Time to Re-think the Funding of Fire and Civil Defence Authorities in New South Wales

http://www.dreamstime.com/-image4932007The terrible bushfires that have caused such widespread damage in the Eastern states, particularly in New South Wales during October 2013, demonstrate the need for fully funded and highly trained fire and civil defence services. Both the human and monetary cost to the economy that results from devastation such as this, means that to do otherwise would be negligent in the extreme.

No doubt and with some justification, there will be calls for additional funding from the New South Wales Fire Service,  but it is no longer appropriate that the majority of the funding be born by those prudent enough to insure. It must be borne equally by all those that benefit from the services.

The position in New South Wales is that funding currently comes from three sources, with the bulk of funding (73.7 per cent) provided by “tax on insurance” companies, while the remainder of the funds are provided by local governments (11.7 per cent) and the State Government (14.6 per cent). Of course the local authorities pass their proportion on via property rates. In addition, some individual brigades also run charity events to raise funds.

When you look at the level of impost on the insurance industry, you would be forgiven for thinking it was a charge on alcohol or tobacco products. Again, using New South Wale as as an example, if you own a business and wish to insure your business assets and/or protect your business income with interruption insurance, then for each $100 of premium (including terrorism levy) you pay nearly double due to taxation. Below is a table showing the calculation on commercial property.

Tax on business insurance in NSW as at 19 October 2013

Description

Tax Rate

Running

Total

Tax

Tax on Tax

Base Premium

$100.00

Fire Service Levy

33.5%

$33.50

$33.50

Sub-Total

$133.50

Goods & Services Tax

10%

$13.35

$13.35

$.3.35

Sub-total

$146.85

Stamp Duty Tax

9%

$13.22

$13.22

$4..22

Total

$160.07

$60.77

$7.57

You do not have to have a PhD in economics to know that if you double the cost of any service, you reduce the demand for the service. It is heartbreaking to me as I assess home and business claims following bushfires, that there is such gross under insurance. Worse still, many have no insurance. In the case of a business, the saving that they thought they were making in a business expense has had the effect of providing inadequate protection for their livelihood and that of their employees. The report “An Assessment of the Economic and Social Impacts of the 2007 Pasha Storm” estimated that 1,170 employees lost their job as their employers’ businesses failed following the Newcastle storm. It is, of course, equally shattering for home owners.

Clearly the level of taxation on insurance contributes significantly to this problem. I am sure a study of the New South Wales bushfires will show similar findings.

This all flies in the face of John Lock’s (1681) position that “Government has no other end but the preservation of property”. I take this one step further and suggest that the primary role of government is to encourage and protect business, and safeguard the ongoing growth of the economy.

Unlike the alcohol or tobacco industries that place a strain on the government  of $76 million every business day (over $19 billion annually). With the bushfires, as well as the storms and floods in Queensland already this year, this figure will rise. On the other hand, the level of taxation on insurance means that the State Government of New South Wales is failing miserably in their primary role and it is time to change!

The entire community benefits from the Fire Services, the SES and other Civil Defence Authorities. The cost to fund this should not be left to an archaic, unfair and inefficient system, developed ironically after the Great Fire of London in 1666 as a fire service levy payable on insurance.

The more enlightened states of Queensland, South Australia, Victoria and Western Australia have moved the bulk of their funding to property taxes where everyone, whether they be the owner or tenant, contributes. In the aftermath of the fires there will be much soul searching by the fire authorities and government and I urge that the methodology for funding be included in any review.

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Insurance Byte podcast – Changes to PolicyComparison

PCI First cheque

The first cheque received to gain access to PolicyComparison.com

As posted recently October celebrates the 10th anniversary of www.PolicyComparison.com. The first cheque we received was from Shepparton based insurance brokers Griffith Goodall with their cheque dated 23 October 2003. From this very modest start the site has become a business in its own right employing nearly 2o people to keep the exsisting comparisons up to date and adding new product classes. Product Recall and Private Travel are expected to be added before Christmas this year.

IB PCIAndrew Aisbett, head of LMI Information Services speaks to me in this week’s Insurance Bytes podcast on the new changes in the release of PolicyComparison 2.0. to view the podcast please visit

http://www.youtube.com/watch?v=EidBki5y0vE&feature=youtu.be

The feedback from users was used to direct the upgrade rather than rest on our laurels which has over 90% of users at least satisifed with our service. A table setting out the main reasons is shown below:

PCI

The reason brokers use the service are listed as:

why use PCI

 

 

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What Makes What I Do Worthwhile

ChildrensFeeling depressed at the adverse media reaction that the insurance industry received following the Queensland floods of 2011, culminating with the socially irresponsible and completely undeserved Shonky Award handed out by Choice Magazine; it made me think how on earth can I get people to understand the importance of risk management and insurance?

