Why tenants should always insure their contents and have public liability insurance.

Picture a high rise apartment building and a young student renting a one bedroom unit on an upper floor. He goes out leaving a candle burning which causes a fire.

The fire is quickly extinguished by a sprinkler fitted into the ceiling. The big problem occurs with the volume of water pumped out by the sprinkler which not only floods his apartment but dozens in the floors below.

While the body corporate insurance covered the building and the carpets in the common areas, it did not cover the contents such as furniture, electronic goods, clothes etc. of any of the tenants.

In this case, not one single tenant had any insurance and as a result they have all suffered an uninsured loss from a few hundred dollars to tens of thousands.

The tenant that left the candle burning did not have contents insurance either. Why, he did not think his stuff was worth much. Further, being in a modern building with sprinklers and on an upper floor, he did  think his low value contents were likely to be stolen or burnt. What he overlooked was that by purchasing contents insurance for around $1 per day, he would have had $10 million, $20 million or even $30 million public liability cover with his contents insurance and he would be protected from all the demands from angry tenants and the body corporate insurer as they seek recovery.

This is valuable warning to anyone renting a home, flat or unit.

It is not just residential tenants that should consider this risk. So often I have attended shopping centres following a burst water pipe, discharged sprinkler, leaking roof or blocked drain and found that several of the tenants are not insured. They felt there was no need for this cover due to the same thoughts on the low risk of fire and burglary.

The reality is that the monetary losses from water perils, of all types, far exceeds losses by fire in Australia and New Zealand.

The difference with insuring your contents in a commercial situation is that you have to buy public liability insurance separately, albeit as an optional extra under a business insurance policy.

If you are in any doubt as to the coverage you should consider, please discuss it with your local insurance broker.

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Why the witch hunt by Fells and the Victorian Government on the past while ignoring the future?

I have had half a dozen property owners and brokers representing them complaining that the Fire Services Levy “FSL” on residential strata is too high. I am not sure that this is correct when you consider the FSL that was being paid on the building and the contents (where insured) on all the units.

With the amount of capital improvements such as fire stations and new vehicles pushed through for their full new cost during the last 3 years of funding by those that insured, I find it difficult to accept that anyone should be worse off under the new scheme except those that were not insured or were grossly under insured.

When Prof Fells was approached and asked what he was finding looking at the way that Fire Services Levy being charged by local authorities he advised that this was not his brief.

This staggers me. The enquiry was started when most insurers had stopped charging FSL after being forced to be a tax collector for 50+ years, and yet ensuring that the way the public are to be charged into the future is ignored.

This reinforces my strong opinion my belief that the whole enquiry is just a smoke screen by the current Victorian Government to move the blame for bungling the transition from insurance to property rates, from themselves to the insurance industry.

Anyone with half a brain can see through this ploy and knows the real truth.

It continues to amaze me that the current government is paying for advertisements claiming credit for the change and yet it was the previous Sate Government under Premier Brumby that made the decision. The other falsehood is that they refer to the fact that there is now no double taxation. This comes as a surprise for every single government member I spoke to in my quest to have the transition made more fair advised me on questioning that the State Government was not going to be one penny worse off and that they had factored into the local government charge the FSL, loss of GST and loss of insurance stamp duty.

These ads remind me of the old line about how can you tell when a politician is lying? His/her lips are moving. Thankfully, not all politicians should be tarred with the same brush, but the way I feel at the moment, please do not ask me how what the percentage is. In my quest on this subject, and on the best way to insure flood, I did meet a few on both sides of politics that I felt understood the issues and were honest. The trouble is that all bar one of the politicians I felt were made of the right stuff in both the Federal and State Parliament have retired over the past few months.

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Water water everywhere

Source: globalnews.ca

At the time of writing reports are coming in that there is record flooding in southern Alberta, Canada. Already this has caused extensive damage and sadly cost four people their lives.

The flood event follows a period of prolonged and excessive rainfall in the region. It has been reported that more than 100,000 residents have been evacuated due to the dangerous flood conditions, with around 75,000 of those residents from the City of Calgary.

The rescue efforts have been enormous with nearly 1,000 residents having to be rescued by either the air or  boat from surrounding communities.

In addition, the early reports state that widespread flood damage and power outages have affected a great portion of southern Alberta. This of course is not the first time with floods in 2012 and 2005 being the most recent.

A state of emergency remains in effect. Energy interests in Alberta have been disrupted. At this early stag, the Bank of Montreal estimates economic losses on the order of CAD 3-5 Billion. While not wishing to insult anyone, my experience suggests that you should double the initial estimates.

