problem at hand. In the 2012-2013 financial year, Insurers have to collect the full $580.5 million this financial year. Not everyone’s insurance policy falls due on the July 1 and you buy insurance one year in advance. For ease of discussion, let us call it $580,000,000 to be collected as Fire Service Levy and paid to the Victorian State Government. This equates to $48,333,333 per month for 12 months.

The fairest way to do this is along the line of the following graph:

 

 

 

 

 

 

 

 

 

 

 

 

Simplistic Graph of fair transition of FSL from insurance to property rates over one year.

This is exactly what Queensland, South Australia or Western Australia did when they removed the levy and so had a smooth and fair transition. The problem in Victoria is that insurers have to collect the whole lot in the 2012-2013 Financial Year..

This means Insurers either have to greatly increase the rate they charge customers in the early months and then drop it down each month or each quarter, or charge the yearly same rate to everyone throughout the year regardless of when a policy falls due. Neither strategy is fair to the consumer. Either the ones in the early months are being slugged way over their fair proportion or those in the later months pay the full 12 months in advance and then pay again with their rates. It is complicated by the very real concern of the insurance industry that home and business owners will drop their insurance due to the fire services levy situation as well as toughening economic times.

When a person stops buying insurance or reduces their cover, they no longer contribute the same amount to the Fire Service Levy, leaving a shortfall to be collected from others or paid for by the insurer themselves out of claims reserves or operating profit.

The third option is that insurers do the transition and pro rata the levy themselves, ie charge the amount represented by the blue line on the above graph.  But that would leave a shortfall that they would need to fund in the amount of $290,000,000. This amount is simply too great an amount for the industry to fund.

I know that the insurance industry is fair game and that is what the government is banking on, but in fairness it has to be remembered that the insurance industry has been hammered with natural disasters over the past few years with Victoria being badly hit with the bushfires, floods and massive hail storms with payouts of over $3.7 billion1. The industry has to maintain capital requirements to ensure the protection of policy holders. The total amount paid out in general insurance claims amounts to over $2.10 per person per day for every man woman and child in Australia. You cannot have a good strong economy without a good strong insurance industry.

This whole issue could have been so easily avoided if the Victorian Government had looked at the successful model adopted by Queensland, South Australia or Western Australia. Instead, the Baillieu Government chose to simply impose the high burden on the insurance industry and say “it is your problem on how you collect it”. Of course this way they continue to collect their part of the GST and all the Stamp Duty on the Fire Service Levy until 1 July 2013 which I think is the real reason they have adopted this approach.

In contrast, the New South Wales state government, which is currently considering removing Fire Service Levy from insurance, fully understands the problem. In its discussion paper (available at www.haveyoursay.nsw.gov.au/ESL) the NSW Government says:

An abrupt replacement of an insurance based system with a system based on land values could cause some households and businesses to delay renewals on their insurance until the insurance levy is abolished.

Depending on timing, individuals could pay an additional component in their insurance premiums, and pay a property based levy for the coming year just a short time later.

To avoid incentives to delay the purchase of insurance, insurance companies could be required to reduce their surcharge on insurance premiums by 1/365th per day. A compulsory scheme would require a defined methodology under which insurance companies would pass on the reduction.” [refer page 25.]

To make matters worse, the Victorian Government has also indicated that it does not believe that the independent actuarial approach was proper and that each insurer and underwriting agency ought to do the calculation themselves. Some insurers increased their Fire Service Levy so that they could scale it down in later months, others left their rates in between and some went half way.  All of this is of course adding a great deal to the cost of operation and the risk of under collection is with the insurer, not the government.

Depending on which strategy an insurer elects to take in order to collect the premium, it may give it a competitive advantage at some point during the year depending upon when a client’s insurance falls due.  But home and business owners need to be very careful and understand the following –

  1. Despite the high level of taxation on insurance which makes the cost of insurance in this state in some cases 2.5 times higher than in Queensland, South Australia and Western Australia, home they ought to remain fully insured to be protected should something happen to their home or business.
  2. Insurance policies are not all the same. They range from very comprehensive covers to bare bones and you get what you pay for. We saw this only too clearly with the recent floods.
  3. When a loss occurs, no one remembers the premium: the insured wants the loss to be covered, the insurer to have the funds to meet the claim and the claims service to be prompt and fair.

I hope this has assisted to explain what is an overly complex problem that only poor government can create and then try and pass the blame onto someone else.