Insurance is not taught in schools or in most university courses, including for professionals such as lawyers and accountants. This prompted me to write two books, one for adults and one for school children, in amongst handing many of the flood claims.

Both books have been really well received, with copies of the children’s book selling worldwide, of which I am considering making it a free eBook moving forward. Furthermore, a chap I started my career with wants to get it out to school children in third world countries and I look forward to working with him on that.

While attending the Insurance Advisernet Conference this week I was shown this photograph (see below) that a broker took of her child being introduced to Mr Owl. It really touched a nerve with me and I hope it puts a smile on your face.

Baby reading Mr OwlI love the photo and am so pleased the broker took the time to take it and show it to me. Thank you.

If you would like to learn more about the book “What’s Insurance, Mr Owl explains it protects your stuff”, please visit:

http://www.lmigroup.com/content.aspx?artId=502

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More Old Policies for the LMI PolicyLibrary

policiesAn ex broker was tidying up his garage at home and found a filing cabinet full of old policies.

Thankfully, rather than throw them out, he rang me and I collected them as a valuable addition to LMI’s extensive library of old policies.

In another recent case, a long standing friend was visiting his grandmother in New Zealand and found all the polices that she had on her home dating back to the 1940’s. He kindly gave them to me, rather than throw them out.

Already LMI  have over 15,000 wordings some dating back to 1885 but most from the 1980’s to the present.

Every now and then we are lucky enough to meet a bower bird who has worked for an insurer or broker for many years and has a heap of policy wordings that go back to the 1950’s. These are great to get.

All policies collected are available to all subscribers of PolicyComparison.com and are proving a valuable research resource or an aid in some litigation matters.

LMI scan all the policies into PDF format and store them on the site indexed by insurer, policy type and year of release. Sometimes the provider of the wording wants them back and we return the wordings to them at no cost, but most are happy for us to have them destroyed knowing that the eVersion is now stored and backed up for good.

If you have any policies in your office or at home, please let me or your nearest LMI office know and we will arrange to collect them and do the rest. Please do not simply dump them as they may be lost forever.

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Understanding “Without Prejudice” and where not to use it

know the rulesI am helping from afar, an insurance broker who has a claim of their own. I was asked to review a letter of demand that the broker had drafted and I immediately noted that it was headed: Without Prejudice.

This is a common mistake that I see and have corrected countless times. Rather than keep doing this, I thought I would say a few words on the subject here. When I think of the frequency of the issue, I recall the words of Justice Wells from my studies on this subject back in the late 1980’s, which he used in Davies v Nyland (1975) 10 SASR 76 at 89. In that case he stated:

“…in some quarters of the community there is a belief, amounting almost to a superstitious obsession, that the expression ‘without prejudice’ is possessed of virtually magical qualities, and that anything done or said under its supposed aegis is everlastingly hidden from the prying eyes of a Court”

I have found that there are many working in the insurance industry that clearly come from the quarter that Justice Wells refers.

My understanding is that the concept of “Without Prejudice” privilege was developed to facilitate the resolution of disputes by allowing parties to make compromises or concessions without the risk that their willingness to concede, typically on quantum (a required or allowed amount, especially an amount of money legally payable in damages) during negotiation will be used against them at a later stage if the negotiations fail. It can apply to both written or verbal statements made in an effort to settle a dispute once legal proceedings, or some alternative dispute resolution proceedings, has commenced or at the very least been considered by the parties to the communication. It will not protect a document or statement made in the course of negotiations that are not related to dispute resolution, such as commercial negotiations.

‘Without Prejudice’ is a long entrenched principle in common law but it is also referred to in the Evidence Act 1995, Act No. 2 of 1995 (Commonwealth). Section 131(1) states that:

1)  Evidence is not to be adduced of:

 (a)  a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or

  (b)  a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute.

Therefore, the principle of without prejudice privilege is established not by whether the appearance of the words “Without Prejudice” at the top of a document or elsewhere within it, but rather by the party’s intentions which are determined from the nature of the communication. Having said this, to avoid any confusion or potential argument in respect of the use of a document in Court, it is recommended to clearly state on the correspondence that it is being offered on a “Without Prejudice” basis.