If you put this on top of the flooding in the US with both the Mississippi and ex Hurricane Sandy, and even more recent floods, flooding in Europe, the United Kingdom and Ireland, Asia, particularly Thailand and of course the past couple of years of flooding in Australia which continues to this day,  it is clear that the cost to insurers and reinsurers from the peril of flood is an issue.  A newly published paper stated that Australia had a record 123 severe weather events during the 90 days of last  summer.

It is all well and good to blame insurers for the non affordability of insurance but at some stage, someone has to understand that flood mitigation has to be the long term answer.

I recently looked at some information on a massive development in the Hunter Valley where something like 130,000 homes were to be built. Anyone with Google Earth can see that a lot of this land is in a flood plain. This enrages me as it means that government and the developers involved are just setting families, often those in the community who can least afford it to fail.

This is not the only council to do this now, in the past or into the future. It does not mean it is right!

With all this pressure on the affordability of insurance why oh why would any government continue to have fire service levy and stamp duty on insurance. None of this makes sense but who can we turn to to talk to let alone fix the problem.

If I were King of Insurance for one day, I would degree that no insurer offer insurance in any new development that is on a flood plain. I would “red line” such areas so that finance companies, the potential residents and government all know that this is a high risk and it is not a case of “if” but “when” and that living there carries with it great personal risk.

When will we get a government at any level that really is there for the benefit of the community? I have been a critic to the carbon tax as the proceeds are not being put to research into alternative fuel or the like. If we are to keep the tax, then would it not be wise to put some of it into flood mitigation which would benefit the economy and the communities under constant threat.

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Glad to see that ASIC are looking at funeral insurance

Wherever I seem to be, whether it be in a plane or watching the odd bit of TV I seem to be bombarded with advertisements for funeral insurance.

On the one hand I have been a beneficiary of the cover, for when I was 13, my father died and he had cover in place which meant my mother did not have to pay for the funeral, which was a Godsend. The death of my father also triggered free funeral cover for my brother and I until each of us reached the age of 21 or 25, I cannot recall which.  I then continued the cover paying weekly or fortnightly then after a few years, I got a note saying that the cost of administering the payment program was prohibitive and they offered for one very modest premium that I would have life time cover. I took this offer up. I thought this was all very fair. The big difference was that this was operated by a Friendly Society rather than an insurer with shareholders.

When I looked at the premiums mentioned in a couple of these ads and assuming no rate increase each year for getting older, that if you were 40 years and lived to the current life expectancy for a male you would have paid around $140,000 in premiums for a $6,000 sum insured. On a second one, if you joined at 60 and lived to 72 you would have paid preimiums of around 4 times your pay-out! I do stress that this is just a back of an envelope calculation.

This seems on the face of this admittedly very rough analysis that it was preying on the less fortunate in the community who would be better off putting the money in the bank, in a jar in the cupboard or buying some old fashioned whole of life cover. If you started saving the current premium at aged 40 and lived to say 72 you could have a funeral to rival a top US mobster.

Seriously, I am sure the family of the deceased could put this money to much better use. The first two options will of course let you down if you die before you have saved the cost of a funeral.

I could not believe that my back of an envelope calculation was correct and so I earmarked this as a project for Angus Stewart, one of LMI’s analysts and I to look at after the June 30 peak advice period. With ASIC onto the case, I will leave the matter lie for the moment but watch what goes on with interest.

One final point I would make is that it clearly must be a very profitable class of insurance as I note that some insurers are prepared to allow customers to pay by the fortnight but will not offer this in any other class of insurance.

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Podcast on Sub-Limits

As mentioned a week or two back I intend posting some podcasts on various insurance topics and where appropriate I will discuss an issue with an industry expert.

This first one, well technically the second if I count the one I posted a few days ago on the responsibilities of directors that appeared on television,  [see  http://www.allanmanning.com/?p=3152] is on Sub-Limits and I am joined in the discussion with industry expert Mr Max Salveson. Max, who I regard as one of the most knowledgeable people in our industry, joined the Insurance Industry in 1950. He has nearly 2 lifetimes of knowledge and experience which he is willing to share and which I am always keen to learn from.

The podcast can be found at: http://www.youtube.com/watch?v=AWjHoCMqqD0&feature=youtu.be

Please let me know what you think of this format and if you have any topics that you would like me to explore in particular.

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Well done GIO on your Business Interruption Insurance campaign

I have heard a couple of different advertisements on the radio pushing the need for business interruption insurance that have been promoted by GIO Insurance.

