Hurricane Sandy Update

Source: US National Weather Service

The most up-to-date information that is available at the present time shows that Hurricane Sandy has continued to intensify to a 940 mb storm, with 90 mph winds, and expected landfall between coastal Delaware and Atlantic City.

Sandy is a category-1 hurricane on the Saffir-Simpson scale, and approaching category-2 status. This is a dangerous, large and historic storm, posing a greater threat than the largest in 2011, Hurricane Irene.

Storm force winds extend outward over 450 miles. Primary hazards include storm surge for coastal and marine areas, inland flooding, and hurricane force winds.  Significant coastal
and inland flooding can be expected, especially for points within 200 miles of the point of landfall. Flooding will be especially severe for coastal areas around Long Island and Manhattan, and coastal areas to Delaware.

Storm force winds, with downed trees and powerlines, some structural damage, and power outages are expected to affect most of the Mid-Atlantic and Northeast. Damage severity and concentrations will be highest within 200 miles of the landfall point. Significant damages and business disruption are possible for this dangerous and historic event.

The catastrophe risk modeling company Eqecat Inc. has issued a statement indicating possible insured losses of US$5 to 10 billion, and total economic losses of US$10 to 20 billion. In comparison, Hurricane Irene caused insured losses in the order of US$4.3 billion.

The eventual size of the monetary losses will depend greatly on actual impacts of Sandy during landfall this evening (US Eastern Standard Time).

Sandy’s imminent danger to the affected population is of course foremost in most people’s minds.  Sandy has already become a killer storm, with a death toll exceeding 60 in Cuba, with a great deal of human suffering being suffered across the Caribbean.

Sources: United States National Weather Service, Guy Carpenter, Eqecat Inc.

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Blog Question – Extra Costs of Reinstatement where costs are sacrificial

I received this question through this blog yesterday:

Hi Allan

Just wondering if in your opinion, there is any provision within the Extra Costs of Reinstatement(ECOR) clause under the [industrial Special Risks (“ISR”)] Policy Mark IV that would extend or deny indemnity for sacrificial costs incurred (as opposed to capital costs) to be deemed an ECOR.

For example, if an Insured jetty was destroyed, which when built 10 years ago was piled and built directly into the river.  When undertaking the policy review each year, a CPI increase was applied, and then following damage to the jetty, it was discovered that EPA requirements had changed and coffer dams were now required to be built at significant cost around the perimeter of the jetty to prevent the release of pollutants in the river system whilst re-constructing the jetty.

If you have any similar examples of Sacrificial Costs that have been deemed as ECOR, I would be most interested.

Kind regards,

James [surname and email provided]

PS do you have any case law in support of your answer?”

I replied that as long as the jetty was insured property and the peril was an insured peril, the Extra Cost of Reinstatement clause within the Mark IV ISR Policy would respond to any requirements by council to reinstate it to comply with any current statutory authority requirements.

A similar example is where WorkCover insists that an asbestos cement roof be removed from beneath using a scissor lift rather than by tradesman walking on the roof.

I know of no specific case law on the issue but what I can say is that in my years handling claims, I have not had any problems with a legitimate claim for extra costs of reinstatement whether a capital expense or sacrificial to reinstate insured property.

As with any Sub-Limit, it is important to ensure that the amount selected is sufficient to cover all the Extra Costs of Reinstatement which of course is not always easy as governing bodies can create new requirements on the fly.

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Fire Safety in High Rise Buildings a Must

Source: The Daily Telegraph

Radio National had a very informative piece on fire safety in their Background Briefing last Sunday morning. The episode had its roots in the tragic death in Sydney of a young student who died when she jumped along with her friend from a 5th floor apartment when fire blocked their escape.

Fire safety in a high rise building should always be top of mind for any engineer, developer, builder or occupant. Despite that, I constantly see fire doors left open, rubbish left in stairwells and occupants ignorant of the location of the fire stairs.

The Background Briefing program mentioned the terrible fire at the Triangle Shirtwaist Company in New York City in 1911 which caused officials to rethink fire safety.  I visited the site of the Triangle Shirtwaist Company, now part of the Brown Building which is part of New York University, a couple of years ago as part of some research I was conducting at the time.  The company produced women’s blouses, known as ‘shirtwaists’.

