An obvious oxymoron

OxymoronI was working with our team from PolicyComparison to include key fact sheets on our website moving forward, as I thought this may assist insurers. We are reading and comparing the wordings and to do this is little or no extra trouble.

When I went to the website to learn about what was to be included, it dawned on me that the regulation imposing this on insurers was being issued by the Australian Government Department of Finance and Deregulation.

I think this could be added to the definition of oxymoron which currently reads: A rhetorical figure in which incongruous or contradictory terms are combined, as in a deafening silence and a mournful optimist. [source http://www.thefreedictionary.com/oxymoron]

I wonder if anyone within government or the department think this is as ironic as I do.

Oxymoron 2

 

 

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Understanding Section 46 of the “Insurance Contracts Act”

bigstock-Cause-And-Effect-Diagram-17824919Like most sections of the Insurance Contracts Act 1984 [Cth Act  80 of 1984] it is designed to protect the Insured.

The main point is that an insurer is not able to deny liability for a defect, unless the defect is known to the Insured or ought to reasonably be known to them. The Section, however, does not protect all Insureds. The attached paper by South Australian lawyer, Michael Fotheringham, a Partner with Winter Hilditch & Fotheringham, addresses the subject in excellent detail.

With Michael’s kind permission, I attach a copy of his paper. http://www.policycomparison.com/pci/ui/s46%20Insurance%20Contracts%20Act.pdf

It is important to understand this particularly, as many of the home and contents in the Australian market do not have a write back provision for resultant damage arising from a defect. This is particularly the case for while the article was correct at the time, the position appears to have changed with the 2010 case of Greg Nelson v The Hollard Insurance Company Pty Ltd  [2010] NSWSC 199.

This case considered whether section 46(2) of the Insurance Contracts Act 1984 (Cth) applied to a clause excluding liability for ‘inherent defects, structural faults, faulty workmanship or faulty design’ where the clause was not expressed to operate by reference to a condition existing before entry into the insurance contract.

Greg Nelson purchased insurance for a newly acquired yacht. Before completing his insurance, the Insured inspected the yacht for defects and also employed a qualified marine surveyor to survey the vessel. No defects were found in the yacht and the condition was shared with the insurer before finalisation of the insurance contract.

The insurance cover obtained by Mr Nelson covered the vessel for loss or damage arising out of ‘occasional slipping, cradling and launching for the purpose of maintenance and repair’; but excluded liability, as I explained earlier, for any loss or damage caused by or resulting from ‘inherent defects, structural faults, faulty workmanship or faulty design’.

Subsequently, while the yacht was being slipped and cradled for routine maintenance, it suffered a structural failure and sustained damage. The parties agreed that the damage to the yacht was caused by either an inherent defect, structural fault, faulty workmanship or faulty design, or a combination of these factors, not discovered by the inspection of the yacht conducted before entry into the insurance policy.

The insurer denied liability for the damage, on the basis that such liability was expressly excluded by the insurance policy. Mr Nelson argued that the exclusion of liability was rendered inoperative by s46(2) of the Insurance Contracts Act 1984, which as Michael points out in his article states:

…Where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the defect or imperfection, the insurer may not rely on a provision included in the contract that has the effect of limiting or excluding the insurer’s liability under the contract by  reference to the condition, at a time before the contract was entered into, of the thing.

The court surprisingly to me agreed with the insurer. As there were no reported cases on s46 of the Insurance Contract Act, the court applied Asteron Life Limited v Zeiderman [2004] NSWCA 47, the current authority on s47 of the Insurance Contract Act, a substantially similar provision. In Asteron, it was held that a life insurer could expressly exclude specific events such as the development of cancers, but not pre-existing conditions under s47 of the Insurance Contract Act. In particular, it was held that:

An insurer is entitled to exclude cover for particular events, irrespective of when they occur, and an exclusionary provision of that character does not fall within the statutory preclusion in either s46 or s47 of the Act because it could not be said that a limitation or exclusion was made ‘by reference to’ a condition of a thing or a sickness or disability at the time the contract was entered into. When the time of entry into the contract is irrelevant to the exclusion, the sections do not  apply.

In Mr Nelson’s case, Justice Einstein considered Asteron to have made it clear that in determining whether s46 (or s47) of the Insurance Contracts Act 1984 applies to render an exclusion clause inoperative, it is necessary to consider the terms of the policy, not the particular facts of the case. He also considered himself bound to follow Asteron despite the requirement to construe s46 remedially.