What I like about them is that they explain the importance of the cover with the ads focusing on protection not price or ease of insurance. While I hope the campaign does well for GIO, I am also hopeful that many business owners will speak with their insurance broker or adviser and look to obtain this extremely important cover.

A useful site to learn more about business interruption is www.bicalculator.com

Well done GIO and to all those that were involved in the campaign!

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Blog Question – Goodwill/Lease

I received this question this morning via email.

Hi Allan

Sorry to annoy you as I know you are a busy man but I’m chasing some information on Business Interruption ?

I have a potential client that is leasing a motel. He has asked the following question – I have paid $1M for a 4 year lease. I wish to take out BI cover but how do I cover my outlay if a fire destroys the building and the owner of the building decides to take the cash and not to rebuild leaving the client without a business.

Regards

Terry [surname and email provided]

My answer is:

An ISR policy and many quality business pack wordings including some for your cluster group provide cover for Goodwill as an optional benefit. A Sub-Limit is selected and premium paid on the Sub-Limit and this to me would be the answer.

This does not protect the original investment but allows the Insured to go and purchase another similar business and pay up to the Sub-Limit for Goodwill for this new business.

Having said this, I am treating this payment as Goodwill as it is unusual to be paying such a large amount of money as a one off payment for such a short period. I suppose it could be prepaid rent. If it is not Goodwill one of two things would happen. Either the landlord would have to refund the amount of prepaid rent as he has not provided the property in accordance with the agreement. If the contract has no such refund provision and it does not fall within the definition of Goodwill then you would need to do a special endorsement to cover the exposure and set an adequate Sub-Limit.

For your convenience I set out the wording of the ISR Endorsement GWILLXS4 Goodwill as follows:

GOODWILL

The Basis of Settlement clauses in Section 2 are extended to include the following provision:

Subject to the Sub-Limit of Liability stated in the Schedule against Goodwill, in the event of Damage (other than in circumstances where cover is excluded) occurring during the Period of Insurance to any building or other property or any part thereof used by the Insured at the Premises for the purposes of the Business, which results in one of the following circumstances:

(a)   the rebuilding or reinstatement, whether total or partial, of the premises at the site being prohibited by, or not being commercially viable because of, any Act of Parliament or regulation made thereunder or any by-law or regulation of any municipal or statutory authority,

(b)   the lessor’s neglect, refusal or inability to rebuild or reinstate the Premises or to renew the Insured’s lease or monthly tenancy,

(c) the refusal of any liquor licensing authority to grant an extension to carry on the Business at the Premises under the licence held by the Insured, the Insurer(s) will compensate the Insured under this Item for the cost expended by the Insured to purchase Goodwill and/or a liquor licence upon acquisition of a similar business, within a reasonable time after the Damage, less that part of any amount(s) recoverable under any other Item or Items of Section 2 of this Policy which represent(s) the actual loss sustained by the Insured resulting directly from the interruption of the Business for such additional time, beyond the period required with the exercise of due diligence and despatch to rebuild or reinstate the Damage, required to restore the Business to the condition that would have existed had no Damage occurred.

GOODWILL means the future benefit from unidentifiable assets.

Special Conditions

1.    The Insurer(s) shall not be liable under this Item unless the Insured shall also have maintained in force an insurance on Gross Profit or Gross Revenue.

2.    The Insurer(s) shall not be liable under circumstance (c) unless the Insured has used due diligence to ensure the observance of all licensing laws.

3. The insurance by this Endorsement shall not be prejudiced if any of the circumstances stated in Clauses (a), (b) or (c) of Condition 13 of this Policy arise due to the Damage.

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The unintentional consequences of speed bumps

Following on from my above post on OH&S gone a bit over board, I question the benefit of speed bumps with a 20 kilometre warning sign in so many streets where the posted speed limit is 50 or 60 kilometres per hour.

Add to these the proliferation of small traffic islands, chicanes, and roundabouts, I question the extra wear and tear it is on cars, damaged tyres on cars with low profiles but worse still what does it do to a fully laden fire truck on the way to fight a fire. Similarly it must slow the trip to hospital for an ambulance rushing to save a patient’s life. The same issue would no doubt face police vehicles. I could go on about delivery trucks with fragile loads and much more that it appears that road engineers are overlooking due to the irresponsible actions of a few.

Going back to the speed bumps in many places they are quite wide and I have witnessed pedestrians mistake them for pedestrian crossings and step out in front of the moving traffic when there are no signs either to the pedestrian or more importantly to the road users indicating that the speed bump is in fact a crossing point.