In a nutshell, the government ought to be applauded for removing the taxation but in fairness this decision was originally made by the Brumby Government and this government has followed through.

The Victorian State Government has bungled the transition, causing the potential for people to be contributing twice to the funding of fire services which, like insurance, all of us in the community benefit from, as does our economy.

I end with a link to a note that Lloyd’s issued to their members on the subject that explains their concerns. http://www.lmalloyds.com/Web/News_room/LMA_bulletins/LMA_Bulletin_2012/LMA12-014-KJ.aspx

Regards

Prof. Allan Manning

PS I am delivering a paper in Albury today but am happy to speak with you if you need any further information on this challenging subject.

Footnotes:

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Manning on Switzer

I was invited to speak on the Switzer show on the Sky Business Network last night. I covered topics such as the need for full insurance, the importance of a broker and insurance taxes.

If you missed it, here is a link to the interview.

http://www.skynews.com.au/video/?vId=3527409&cId=Programs&play=true

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Feature in BRW Magazine

I was honoured to be chosen to represent Victoria University in an article on higher degrees that appeared in this week’s BRW Magazine. To read the full article by Leo D’Angelo Fisher please go to: http://www.brw.com.au/p/sections/focus/mba_take_it_to_the_next_level_B7INNY3g7cBYzYAAzpzAZO

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Visit to Alice Springs and Katherine

I have been invited to speak on the subject of flood and resilence to the communities in Alice Springs and Katherine in the Northern Territory next week (Tuesday 25th Alice and Thursday 27th Katherine). If you live in these towns or know someone who does come along or pass on the message. The information night is free and should be both informative and a bit of fun.

The evening is being sponsored by TIO Insurance. To learn more please download the attached flyer which covers both events.

TIO_BusinessResilience_DL Flyer_v2

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Top 10 insurance brokers rely on LMI services and advice

It was pleasing to see that, of the top 10 brokers as reported in Insurance Business, all of them subscribe either directly or through their cluster group to LMI Group’s research and knowledge services, such as PolicyComparison, BIcalculator, RiskCoach and PolicyCoach.

Further, 8 of the top 10 use LMI’s claims services, training, technical advice, policy review, or business interruption sum insured review services.

At this 200th blog post milestone, I and all of us at LMI would like to congratulate the deserved winners.

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ISR Additional Benefit 6 part 1 – Removal of Debris, Dismantling & Temporary Repairs

Continuing on with the weekly look at the additional benefits afforded by the Mark IV Industrial Special Risks Policy, we look this time at the first part of the cover afforded for removal of debris at the situation, dismantling and temporary repairs. I only cover the first of the three parts this week as this one section has a lot to cover in itself. The wording found in both the Advisory and Modified wordings 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:…
Costs and expenses necessarily and reasonably incurred in respect of:
the removal, storage and/or disposal of debris or the demolition, dismantling, shoring up, propping, underpinning or other temporary repairs consequent upon damage to property insured by this Policy and occasioned by a peril hereby insured against.
The word ‘debris’ is not defined in the Mark IV policy wording. Its ordinary meaning as recorded in The Macquarie Dictionary[1] is: “the remains of anything broken down, or destroyed; ruins; fragments; rubbish…”. 

This Additional Benefit provides protection not only for the removal of debris but also the demolition, dismantling, shoring or propping up, and any other temporary repairs required. I will return to these benefits later in this section. 

Following a major fire, the police, fire brigade investigators or the state forensic scientists, and the Insurer’s own investigators for that matter, may require a section of the building to be propped up or some of the debris removed to allow for a thorough investigation into the cause. The practice has been that even though the costs may increase due to this work, Insurers will meet the cost subject to liability for the claim being ultimately granted. The reason for this is obvious. The Insurer will benefit from knowing the actual cause of the loss, if it can be determined. A close working relationship with the statutory authorities, who do not generally have the resources to do the work themselves, is gained, which often assists in prompt access to their findings. This is mentioned to remind those who are selecting a Sub-Limit, to ensure it is adequate to include this eventuality. 

In fact, an inadequate Removal of Debris Sub-Limit occurs far too often. There are several other reasons for this besides an increase due to the investigation into cause, yet many brokers and Insureds appear to choose 10% of the Declared Value for replacement as an adequate Sub-Limit. This ‘rule of thumb’ is not always a good guide. 

Let me take a recent fire as an example. A photograph of a typical fire damaged building similar to the one I will use in this example is seen here. 