In applying Asteron in the Nelson case, Justice Einstein found that the insurer was able to rely upon the exclusion of liability in the policy because the exclusion did not operate by reference to a condition existing before entry into the insurance contract. Rather, the exclusion operated by reference to subsequent events of loss or damage caused by the inherent defect, structural fault or faulty design, events that his Honour considered could occur at any time.

This suggests that an exclusion clauses that are not expressed to be operative by reference to the existence of a condition before entry into the contract of insurance may survive the operation of s46 of the Insurance Contract Act.

I am certainly interested to see if other judges in different jurisdictions take the same technical approach, particularly with a claim involving home, contents or private motor, particularly where resultant damage arises from a typically insured peril such as fire, which has been an insured peril for literally hundreds of years.

The importanceof understanding the full extent of all the policy exclusions cannot be over emphasised. Remember to use LMI PolicyComparison to keep on top of the changes that constantly occur in the wordings.

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Blog Question – Cafe tables and chairs on the council footpath

bigstock-Street-view-of-a-coffee-terrac-51169387I received this question late last week”

“Good afternoon Prof Manning,

 I have a Liability query.

 We have an insured who has a cake/coffee shop. On one side

of our insured is a restaurant and on the other side there is a dwelling.

Our Insured has asked permission from both landlords if they can extend their setting of outdoor tables and chairs (see drawing attached below).

My question is, in the event of an incident, is our insured covered for the extension of his tables and chairs?

Your answer would be most welcome.

Regards

Anna [surname and email provided]”

 

Hi Anna,

It is difficult to know without reading the policy you are using. The wording may limit the cover purely to the situation.

As with all insurance, an accurate description of the risk being offered to an underwriter should be accurate and complete.

To be safe, I would ask that you notify the insurer that your client has the tables and chairs out on the footpath and that these extend beyond the footpath immediately in front of their own premises to both two neighbouring properties.

Many councils charge a fee per table and/or chair and often require the Insured to provide an indemnity back to the council. Please double check that your client has not entered into such an agreement, which may fall foul of any contractual liability exclusion that may appear in the policy.

As an aside, I think if I owned one of the neighbouring properties I would be looking for such indemnity to protect me.

cafe Hope this helps.

Regards

Allan

As always if anyone  would like to add to the advice to Anna, please use the comments section.

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The TIO “Resilience Through Knowledge: A Conference for Insurance Professionals – The Journey Continues”

TIOFollowing on from the inaugural TIO Insurance Conference in Darwin last year, the conference has become an annual event and will be held this year at the Darwin Convention Centre from Tuesday 29th October until Friday 1st November. It promises to be bigger and better than the last year.

TIO, being the responsible organisation that they are renowned for, have again thrown out the welcome mat to everyone involved in any aspect of general insurance.

With continuing professional training being one of the key challenges for the industry, particularly for those in the Top End. I see this as a really important initiative; one that certainly has my personal support and that of LMI Group.

To learn more about “The TIO “Resilience Through Knowledge: A Conference for Insurance Professionals – The Journey Continues” please visit the website at http://www.tioinsuranceconference.com/ where you will get details of the sessions, speakers etc. I look forward to seeing you there.

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Letting the tenant insure the building on behalf of the landlord is rarely sensible

bigstock-Risk-Management-7553272Last month I was involved in a claim, where the owner of a commercial building had a clause in their commercial lease that required the tenant to insure for full value. A second clause required the tenant to insure for Loss of Rent for 18 months. A third clause required the tenant to provide a Certificate of Currency confirming the insurance from the insurer selected by the tenant.

The tenant understood the requirements of the lease but, on obtaining quotations, elected to “take the risk” and under insure the building and not insure for Loss of Rent. What could ever go wrong? To hide the fact that he was in breach of the clear conditions of the lease, the tenant never provided the Certificate of Currency to the landlord. Despite being a practising lawyer, the landlord did not follow up the tenant for a copy of the Certificate, confirming the existence and levels of insurance.

When a fire occurred, the landlord heard about it on the radio and could not contact the tenant. He had a very anxious weekend and, when he rushed into his office to check the file to report the loss to the insurer, he could not find any evidence of insurance. He was understandably worried that the tenant had failed to take out any insurance.