To summarise documents that ought not to be headed “Without Prejudice” include:

  1.  Letters of Demand
  2.  Mere Assertion of rights – Where a letter merely purports to set out your client’s rights and reserves them, it will not be privileged and can be relied on in Court at a later date.
  3.  Correspondence which is not related to settling a dispute such as. general commercial correspondence
  4.  Correspondence for the purpose of finalising the terms of a contract/agreement where the agreement is not a settlement

It is also important to always bear in mind that “Without Prejudice” privilege will invariably only be found to apply to part of a document that refers to an offer of compromise rather than the entire document.

Areas where “Without Privilege” will not be accepted by the court includes:

  1.  where the court has to decide if the parties have reached an agreement;
  2. where a party is claiming an agreement should be set aside because there has been misrepresentation, fraud or undue influence and the ‘without prejudice’ communication are evidence of that conduct; or
  3. where the ‘Without Prejudice’ communication is evidence of a wrongdoing such as perjury or blackmail.

I hope this provides sufficient guidance for readers moving forward and we all see fewer letters of demand incorrectly headed “Without Prejudice”. As my old lecturer said: “letters of demand should have as much prejudice as you can muster!”

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The messy introduction & transition of the funding of Fire Services continues!

Copy of advertisement from Herald Sun Newspaper

Copy of advertisement from Herald Sun Newspaper

Like many within the Insurance Industry I could not believe it when I saw a large Public Warning in the Herald Sun warning the public against brokers.

It makes it look like every insurance broker in the State is engaging in dishonest behaviour and yet this is of course far from the truth.

While this may be justifying the position of the Fire Service Levy Monitor in an effort to maintain a position that at best was too little too late going a bit longer. But the real question is at what cost to brand insurance and to that of insurance brokers as trusted advisers.

The question is how many cases has there been and what is the amount involved. Should it be that every honest diligent broker in the State is tarred with the same brush? It is like suggesting every politician and public servant is dishonest due to the actions of a small minority.

Having worked in the insurance industry for over 40 years, I know the vast majority are honest hard working individuals who act as the risk manager and trusted adviser to their client.

I know that I am not the only person to be upset by this advertisement and it was certainly the topic of discussion by many at the recent National Insurance Brokers Association conference where the general feelings were of disbelief and outrage.

It is too many of us yet another example of the appalling way the current State Government handed the transition and are trying to move the blame from themselves to the insurance industry.

The State Government is spending a fortune on advertising the changes to the fire service levy, taking the credit when we all know it was the Brumby Government that made the correct decision. Why is such an advertisement necessary. Would not a polite note to every broker in the state reminding them of the changes and pointing out the penalties for getting it wrong been sufficient.

I understand that NIBA quite rightly arranged a meeting with Prof Fells last week and I look forward to hearing the outcome of that meeting and what will be done to undo the travesty of justice bordering on defamation that appears to have occurred.

Meanwhile, we have the ongoing issues of bushfires in New South Wales with a government there sitting on its hands rather than taking proactive steps to improve the affordability of insurance for home and business owners by retaining the unfair taxes on property, business interruption and contract works insurance.

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Is $10,000 combined limit for debris removal and architect’s fees providing genuine protection to home owners?

Picture: Rohan Kelly Source: The Australian

Picture: Rohan Kelly Source: The Australian

Back in July I wrote an article expressing concern that some of the supermarket badged wordings around the coverage for flood. http://www.allanmanning.com/when-is-flood-insurance-not-flood-insurance/

With the bushfires in New South Wales and elsewhere I revisited the wordings to look at some of the key benefits provided by home and contents policies in Australia. Having only a few days ago written an article on removal of debris (refer http://www.allanmanning.com/removal-of-debris/) that was one of the first things I looked at.

I was horrified to see that one of the supermarket badged policies, in fact two through the same supermarket, one a defined events policy and another the optional upmarket ‘accidental damage’ cover has a combined limit for removal of debris and architects fees of only $10,000.

I doubt this would be enough for the average home at the best of times to cover removal of debris by itself but if any home has asbestos building materials and or the home is situated a significant distance from a tip that will take the debris then this level of coverage is going to be completely inadequate. It of course leaves nothing for architect’s fees.

I am not sure what the premium is on these policies and will actually go and get a quote on my own home and compare it to a policy that affords reasonable protection and see what the difference is.

Don

Don Quixote de la Mancha and Sancho Panza, 1863, by Gustave Doré

This is another case where I feel I am Don Quixote but how do we get the insuring public to understand that insurance is not all the same and that it about protecting your greatest assets and your life’s work NOT price.

I suppose I joined the industry at another time. One where the insurers had a social responsibility and looked after their customers. Thas was taught to me at the General Accident and at MBS Pumfrey’s Loss Adjusters. I see more and more sectors of the industry moving away from this.