In this example, let us assume that the Insured decided deliberately to under-insure. Notwithstanding this, the adviser elected 10% of the replacement value as the Sub-Limit for Removal of Debris. As the Declared Value to rebuild the building was inadequate, the starting point for the rule of thumb estimate for the Removal of Debris would be too low to start with. This is despite the fact that the Removal of Debris Sub-Limit may be a 6-figure sum. 

While this Insured made have made a conscious decision to under-insure his building, many Insureds are nonetheless surprised by just how much the Declared Value on their building is too low when the loss occurs. Building costs have increased by more than 30% in some areas over the past few years and, if an Insured has not increased cover in line with these costs, they may well find that they will be under-insured. Even where an Insured has increased the Declared Value on buildings, the Sub-Limit on Removal of Debris was not been reviewed and has been found to be inadequate at the time of the loss. 

The second point that appears to have been overlooked in the claim involving a similar building seen in Photograph 1 is the fact that this building had an asbestos roof. The cost to hire a 6-metre bin in 2012 for the removal of the debris, increased from $350 to $2,100 once asbestos became involved. This is a 6-fold increase in just a portion of the removal of debris cost. Add to this the fact that much of the removal has to be done by hand and not machine, also increases the cost considerably. Further, those doing the removal had to wear special respirators and protective clothing. The result of these added costs means that this Insured finds that his Sub-Limit on Removal of Debris is around 1/3 of what is required. It is nearly 20% of the full replacement value of the building in this example case. 

Having an asbestos roof is not the only cause for concern. The contents of the building need to be considered. On two recent occasions, the cost of removing the debris was much higher than anticipated due to the cost of removing the damaged stock. One situation involved a specialist paint manufacturer, while the other involved a supplier of agricultural chemicals. In both these cases, the Environmental Protection Authority (“EPA”) insisted on very stringent procedures to remove the debris, including the burying of the contaminated material in large concrete canisters. This resulted in the cost of removing the debris exceeding the cost of rebuilding the damaged building. 

Turning back to asbestos, an old building can contain asbestos other than as roof and/or wall cladding. In another recent fire, it was found that the material used to insulate a cool room, built during World War II, was all asbestos. Even with some very hard negotiations taking place with the EPA, the cost was over 20 times the policy Sub-Limit for Removal of Debris. Historically, asbestos was also used as lagging around pipes to reduce the loss of heat and as a fire retardant material around otherwise exposed steel framework. 

When considering the adequacy of the Sub-Limit for Removal of Debris, it is also important to take into consideration whether the insured building is on a main road. In such cases, the local authority may require special permits and/or recompense for lost parking meter fees. 

Many contractors who specialise in debris removal have an Enterprise Bargaining Agreement in place with their workforce, which may escalate costs by up to 30%. If the site is on a main road, is in an inner city suburb and/or has a high profile, Unions may become involved, which again can increase the cost of the contract[2]

Yet another point to bear in mind is that under the Mark IV ISR policy wordings, Removal of Debris is not subject to co-insurance. However, the Sub Limit and overall Limit of Liability need to be adequate to ensure the policy fully indemnifies the Insured. Another way of looking at the Sub-Limit for Removal of Debris under a Mark IV wording is to consider it as a ‘first loss’ limit only. 

As an aside, I would explain that traditionally, to strip out fire damaged and sound material to gain access to fire damaged sections of the building or contents, was always considered part of the repair cost and not demolition. Demolition is the cost of knocking down (demolishing) a building or machinery that is destroyed to the point that it has to be replaced. The same applies to flood damage or damage from any other insured circumstance. I would also point out that different contractors do the two types of work. Demolition contractors are different tradespeople from builders, and it is the builders who carry out the stripping out work as they determine just where and when to stop as part of the repair. The only reason Removal of Debris extensions were introduced was to pay for the cost of removing and disposing of the debris from the Situation. 

In summary, it is not good practice to simply set the Sub-Limit for Removal of Debris at 10% of the estimated cost of rebuilding on every risk. The adequacy of the building value, its construction, the presence of asbestos, location, and the type of stock and contents must be taken into consideration to ensure that the Insured is fully protected. 

I have spent a great deal of time on this 3-line Additional Benefit for Removal of Debris. As I pointed out at the start of this section, Sub-Clause (f) within The Indemnity also provides cover for: “the demolition, dismantling, shoring up, propping, underpinning or other temporary repairs consequent upon damage to property insured by this Policy and occasioned by a peril insured against”. I now analyse this issue. These words may appear straightforward, but a great deal of debate has occurred over what actually the words “other temporary repairs” mean. To me, these words are quite wide-reaching and any temporary repairs carried out by the Insured are covered. The only limitations are set by the preceding paragraphs to the one providing the cover, and I reproduce the preceding words hereunder. 