He was relieved that there was some insurance in place on the building, but this was short lived when I explained the level of underinsurance and the amount of which he would have to bear himself. Like many property and business owners, he did not realise that the penalty for underinsurance applies on all claims once the loss is greater than either 5% or 10% of the Sum Insured/Declared Value. Worse was to come when he found that the rent was not insured at all.

His first thought was to sue the tenant, but the tenant was under insured on his own loss for Stock and Contents and had no other assets. Therefore, seeking recovery, notwithstanding the personal guarantee from the tenant that is contained in the lease, was just going to be a case of “throwing good money after bad”.

This of course is not an isolated incident. I have seen this countless times. So why does it happen?

The main reasons are:

  1. The landlord does not want to pay for a valuation to determine the full replacement value which is the amount to be declared for the building and so, thinks that by putting the onus on the tenant for full insurance, they are avoiding this cost.
  2. The landlord does not want to upset a tenant who believes they can buy insurance better than the landlord.
  3. The landlord does not want the hassle of arranging the insurance.

The reality is that in the vast majority of cases, the tenant is only interested in one thing: the cheapest possible insurance. It is not his or her asset, so why bother looking for quality with a broad range of perils covered and a good claims service?

The landlord in this and so many other cases has a lot more to lose when the insurance is not correct.

My advice to landlords is – do not transfer the risk to the tenant. The best way to protect yourself is find a good insurance broker, get them to arrange quality insurance on the building, landlord fixtures and fittings and the Loss of Rent for a period which will realistically cover the time needed to obtain all council approvals, rebuild and refit the building and find new tenants, plus any rent free incentive. The cost can then be passed on to the tenant.

Even then there are rules that must be followed:

  1. Always advise your insurance broker/insurer when the building is left unoccupied for the period stated in the policy. Typically either 30 or 60 days.
  2. Always advise your insurance broker/insurer when the occupation of the tenancy is changed.
  3. Check with your insurance broker/insurer if the tenant is a high risk occupancy before you offer the new tenant a lease. A good example here are tattoo parlours.
  4. Advise your insurance broker if there is any unusual risks with the building, such as non-approved works, any council orders against the building, if there is more than 30% EPS (sandwich) panelling or any asbestos.

Turning back to who should insure the building, my normal advice is that the landlord should not abrogate this important function to a tenant who does not have the same financial interest in the asset as the landlord. There are exceptions to this general rule, as there so often is. The exception is when the tenant is a blue chip company with a first class insurance program in place, with every bell and whistle imaginable. Even then there are three things that should always be done.

  1. Double check the policy excess / deductible and be satisfied as to who is responsible to pay this. I have seen cases where the landlord has to bear the excess and they find it is much more than they can afford.
  2. Double check each and every change in the lease to see if the rules on insurance are changed on you.
  3. Obtain a Certificate of Currency each year and have your insurance broker check it for any unusual or changed terms or conditions such as an increased excess or deductible.

The opposite can also occur. I am handling several cases out of the Wellington earthquake where the lease stated that the tenant was to pay the excess and with the earthquake deductible being 10% of the value of the building in some cases, this is causing massive problems for some tenants.

In summary, insurance is not something that a landlord should abrogate or leave to a tenant as a matter of course. If it is your asset then you are best to control the insurance yourself, by using a competent insurance broker that will ensure the coverage is in line with your risk appetite and that the Loss of Rent, including the outgoings paid by the tenant, are adequately insured for a period long enough to reinstate a major loss and replace tenants who break the lease.

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Thanks for the great feedback

http://www.dreamstime.com/stock-image-feedback-concept-image29694471There are very few major upgrades where there are no glitches, but I am pleased to say that the release of PolicyComparison 2.1 when off smoothly. This is a reflection of the great work of both the LMI research and IT teams involved.

Besides acknowledging their great work I also want to thank the huge number of people who have taken the time to check out the site (4 times the usual traffic) and particularly those that have written to congratulate the team on the improvements.

 

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The need for “contract certainty” # 1 Statutory Fines and Penalties Cover

The need for any contract to provide certainty is, on the face of it, important. This allows each party to the contract to know exactly what their rights and responsibilities are.

As a contract of insurance is, to my mind, the most important contract a business owner enters into in their business life, coupled with the fact that insurance is a product that does not follow the principle of ‘buyer beware”, but rather requires utmost good faith on both parties, it goes without saying that it is more important for an insurance contract to provide contract certainty.