What causes me the most stress is that in my discussons all around Australia when I raised the issue of the Clayton’s flood cover with insurance brokers I did not know one that realised the limitation in their competitor’s product.

I know of one broker that knows about this limitation on removal of debris and good on him. How can a broker compete on advice if they do not know the facts.

Capture 7

Screen shot from LMI PolicyComparison

The most frustrating part to all of this is that it is not that hard. I found this in less than 30 seconds using LMI PolicyComparison.

I see two major problems with all of this. One Australian home owners are not getting the protection they need or deserve. This is in my opinion after doing claims for over 40 years a disgraceful sub-limit.

Secondly when it comes out in a disaster like this, the whole insurance industry will be once again tarnished with the same brush as we are only as good as our weakest link.

I look at what the Australian supermarkets have done to their supply chain and to the customer so that they can achieve their record profit levels. I see the same thing happening to my industry led by these guys. I wish they would stick to groceries and leave the important job of protecting Mum’s and Dad’s to those that really care!

PS after this rant due to pent up frustration, I can fully understand why PI insurers are so worried about providing cover to those that write blogs! Having said this, I really feel that I must say what I feel for if I get just one person to think about genuinely protecting their home it is worth it.

 

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Trying to paint the industry and the role of brokers in a positive light

2gbI had the privilege of being asked by Ross Greenwood of 2GB in Sydney to answer some questions regarding the current bushfires in New South Wales. Here is a link to the interview for those that missed it.

http://www.lmigroup.com/documents/allan%20on%202gb.mp3

Hopefully, the event and this discussion will prompt people to look at their insurances and realise that it is not about price but protection.

I did get a lot of positive feedback and while I cannot reproduce it all this one from Jeff sums up the typical response. Thanks to all those that took the time to write:

Hi Allan, Trust all is well. I heard your interview on Radio 2GB whilst driving home last evening and just wanted to congratulate you on an excellent representation of our Industry. Your reference to the matter of “getting the coverage correct” was most important and the focus on Business Interruption coverage was excellent. Well done. Regards, Jeff “[surname and email provided]

 

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Tips in Preparing a Expert Report for the Court

bigstock-Stamp-Expert-Opinion-46813468I prepare anywhere between 1 and 4 expert reports on insurance matters each month. Typically, my work involves an issue of policy interpretation, availability of coverage or calculation of the loss (quantum).

A number of people have contacted me of late to ask advice, as they are being asked to prepare a report for the first time.

From the large number of barristers and lawyers I have worked for, I offer the following guidelines. Having said this, it is best to double check the way that the lead barrister on the matter and/or the solicitor wants the report completed.

Numbering of the paragraph and other numbers.

I number each section 1. 2. 3. etc and then number each paragraph beneath the section title. 1.1, 1.2 etc so that the judge, the court officials and myself for that matter, can navigate around the report easily. I refer to appendices as Attachments and number these 1. 2. 3. etc. as I have been criticised in the past for calling them appendices and using letters.

Finally, I always put page numbers on my report and attachments ideally: e.g. Page 3 of 10.

I also allow a lot of white space so that the judge and other court officials can write notes if needed.

Date

It is a simple thing but I always date my report.

Introduction

I start my report by summarising the instructions, who instructed me and/or questions that I have been asked to address. I then explain that my opinion follows.

Code of Conduct

Before I go any further, I set out the relevant Court (District/Supreme/Federal) Code of Conduct for Experts that I am following. An expert  report will be deemed inadmissible without this. The rules under which I am to give evidence are always provided by the instructing lawyer. If I do not get them, I ask for clarification as to what court the matter will be heard in and ask for a copy of their regulations.

The key thing I have to keep in mind is that my duty is to the court and not to the party that instructed me. Sometimes this means that my instructing lawyer hears something that they do not want to but I feel it is always best to be honest. I have never been accused nor do I ever want to be called a “hired gun” who will just take any job for the fee.

As part of my acknowledgement to the Code of Conduct, I set my full name, address and refer to a CV, which I attach to my report as Attachment 1, which details my training, qualifications and experience to demonstrate how my “specialised knowledge” relates to the matter before the court and the ‘discrete area of expertise’ that I have. My CV loosely follows the ‘About Me’ page of this blog. However, I always read through my CV and tailor it to the case setting, including any information about my experience or knowledge that increases my credibility. I will, however, never say anything false in my CV, as I have to be able to defend it should it be attacked. I stress, for example, any book that I have written on the subject, eg Industrial Special Risks or Business Interruption.

Materials Relied Upon

I also include any documentation or other material that I have relied upon to come to my opinion(s) on the question(s) asked of me. Typically, most of this is provided by the instructing solicitor, although I would prefer that they provided the list in Word or some form where I could simply copy and paste it into my report rather than have to retype it or worse still, create it from scratch. This is quite time consuming in some cases.