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:… 

The limitations in the preamble of the actual cover are that if the Limit of Liability is exhausted, the Insurer’s liability is at an end, and that the “costs and expenses must be necessarily and reasonably incurred”. Therefore, if the costs incurred are reasonable in amount, and if the logic behind the decision to carry out the temporary repair(s) in the first place is reasonable, and the repairs were necessary, then the Insured would be entitled to recover those costs. 

Where some adjusters and claims officers feel the cover goes against the spirit of Section 1 – Material Loss or Damage of the policy, is that some temporary repairs are not reasonable purely from the material damage standpoint, but are from an interruption insurance perspective. Such cover should be provided by Increase in Cost of Working (see Section 2, Item No. 1(b), ie. Sub-clause 8.1.1(b)) or Additional Increased Cost of Working (Section 2, Item No. 4, ie. Sub-Cause 8.4). The major concern is that the Insured is able to mitigate a potential interruption loss without purchasing Section 2 cover, or that they are able to avoid a time deductible or separate monetary deductible under Section 2. 

I did not design the policy, nor have I been able to determine exactly the reasoning behind the introduction of the cover. All I can do, like anyone else reading the words, is to interpret the written clauses and sub-clauses. To me, the wording is quite clear and there appears to be no restriction in what constitutes “reasonable and necessary” other than to consider the Insured’s actions against that of a prudent businessperson faced with the same decision. 

I would also point out that a common extension endorsed onto ISR policies is Expediting Expenses (EXPEDXB4[3]). This cover is also a limited form of Increase in Cost of Working or Additional Increased Cost of Working, and yet no one shows any concern. 

I did consider whether Perils Exclusion 9 (refer Sub-Clause 12.9) would limit the cover, but came to the conclusion that if the Expediting Expenses Endorsement was freely accepted as being a legitimate Section 1 cover, then likewise, temporary repairs claimed under this additional benefit of The Indemnity under Section 1 property damage, was likewise in order. For the sake of completeness, I reproduce Perils Exclusion 9 for your convenience below. 

The Insurer(s) shall not be liable under Section 1  and/or Section 2 in respect of:…
9.       consequential loss of any kind, including con sequential  loss due to due to delay, lack of performance, loss of contract or  depreciation in the  value of land/or stock  except  as herein provided in Section 2.”
Two wrongs do not make a right, and my argument may be flawed as to why this exclusion does not limit the Insured in carrying out repairs that are reasonable and necessary from a Section 1 property damage perspective. However, it could be argued that if the draftsperson(s) wanted the cover for temporary repairs to be so limited, they could have easily done so within Sub-Clause (f)(i). Secondly, it may be argued that the claim from an Insured is not for a consequential loss, but the cost of carrying out temporary repairs which, having been completed, may or may not have avoided a consequential loss. 

I do not wish to labour this one point, but I feel it is appropriate that I provide both sides of the argument. Interestingly, nobody to my knowledge has raised the issue of Perils Exclusion 9. 

It has been suggested to me that the words “demolition, dismantling, shoring up, propping or underpinning of the Property Insured” are activities that are all linked, by their very nature to the protection from further damage of the building. In other words, work carried out for the temporary protection of the property until it can be safely demolished or permanently repaired. For example, you may prop up a wall that is in danger of falling and causing more damage to the Insured Property, adjacent property or injury to persons

The proponents of this argument suggest that this is a logical explanation of the cover and, as further justification, suggest that this is why the activities listed in Sub-Clause (f)(i) are linked to Removal of Debris and not Sub-Clause (d) (see Sub-Clause 3.2(d)) above, which covers: 

“(d)    Costs and expenses necessarily and reasonably incurred for the  temporary protection and safety of property hereby  insured pending repair or replacement consequent upon damage recoverable hereunder;”
The reason for the above interpretation is not so much to restrict the words “demolition, dismantling, shoring up, propping, underpinning” but, as discussed above, to limit the words that follow, namely: “other temporary repairs consequent upon damage to property insured by this Policy and occasioned by a peril insured against”. These words do, if standing alone, mean more than temporary works to protect the building while it is made ready for repair. For example, if a conveyor belt were to be cut by an event not excluded by the Policy, it is often possible to carry out temporary repairs by stapling a join in it. This is not repairing the belt “to a condition substantially the same as, but not better or more extensive than, its condition when new” and, as such, the Insured is entitled to a replacement under the terms of the Reinstatement & Replacement Memorandum. 

