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
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
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
). 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)
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
. 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
. 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.
“184.108.40.206 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)
or Goodlad (1993)
, 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.
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) 
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.
. 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
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”.
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’
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’.
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.
Nothing untoward is being suggested with this statement.
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.
Davidson C., 1871, Precedents and Forms in Conveyancing
Edition, W Maxwell, London. p.43.
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.
Osborn’s Concise Law Dictionary
Edition, edited by Rutherford L. and Bone S., 1993, Sweet & Maxwell, London, p.88.
Marks F. and Morgan T., 1991, Guide to the 1990 ISR Advisory Policy Wording
, Dunhill Madden Butler & Robins GAB, Sydney.
Goodlad D., 1993, The ISR Book: A Working Guide for Insurance Executives and Risk Managers, Mark V Edition
, Craftsman Publishing Pty Ltd, Burwood.
It appeared as four lines in the original policy wording.
Meacham D., 1985, The Magic of Self Confidence
, Simon & Schuster, New York.
This rule applies equally to other contracts and to the interpretation of Acts of Parliament.
Amalgamated Society of Engineers v Adelaide Steamship Co. Ltd
(1920) 28CLR 129 at 161.
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).
 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.