Back in 1911, the top three floors of the Triangle Shirtwaist Company building were occupied by the shirt company. Over 500 young, mostly immigrant, girls worked on the 7th, 8th and 9th floors.  The fire doors were locked and when a fire broke out, 142 either jumped to their deaths or perished in the fire.  Some of the girls who died were as young as 11.  I found it a very moving experience to visit the Brown Building as I thought of the last few moments of these young women.

The owners and managers escaped prosecution due to the skill of their lawyer Max Steuer who successfully proved that the witnesses, many of whom spoke little English, had memorised their testimonies.  However, the owners were later held liable in a civil action.

The Triangle Shirtwaist Company fire was the deadliest workplace disaster in New York City, until 11 September 2001.

As with most, if not all disasters, great good came out of it, including labour laws and fire escapes.  Another great benefit which resulted from that disaster: every external door in New York opens outwards, as do fire escape doors worldwide.

Why it still takes tragedies like the death of this young student in Sydney before we review our fire standards continues to amaze me. Do we really have such short memories?

Fire is a very real risk for us all. Fire safety should be top of mind even when we are on holidays. If you are going to a third world country over the upcoming holiday period, special care needs to be taken and perhaps a lower floor taken over the one with the view. I for one always carry a torch and ensure I know where the fire escapes are.

If you are about to purchase a high rise unit, obtaining an independent report on whether the building meets current fire safety standards is always a very good idea. As I keep telling my clients, hope for the best but plan and insure for the worst.

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Home and Contents Policies – Requirement for Council Approvals

With so many do it yourself renovation television shows and a plethora of advertisements from the hardware chains, it is not surprising that many Insureds do their own renovations, from building a simple deck to much more complex building projects.

What is not well known is that more and more home building policies contain an exclusion, either a blanket exclusion or one just excluding the structural improvement, for any loss or damage or legal liability claim arising from a structural improvement where the appropriate council permit has not been obtained. An example of the softer of the exclusions out in the market is reproduced below:

In more than one claim LMI has been involved in in the last month, the insurer has attempted to rely on the exclusion without first testing if a permit was obtained. It is a case of rejection first and then the Insured having to prove that a permit was obtained.

Two things are important to keep in mind here. First, all relevant permits need to be obtained when doing work around the house or business building. Not to obtain permits could prejudice an otherwise valid insurance claim and may in addition render the building very difficult to sell.

Secondly, keep the documentation handy to prove that the permits were obtained, to reduce the time in takes to have a valid claim accepted.


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A reminder about the effect of the Carbon Tax on reinstatement and replacement values

According to a recent report by the Green Building Council of Australia, buildings account for 23% of greenhouse emissions.

Under the legislation the top 500 polluters will pay $23 per tonne for the carbon dioxide that they produce. Think how many of our major manufacturers manufacture building materials. BHP, Boral, CSR, Pioneer, Laminex Industries, Pilkington ACI to name a few.

But the tax is not just on the manufacturers. The Clean Energy Act 2011 (Cth) is a tax on:


  1. stationary energy (including natural gas suppliers),
  2. industrial processing,
  3. resources, and
  4. the waste sector.

If you consider that the vast majority of building materials start life as a resource, iron ore, bauxite, silicone sand, clay, limestone, etc and then think just how much energy is required to smelt, refine, bake etc the raw material to convert it into the building materials we use you can see that the cost of reconstruction is going to increase.

This means that more than ever, the sum insured on every building in Australia, commercial and domestic, needs to be reviewed to ensure that it is adequate to rebuild it should it be damaged by an insured peril.

Remember that commercial insurance policies are subject to a test for under insurance.

If a building is insured for say $1 million but its current replacement cost at the start date of the period of insurance (some policies are tested at the date of the damage) is $2 million then it is not the case that the owner of a liability has no exposure for under insurance unless the claim exceeds the sum insured of $1 million.

Under the vast majority of insurance policies on commercial buildings, stock and other property, the insurer will allow a 15% or 20% tolerance for being under insured. If you are under insured by more than this tolerance then the Insured is deemed to be his or her own insurer for a portion of each and every loss where the value of the claim is greater than 5% or 10%.

As an example, let us assume the building has had the roof damaged by hail and it needs to be replaced and the cost of this including some repairs to the interior necessary due to water entry amount to $250,000.  With an insurance policy with 80% co-insurance (20% tolerance for under insurance) the claim would be settled as follows.

The Insurer would pay:

Sum Insured on the building times the repair cost of building divided by 80% of the true replacement value of the building.