By limiting the earlier words to activities that, in their argument are all linked to the protection of the building, the argument goes that the Policy, under Additional Benefit 3.2(f)(i) only provides cover for temporary repairs that are linked to the protection of the building, and not to other temporary repairs such as the temporary repair of the conveyor belt mentioned above. 

Let us consider the position using the rules of document interpretation. Many rules of document drafting may apply here. In the reasoning that was put to me on this Clause, the first rule of document interpretation used was the ejusden generis rule, which may limit the meaning of “temporary repairs” to those involved in temporary protection. Simply put, the rule states that when general matters are referred to in conjunction with a number of specific matters of a particular kind, the general item is limited to the class of the specific matters (Davidson, 1897)[4].

The question therefore is, are the words “or other temporary repairs consequent upon damage” limited by the words before them and, if so, in what way? The preceding words are: “the demolition, dismantling, shoring up, propping, underpinning”. Without the words ‘to buildings’ or ‘to buildings or other structures’, I do not accept that the words limit the temporary repairs to exclude machinery such as a conveyor. You can dismantle a machine, just as you can prop or shore a machine up if it were in danger of toppling over. Further, the words do not limit the work to safeguarding the building or equipment. You may simply be dismantling the equipment to determine the extent of the damage, or to allow the continued use of the building or equipment until final repair work is completed. The conclusion I reach on my reading of the phrase, is that there is no genus in the preceding words. That is, that the specific words are not of one particular kind, and certainly do not create the limitation of only referring to buildings and/or are for safeguarding damaged property only.

The second rule applies where there is an ambiguity. The rule here is known as contra proferentem[5]. Put simply, the rule means that if a word or words have more than one meaning, ie. they are ambiguous, then they will be construed against the party to the contract that drafted the wording[6]. The Courts will only apply this rule if they feel that there is an ambiguity. I do not accept that there is any ambiguity.

The third rule is that the intention of the parties must prevail. In the Mark V wording, the draftsperson(s) split “temporary repairs” away from the other activities, so that it stands alone.
“3.1.5.3  the demolition, dismantling, shoring up, propping or underpinning of the  Property Insured or the carrying out of other temporary repairs to the  Property Insured as a result of the Damage;”
In this format, many believe that there is absolutely no doubt that “temporary repairs” in the context of the Mark V policy would be read by the Courts in its widest meaning. That is, they would allow an Insured to claim any type of temporary repairs as long as they were “necessarily and reasonably incurred”.

What we do not know is whether the draftsperson(s) of the Mark V policy wished to broaden the original cover or, as I suspect, simply make clearer what the cover was originally designed to provide. The reason for the change in  wording is not explained by either Marks and Morgan (1991)[7] or Goodlad (1993)[8], both of whom had input into the changes. Without such advice, it is not possible to draw any link on intention between the Mark IV and Mark V wordings.

In any event, it is only in cases where the Courts find the wording ambiguous that they will they look behind the words to the intention of the parties. I do not believe that any Court would need to resort to this step.

I have purposely gone a long way round to discuss this 4-line sub-clause.[9] It must be remembered that:
“The human mind is like a magnifying glass: It exaggerates. A simple  rule of thumb: Whatever you’re looking at is not as big a deal as you think  it is.” Daniel Meacham (1985) [10]
The reason for my circuitous route is to demonstrate that it is easy to read what you want to into some wordings. The Courts, however, take a far simpler approach. 

The first rule that should be applied in the interpretation of a contract of insurance, is the Literal Rule.[11].  While it specifically addresses statute interpretation, one of the clearest statements of the literal rule was provided by Higgins J. in Amalgamated Society of Engineers v Adelaide Steamship Co. Ltd (1920)[12] where he said: 

The fundamental rule of interpretation, to which all  others are  subordinate, in that a statute is to be  expounded according to the intent of the Parliament that made it; and that  the intention has to be found by an examination of the language used in the statute as a whole. The question is,  what does the language mean; and when we find what the language means in its  ordinary and natural sense, it is our duty to obey the meaning, even if we think  the result to be inconvenient, impolitic or improbable”[13].
It is only if this rule cannot be applied to provide a single meaning due to some ambiguity or confusion that the other rules discussed earlier are applied. 