With the height and steepness of some of the speed bumps, it would be impossible to drive over them in a low rise sports car without causing damage to the vehicle’s skirts. While my car does not fall within this category I have witnessed the damage done to other motorists.

Again, I appreciate that reducing the speed of the traffic does reduce the road toll and is a good thing but I feel that it would be better for all of us if we stopped wasting all the money to put in these barriers and simply put in a speed camera.

The benefits would be the cost of the infrastructure would be lower, the government would make much needed more money from those that break the posted speed limit, emergency services would not be impeded in doing their much appreciated work, those that obey the speed limit would once again enjoy the pleasure of driving, while the incidence of damage to tyres etc. would be reduced.

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I am just do not know how I survived in this dangerous world so long

Last weekend I decided to shout my wife and I a finger bun between us to enjoy with a coffee. Big spender I hear you say!

I asked the young lady serving me if she could cut the bun in half but she explained that this was not possible as it was against occupation health and safety guidelines.

I did not say anything and ended up cutting the soft bun with the handle of the spoon provided with the coffee. That evening I noticed a television commercial for the same bakery using a knife to score some bread that they were about to bake! False advertising I wonder? But that is another issue.

Am I alone in wondering how I survived so long in this dangerous world? In my youth I worked as a chef, well cook really with a fancy title, as a second job and I was let loose with knives of all sizes and do not recall hurting myself, any colleagues or the general public in fact the use of knives was the least of the risks I faced in that job.

I am all for risk management and safe work places but I question whether training on the safe use of knives or some form of plastic knife with a rounded tip that reduces the risk but still provides a modicum of customer service would be better than a sharp “no I can’t do that” would be a more appropriate option. I wonder how long it is before restaurants will be asking patrons to eat with their hands?

Cutting the finger bun with the handle of a spoon

I thought about carrying my own pocket knife for just such occasions but I would lose that the first time I fly and in some states be arrested for carrying a weapon.

While this is but a small example of what I think is a world gone mad, I question whether we really do need to wrap everyone up in cotton wool and then lose some of the joys of living.

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When is flood insurance not flood insurance?

There are some floods where the water is flowing so strongly homes are knocked off their stumps, doors and windows smashed etc. such as we all witnessed in the Lockyer Valley floods in Queensland during 2011.

While such floods do occur, it is my experience in handling flood claims since the early 1970’s located all around Australia, that more frequently in this country, the flood water rises slowly with water entering homes and other buildings first by backing up through pipes such as the waste pipe in a ground floor shower or an overflow drain in the bathroom or laundry. The water continues to slowly rise and eventually it finds its way under doors, and through any gap in the walls or floors.

As I say, in my experience this is the most common type of water inundation from flood in Australia. It is certainly what occurred with many of the homes in Brisbane during the 2011 floods when on the day of the floods there was blue sky and no or very little rain.

With all the bad press that the Insurance Industry received following the 2011 floods, less thank goodness following the 2013 floods, that insurers would purport to provide flood cover only to restrict the coverage to losses from the first and as I say less frequent cause. Let me take two policies, as an example, that are being offered by major grocery retailers currently in the Australian Market.

Example 1:

Example 2:

 

In the second  example I have cut and pasted the definition of flood from an earlier part of the policy and put it with the exclusions that apply to flood.

I believe that the restriction to the flood coverage that excludes flood damage where the damage or loss has not occurred as a result of an opening made by the storm (refer inside the red boxes I have overlaid) to greatly reduce the coverage for flood. Such exclusions are common under the peril of “storm” but are to my knowledge quite new in the case of the peril of “flood”.

I think we all accept that rightly or wrongly the general public in many cases do not sit down and read their insurance policy. They at best skim it and if they see flood is insured they would expect flood, particularly with the new government inspired common definition to cover all types of flood.

My concerns are not only for those home and contents owners who find that the restriction leaves them with a huge uninsured loss but I also question the damage that the hue and cry that will follow the next major flood will have on brand insurance.

I also urge these insurers to examine their own role in society. Are you in the business to provide protection to your customers when they need it or are you there to provide a “Clayton’s” cover and take premiums under false pretences.

Hopefully, this is not a scam but rather a drafting error where an exclusion for one peril is being imposed incorrectly on another peril.

Issues like this and requiring insureds to include the GST in their sum insured when it will never be paid, or where there is no write back for perils such as fire due to an exclusion under ‘accidental damage” is moved to a general exclusion greatly reducing the cover, really makes my blood boil. It is simply wrong and shows yet again the importance to any home or business owner to find a good insurance broker/adviser who will look after your interests and provide genuine protection.

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