= $1,000,000 x $250,000 ÷ 80% x $2,000,000

=  $156,250 less any policy deductible/excess)

The owner of the building would have to fund the shortfall of $93,750 ($250,000 less $156,250) plus any policy deductible/excess.

Rather than risk the potential loss of nearly $100,000 from a claim of $250,000 it is my strong advice to review the sum insured and to ensure that it is adequate to avoid the penalty of under insurance, bearing in mind the extra costs of building caused by the introduction of the Carbon Tax.

One final point, as the tax is also applicable to the waste sector, it is necessary to review the limits or sub-limits in the insurance policy for Removal of Debris.

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One local council sees common sense

Back in July I received an email from an insurance broker explaining some proposed changes by the Adelaide City Council in respect of the replacement of buildings. I posted the question to my blog at the time but in case you missed it, the email read as follows:

The Adelaide Development Plan has altered zoning throughout the City of Adelaide via the Capital City Development Plan Amendment. Any building that has been damaged and/or destroyed has to be replaced with a building with a minimum height of 21.5 metres (six to seven storeys).

We have a client that has been impacted by this.  At present the client has a 3 storey building.  In the event of a loss, the client would not be allowed to rebuild a 3 storey building.

How do you think we handle this??? – they have $500,000 Extra Cost of Reinstatement – the Underwriter will not increase this sub-limit to accommodate the extra costs involved in re-building (could be $20 million or more) and of course this also has an impact on the BI [business interruption]


Libby [surname and email provided]

Clearly the Council is trying to increase the occupation per square metre in the city which of course generates more rate revenue without really appreciating the ramifications for the property owner where the building has to be replaced through no fault of the building owner. I wrote back setting out the coverage afforded by Extra Cost of Reinstatement:

Hi Libby,

Thanks for your note raising a very interesting question.

The concept behind Additional Increase in Cost of Working was designed to cover upgrades of an existing building to cover things like the fact a building could no longer contain asbestos, could not contain timber floors and or open staircases in a multi-storey building, the building now requires disabled toilets, or a sprinkler system or the like. In each case it allows the insured to have the same sort of building but one which is compliant with the current Building Code of Australia, or other legislation or regulations.

I do not believe that the Additional Increase in Cost of Working cover was ever designed to provide a much larger building with many more storeys and more rentable area, etc. While technically caused by a Local Authority requirement, the situation you paint is really a betterment issue rather an Extra Cost of Reinstatement issue.

With what you have arranged, the Insured could do a couple of things. Either rebuild elsewhere and put back the same sort of building albeit to current code anywhere else in Australia or use existing funds or borrow funds and rebuild in accordance with the newly established minimum height requirements and the additional rent they would
receive over the life of the new building would more than cover the cost of the development.

I am sure your client is scrupulously honest and I am not for one minute suggesting anything else but the moral hazard of allowing an insured to insure a 3 storey building and end up with a 6 or 7 storey building, on the face of it twice the building and twice the value and rental income, is just too great for an insurer to accept.

Another idea is to ask for $500,000 as Additional Extra Cost of Reinstatement if the building is insured under an ISR policy. You client will pay an extra premium but the insurer may accept this relatively standard cover often seen as a core endorsement.

As for the Business Interruption cover, your client will require a sufficient Indemnity Period to allow for the planning, financing, building and re-letting (of the same floor area). The balance of the area would need to be insured under an Advanced Loss of Profits policy.

I hope this is not another case where changes to government legislation pushes the blame onto the insurance industry and away from those who made the change. If the Insured disagrees with the by-law, then he or she needs to take it up with the council either singularly or through the local Chamber of Commerce.  Should this fail, then he or she should exercise their democratic rights and vote against the decision at the next election.

I hope this helps in your and your client’s understanding.

The good news is that armed with


This explanation on Extra Costs of Reinstatement provided by the broker to the Insured along with her own comments went to council and I am delighted that the Adelaide City Council has agreed to include an exemption where the redevelopment is as a result of fire, water or natural disaster. The proposed draft is attached a Draft changes to legislative changes.

This very proactive broker is now working with the Insured to have the perils widened but all in all it is a great result for common sense. Well done everyone concerned including the Adelaide City Council.

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Another Council another Problem

Just as one problem appears to be solved (see posting above) another one rears its ugly head. This time from New South Wales.
The following email explains the problem:

Dear Allan,

I was wondering if I could call on your expertise to assist with the following.