It is the application of the Literal Rule that leads me to the conclusion that the words “temporary repairs” would be construed in their normal meaning and not be narrowed by the perceived context in which they have been used in this sub-clause, ie. Sub-Clause (3.2)(f)(i). That is, that in the case of the conveyor belt, the Insured would be entitled to claim the cost of temporary repairs to allow the continued use of the conveyor until a replacement belt was procured. 

Certainly as I have already mentioned, any confusion that may exist could have been avoided by listing the additional benefit separately, if the draftsperson(s) wanted it to be full cover for any temporary repairs, similar to what the draftsperson(s) of the Mark V version did. Conversely, if it was the intention not to provide such wide cover, the drafts draftsperson could have added words that limited the cover such as, “temporary repairs to allow safe demolition”. The word ‘demotion’ is often misunderstood. It is different from ‘dismantling’. The meaning of ‘demolition’[14] and ‘demolishing’[15] are set out below: 

Demolish: 1. to throw or pull down( a building, etc.) reduce to ruins, 2. to put an end to;  destroy; ruin utterly.”
“Demolition: 1. the act of demolishing, 2. the state of  being demolished, destruction”.
Wrapping up then, the only limitation contained within the Sub-Clause itself is that the costs must be “necessarily and reasonably  incurred“, while to be ‘reasonably incurred’ means that the circumstances for the expenditure will need to be reasonable, as will the amount (quantum) of the costs. If the repairs were to  reduce a business interruption loss and the cost of the work  itself was reasonable for the work performed, then the costs would appear  claimable here. This may assist an Insured who has failed to insure Gross  Profit, either adequately or not at all, or where a substantial time or  monetary deductible applies to Section 2 –  onsequential Loss of  Profits. It certainly should not be  grounds not to  take out Section 2 and/or have reasonable Additional Increased Cost of Working cover. 

For further discussion on the rules of document  interpretation, please refer to Volume 3,  of my book Understanding the ISR Policy, Part A, titled ‘An Overview of  Document Interpretation and Drafting’.


[1]The Macquarie Dictionary, Revised 3rd Edition, edited by Delbridge A., Bernard J.R.L., Blair D., Peters P. and Yallop C., 2001, The Macquarie Library Pty Ltd, Sydney, p.496.

[2]Nothing untoward is being suggested with this statement.
[3] Goodlad D., 1996, “Augmented List of Endorsements”, The ISR Book – The 1996 Supplement to the Mark IV Edition, Risk Technologies Pty Ltd, The Patch; and as Endorsement 1A1j in Goodlad D., 1993, The ISR Book: A Working Guide for Insurance Executives and Risk Managers, Mark V Edition, Craftsman Publishing Pty Ltd, Burwood. p.4.2.
[4] Davidson C., 1871, Precedents and Forms in Conveyancing, 8th Edition, W Maxwell, London. p.43.
[5] The full maxim is verba chartarum fortius contra proferentem accipuntur, See Part A of Volume 3 of this Guide for a comprehensive list of the rules for document interpretation.
[6]Osborn’s Concise Law Dictionary, 8th Edition, edited by Rutherford L. and Bone S., 1993, Sweet & Maxwell, London, p.88.
[7] Marks F. and Morgan T., 1991, Guide to the 1990 ISR Advisory Policy Wording, Dunhill Madden Butler & Robins GAB, Sydney.
[8] Goodlad D., 1993, The ISR Book: A Working Guide for Insurance Executives and Risk Managers, Mark V Edition, Craftsman Publishing Pty Ltd, Burwood.
[9] It appeared as four lines in the original policy wording.
[10] Meacham D., 1985, The Magic of Self Confidence, Simon & Schuster, New York.
[11] This rule applies equally to other contracts and to the interpretation of Acts of Parliament.
[12]Amalgamated Society of Engineers v Adelaide Steamship Co. Ltd (1920) 28CLR 129 at 161.
[13] Impolitic means: inexpedient; injudicious (The Macquarie Dictionary, Revised 3rd Edition, edited by Delbridge A., Bernard J.R.L., Blair D., Peters P. and Yallop C., 2001, The Macquarie Library Pty Ltd, Sydney, p.953).
[14] The Macquarie Dictionary, Revised 3rd Edition, edited by Delbridge A., Bernard J.R.L., Blair D., Peters P. and Yallop C., 2001, The Macquarie Library Pty Ltd, Sydney, p.509.

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