The fact that the policy wording on the World Trade Centre towers had not been agreed on, was a stark reminder to the insurance industry for the need for contract certainty. Having insurance in place saying “wording to be agreed” is naturally going to lead to a massive dispute when a large claim arises before the wording is agreed.

Contract certainty is now compulsory for brokers and insurers in the United Kingdom and this has been welcomed by consumers. In summary, the standards in the United Kingdom’s Financial Services Authority’s Code of Good Practice require confirmation of the agreed wording to be used before placement.

But this is just one issue. The other is when the policy purports to provide coverage, but when it comes to the crunch the insurer refuses to grant cover.

One example is the cover afforded for statutory fines and penalties. When this cover first came out I questioned whether it had a place. My concern was that it may be regarded as being against public policy. I have written articles on this subject, such as the proposal by a group of students to offer insurance for fines for fare evasion. Refer http://www.allanmanning.com/traminsurance-its-illegal-on-so-many-levels/

In discussion with underwriters they advised that statutory fines and penalty cover for, say, a breach of employment practice law was different and it was to protect the directors and senior offices that may be innocent, but caught up in a breach. I could see how this had a place to protect such people but the policies did not spell when a claim would be paid or when it would not be.

A number of insurers who have issued such cover are now refusing to pay claims for statutory fines and penalties due in their belief that any such payment would be against public policy.

So what is insurance against public policy. An insurance contract that violates government legislation, is contrary to public policy. Similarly, if it plays a part in some prohibited activity the insurance policy/contract will be held unenforceable in court. An insurance contract that protects against the loss (fire or theft) of illegal drugs, for example, is contrary to public policy and is therefore unenforceable.

The trouble for the Insured and, as such, for the broker that advised them to take out this coverage, is that the Insurer picks and chooses which fines they will pay for and which ones they will not, after the event. The only way this can be overturned is to take the matter before a judge.

russian rouletteWhat needs to happen so that clients do not have an insurance contract, which in effect they are playing Russian roulette with? Either the cover for statutory fines and penalties has to be removed completely from contracts by Insurers who are uncomfortable about providing any coverage, which they believe may, under some circumstances, be against public policy or Insurers need to include in the policy wording a clear set of conditions as to when an insurer will not pay the claim. This allows the client and their broker to know the rules in advance. It also assists in protecting the  brand insurance, which has been tarnished in so many ways of late. The third option is to pay all claims arising from statutory fines and policy limits.

As for the brokers, if you hear of an insurer rejecting a claim under one of these policies, due to a belief on the part of a claims officer that the circumstances giving rise to a particular claim are against public policy for indemnity to be granted, how then are you going to explain the benefits of the policy to your client? What exposures do you create for your own practice by recommending such cover without contract certainty as to what will and will not be paid? Please give this serious consideration before you find yourself caught trying to explain a denial to one of your clients.

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The need for “contract certainty” # 2 Claims Preparation Fees

http://www.dreamstime.com/-image24719108The second area that has to be addressed sooner rather than later is claims preparation fees.

Under an Industrial Special Risks (“ISR” ) Policy, the Insured has the right to appoint a claims preparer. The words from the Mark IV, both Advisory and Modified versions reads:

Item No. 2

“The insurance under this item is to cover such reasonable professional fees as may be payable by the Insured and such other reasonable expenses necessarily incurred by the Insured and not otherwise recoverable, for preparation of claims under the Insured’s Material Damage and Consequential Loss insurance policies and the Insurer(s) shall indemnify the Insured for such reasonable fees and expenses.”

With these covers, the Insured and/or broker selects a Sub-Limit and a premium is charged for the cover. There is no requirement under such a policy for the Insured to obtain permission to appoint a professional expert to assist them.

The position is much more complicated under a business pack, however, some follow the same approach as the ISR policies.

A few offer a very small limit to cover accountants costs to verify a claim. This is next to useless in practice.

Next you have some that purport to provide cover for anywhere between $5,000 and $25,000 cover for claims preparation services as standard, under the policy. There are two things to watch for:

1. what sections of the policy does the policy allow the appointment; and

2. does the Insured have to obtain permission?

Some policies have a combination of a standard cover and the ability to purchase additional coverage for an extra premium. This extra cover can be for the same sections as the standard cover, or it may be limited to just fire/property losses and business interruption, or just business interruption.

The same issue can arise with some product recall policies. AIG is an example.

Again, some require the Insured to obtain permission to appoint a claims preparer before the client can seek to recover the expenses.