The local council has introduced an Awning Policy. This has not come about from any recent events locally and is seen as a bit of a revenue raiser more than anything else.

The council sought legal advice on this policy but not insurance advice and the result is a rather ugly policy which no insurer would accept.

Basically, the council wants every main street awning certified by an engineer every five years (or following damage which the council considers renders an awning unsafe).

They want to be indemnified under the property owners’ liability policy (See document Awnings-Policy-POL-050).

They also want in respect of the awning, noting the Council’s interest as “owner”.

This obviously will not be accepted by any insurer. Can you please give some guidance as to how we could keep both parties satisfied?

Thanks Allan.

Kind Regards,

Scott [surname and email provided]

After discussing this with one of the LMI team, Max Salveson, I wrote back to Scott as follows:

Thanks for your email Scott. The following are my first thoughts.

One thing which never ceases amaze me is the ability of bureaucracies at any level to make simple things more difficult and to complicate the process of daily life, including the activities of running a small business. I am not sure if this is just a Wagga Wagga thing or something taking place state wide.  Even if it is just for Wagga Wagga, I fear that it may
spread to other councils after the next meeting of council officials.

This whole proposition seems to be more about extending the control and income of the Council.  What the Wagga Wagga council is proposing is setting up a new local government department “the Department of Blinds and Awnings” to monitor and manage property not owned by the council.

I have made inquiries of our municipality in Melbourne (Stonnington) and have been advised that unless there is an overlay (heritage or otherwise) no planning permit is required and the management of the awning is the responsibility of the building owner. No indemnities or insurances are required, regardless of whether a planning permit is required.

Since the liability crisis when it was agreed that business and all levels of government including local government  would accept responsibility for their own negligence, I thought, as did many in the community, that this type of problem had diminished.

There was a case a year or so ago when Port Phillip Council tried to do something similar with a sandwich board that a café was seeking to place outside its premises at Port Melbourne. This was referred by LMI to an insurance broker for the Municipal Association and after discussion.  The Council agreed with the Government’s undertakings to the Liability Working Party, and the Municipal Association instructed the Council to back off.  The council subsequently approved the siting of the sandwich board on the footpath subject to a guarantee by the café owner to indemnify the Council for all claims arising out of the presence of the sandwich board on the footpath caused by the negligence of the café owner or  his/her servants or agents.

The insurer had no difficulty in noting the contractual liability as an agreement specified in the Schedule.

Under the Wagga Wagga council proposal as I understand it, the chain with potential legal liabilities will increase:

a) The common law liability currently with the Owner of the blind will remain.

b)The engineer becomes involved because his reports will include him in the professional risk in relation to problems with blinds.

c) The Council by setting up this process and creating a situation (notwithstanding the indemnities) is creating an additional legal liability for itself because it is managing the process and may become liable in negligence. The insurance policy is unlikely to be extended as requested or may have lapsed and/or the personal guarantor may be impecunious.

One would have thought that verandas and the soundness of the building structure on the footpath alignment would be far more important to public safety than blinds and awnings.  Perhaps that might be their next move.

I would not expect any insurer to agree to:

• Noting the Council as Owner when it is clearly not.

• In the light of the liability crisis, agreeing to provide cover to the Council for a complete hold harmless.

The suggestion that property owners would pay the cost of the Council administering such a scheme is ridiculous and yet another cost of doing business which in this country is already far too high and a disincentive to starting or remaining in business. Councils and all levels of government need to remember that SMEs are the biggest employer in this country, and  the impact they have on business every time they put more restrictions and costs onto SME’s. Payroll tax, land tax and rates are already at a crippling level.

Is there a problem with collapsing blinds and awnings in the City of Wagga Wagga other than the usual involvement of trucks, vans and council garbage trucks impacting verandas?   The question that needs to be asked is:  can it be managed more cost effectively than is the case with the council’s proposal?

Surely this is a matter which property owners rather than insurers should become agitated about and getting their local Chamber of Commerce to be up and about with the Mayor and Councillors in no uncertain manner. When are the Council elections due? [I subsequently learned it was only 2 weeks ago!].

The Federal Government is currently awaiting a report on de-regulation so discussions with State and Federal politicians on this issue could also be useful.

One would normally have alerted ICA to this type of development.

In the light of the liability crisis, they may still be able to consider this one and exert some influence with the powers that be. I am not sure if they would help now as they did in the past.

I hope that this assists. Let me know if there is anything more I can do for you on the subject but think the Chamber of Commerce, worded up by you as to the issues as outlined above, would be the best starting point.



I have since learned from the broker that he is meeting with Council next week and, like in Adelaide and Port Melbourne, I do hope common sense prevails.

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The struggle from Small to Medium Business – the best way forward confirmed?

As LMI continues to grow rapidly and we move internationally, we are confronting all the issues of other companies who struggle from youthful enthusiasm through sophisticated confusion through to mature efficiency and then of course you have to reinvent your business and start the process again.

One of the great benefits I have is that working with so many businesses after a major loss or better still, assisting with their risk management and business continuity planning before any loss, I can look at the different ways that other businesses overcome the hurdles of moving from a small enterprise to a medium or large one.

My own observations have been affirmed by the Federation of European Risk Management Associations (“FERMA”). Research conducted by this organisation has found that mature and best practice risk management improves corporate performance.

The survey also found that companies with the most advanced risk management policies reported the strongest level of growth for the past five years, as measured in terms of earnings before interest, taxes, depreciation and amortisation.

The President of FERMA, Jorge Luzzi, was reported in Commercial Risk Europe yesterday as saying “We have long believed that good risk management contributes to sustainable corporate growth. Now we have clear evidence that there is a correlation. This is a particularly important finding in light of the pressures on corporate results during the last five years.”

I found it quite reassuring to have support for this strategy which I use to develop my own business and in developing products like LMI ContinuityCoach which are designed to assist brokers and business owners develop their own risk management and business continuity plans.

Of course one of the most powerful risk management measures is to transfer risk through a comprehensive insurance program and that is where an insurance broker is so important.

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Should texting while driving be an exclusion under a motor policy?

Travelling as much as I do, I see a lot of things. As I was driving to the airport this morning to catch an early flight, I was travelling behind a white van which kept weaving erratically into adjoining lanes.  As the weaving continued, I became  so alarmed by how dangerous it was that I pulled up beside the driver, which is when the cause of the weaving became clear: the driver was texting!!

It occurred to me that, if I were an underwriter/product manager in the motor portfolio, I would consider excluding coverage while people were texting, as from this experience and others I genuinely believe it to be as dangerous as drink driving, which is a policy exclusion. Watching this driver this morning, it was an accident waiting to happen. Insurance is there to protect against accidents, and not certainties.

I certainly support the New South Wales proposed legislation to make it illegal to even have a mobile phone in their hand while driving.

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The removal of Fire Service Levy in NSW is not a done deal – have your say!

I was speaking in Sydney during the past week and then had to rush back to Melbourne to attend an important function at Victoria University.

After my departure, the following speaker asked the audience which was comprised predominantly of insurance brokers, if any had had their say on the New South Wales Government’s website seeking community views on whether Fire Services Levies in New South Wales should be removed. Not one person present had done so! I am glad for their sake I was not still there.

In the meantime, the Fire Brigade Employees’ Union has mounted a campaign to stop the tax being removed from insurance and moved to property rates.

This is despite the fact that:

1. The HIH, Canberra Bushfire and Victorian “Black Saturday” Royal Commissions recommended that all taxes on insurance be removed.

2. The Henry Report into Australian taxation advised that taxes on insurance are the most unfair and inefficient taxes in Australia.

3. The Brumby Labor Government in Victoria made the decision years ago to remove the tax, a decision which is now being implemented by the Baillieu Government.

4. All other Australian mainland states and territories have removed or are in the process of removing the tax.

5. With all in the community contributing fairly to the cost of running the fire brigade, there should in theory be more funding for the fire services.

6. It has been clearly shown that the high level of taxation on insurance results in high levels of under and non-insurance which hurts home and business owners, New South Wales communities and economies.

The campaign being run looks remarkably similar to my own campaign that I have funded for the past 5 years to help remove the taxes. The concern I have is that while mine is self-funded and I speak and write when I can, the Union campaign is well funded and is therefore getting a lot of press. The irony is that they are using fire trucks, etc paid for by taxes on insurance!

I urge you, if you have not already done so to get onto the government website: If the NSW government realises that the removal of the taxes has widespread support, it will continue with this much needed reform. What we cannot afford is apathy on your part. Do it now!

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