Some insurers appear never to want to grant cover. This immediately causes problems for the Insured and broker, particularly where the loss is significant. There are documented cases of claims in excess of over $2.5 million where the Insurer has refused permission.

To keep track of who offers what, the easiest way is to use www.PolicyComparison.com and use the “Product Feature” comparison option.

Can you imagine how an business owner, who has suffered a loss and who has been recommended to use a claims preparer by their broker or someone who has found the service to be of benefit, asks for assistance and is told that permission is denied? What type of opinion do you think the Insured then forms of  his broker, his  insurer and the insurance industry in general, as a result of this?

Concurrently, even where permission is granted it invariably takes days or weeks for permission to be granted, which considerably slows the claims preparer involvement in mitigating the loss.

Some may suggest that I do not like this arrangement as I am a claims preparer and it is effecting me. Nothing could be further from the truth. I would ask that either the cover is removed from policies, or that insurers charge a fair premium and then allow the Insured to appoint professionals when they, the Insured, deem they need help. It all comes back to contract certainty and if we are going to grant cover as an industry, we grant it once an insured peril has triggered the policy. If we are not going to grant cover when a loss occurs then say so up front so that brokers and Insured are not conned into thinking they have coverage which is purely illusionary.

In countries such as the United Kingdom, there are a number of schemes where claims preparation is insured by a seperate insurer and these covers do not require permission. This may be an solution if business pack insurers are uncomfortable in granting the cover. They remove it from their policy and the Insured purchases a cover that will respond as it should when they need it from an insurer they can trust!

I certainly intend getting this issue sorted for any future policies that I draft for insurers or brokers.

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LMI ClaimsComparison has a new home

Claims ComparisonIn addition to delivering the major upgrade of LMI PolicyComparison, the IT team also moved LMI ClaimsComparison site to www.ClaimsComparison.com from the .com.au site.

We did try and get the .com domain, in keeping with www.PolicyComparison.com, but it was being sat on by a domain squatter. The original price being asked by the squatter was simply not realistis and so we went with .com.au. This caused the squatter to reconsider their pricing structure and I am pleased to say that we have been able to negotiate a very modest price to secure the .com version.

We now own both versions with the .com.au pointing to the new home.

The service itself continues to gain a very wide audience, with more and more insurers advertising their LMI ClaimsComparison star rating in their marketing material.

 

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Introducing LMI PolicyComparison version 2.1

PCI NewLMI PolicyComparison is about to celebrate its 10th anniversary. In that time over 3,000,000 comparisons have been done and the service has established itself as an indispensable research and  eService tool to our subscribers in Australia and internationally.

A major factor in the success of our relationship with our subscriber base is our willingness to listen to our user’s feedback and act upon it to ensure we continue to deliver what you need to assist you as best as we can.

Since its inception in 2003, the LMI team have continuously introduced incremental improvements to the service. However, at the 10 year mark, I threw out a challenge to the PolicyComparison team to do something special. But what?

Who better to ask that our loyal users and with this in mind, we commissioned the independent market research firm of Brand Matters to ask. My sincere thanks to all of you that took the time to provide your input. Building on these recommendations and the beta trials conducted by selected users I am confident that your “user experience” will be considerably enhanced. To acheive this and to allow us to keep building on the product, meant rewriting / recoding the entire program from the ground up. Just a few of the improvements you will immediately see include:

  • Faster speed
  • Introduction of “most popular” comparison template (short version)
  • Choice of traditional text or “new” icon views
  • Ability to compare 4 policies at once, up from 3.
  • Ability to save comparisons for easy retrieval
  • Better and more contemporary look and feel

Having completed their work ahead of schedule, LMI PolicyComparison version 2.1 will be released at the close of business tonight (5pm Australian Eastern Standard Time) , ready for use when users arrive at work tomorrow Wednesday 25th September 2013.

While the revised site is very intuitive and you will be guided the first time with help boxes, there is a step by step user guide accessible at http://www.policycomparison.com/pci/usermanual/userguide.pdf.

In the unlikely event of your encountering an error message please advise techsupport@lmigroup.com and one of our IT team will resolve the issue for you as quickly as possible.

While this is a significant improvement to LMI’s existing website please be assured that we will not be resting on our laurels. You can expect to see continual improvement reflected in further enhancements over the coming months.

I trust that this significant reinvestment by LMI Group for your benefit is well received. We welcome your feedback through comments or the “contact us” button on the LMI PolicyComparison website.

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