I usually prepare this as a table or schedule and if it runs to more than 1/2 page, I will attach it as an appendix rather than clog up the whole report. The schedule typically has two columns, although I may add extras if it will help, particularly if the documents have court numbers. Otherwise it is simply a description which describes the document, who authored it and who it was addressed to and the last column is the date of the document, if it is dated.

It is of paramount importance that each document is read thoroughly and understood.

If there is insufficient information for me to reach a conclusion, I will always write to the solicitor and ask for the documents or other material that I need to do the job properly.

Assumptions

Equally important to the documentation is to advise the court of the assumptions I have relied upon in forming my opinion. These are often provided by the instructing party but sometimes, I have to make one or more assumptions based on the information before me. Whatever these are, I set them down in the report. This section may include a background of my understanding of the facts as I know them.

Body of the Report

This typically includes the question asked of me and my answer. I try and explain to the court the reason for my thinking and what I have drawn on to reach my opinion. This may be a text book, a professional code of conduct or the like.

Sometimes, if there is a series of questions that all really address the same issue, I provide an overview, such as the history of the development of an insurance coverage, or the duties of an insurance broker etc.

This means I do not have to keep repeating myself in the answer and I can answer by saying something like: “for the reasons I set out in paragraphs 4.x to 4.y I believe that …..”

Naturally, it is important that I answer the specific questions asked of me in the brief and if I am not able to provide an opinion on a particular question, explain why. I have found that I am not marked down at all if I am honest and admit when a question is outside my area of expertise. This tends to lead to the court accepting that I do know what I am talking about on the items I do address.

I look to use consistent language when commenting on measurements and degrees of certainty. I try and use objective industry or professional terms of standardised language and I do not use abbreviations where I can help it. If an Insured’s name or some other party to the action or name in it is long, I will write it out once in the introduction or where it appears the first time and then put in brackets what I call them during the balance of my report eg EXY Holdings Pty Ltd (“EXY”). If the lawyer writing to me has done this I will use the same abbreviated name as they have to minimise confusion.

Conclusion

I end with a summary of my report,  clearly stating my opinion and conclusions. I try and keep this to no more than one page in length.

Depending on the report, I set out the key assumptions, crucial piece(s) of evidence or methodology I have relied upon and or used as to how my conclusion was derived. Should there be some qualification to my opinion I also include this.

Attachments

If I have referred to a book or other reference material, I will provide a bibliography and/or copies of the pages, particularly if the books/texts are out of print or hard to come by, such as a Tarrif. Having a huge insurance library at my disposal certainly helps me.

Ensure that your CV is updated and relevant to the particular matter in terms of describing your ‘Training, study and experience’ and publications and peer reviewed articles.

Proof Reading

As the presentation is so important, a simple mistake could undermine your credibility. As such, I prefer to have my spreadsheet and any other calculations double or even triple checked by my colleagues and have the report proof read for ease of understanding, spelling and grammar. I would rather my colleagues find an error and fix it than the judge or other side.

The trouble I find is that often you are given insufficient time to prepare a report to the standard that I would like. I am guessing but it appears on some cases the lawyers are trying to do things as cheaply as possible and when they find an important deadline is approaching I have to drop everything to meet the deadline. This I find hard sometimes.

Draft Reports

I find that most barristers do not like draft copies floating around. I therefore do not prepare draft or email or otherwise submit draft reports.

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Removal of Debris

bigstock-Industrial-Waste-Skip-2782696For my milestone 400th post in this blog, I thought I would  choose one of the most popular Google searches that brings people to the LMI Group website. That search tag is “Removal of Debris”.

This is not surprising for it is an important issue in many Property claims. With any reinstatement or repair of a building, it is necessary first to remove and/or dismantle the damaged section. This entails removing the damaged materials to a designated part of the worksite where it is typically thrown into a pile or, more likely to avoid double handling, placed into a waste skip. Although this is all part of the reinstatement/repair process, cover afforded by the normal policy wording would, in the absence of a Removal Of Debris clause, cease at this point, even though the Insured would still incur costs to remove the debris (or skip) from the property or a point adjacent to it.

The Removal of Debris clause is likely to cover considerably more than just waste transportation and disposal costs. Under the Mark IV ISR policy for example, cover is for “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”.

At times there will be also be requests to extend this section by the addition of the words “or the decontamination” after the words “disposal of debris”. The underwriter would need to carefully consider whether there was any asbestos used in the construction of the premises, since, due to the precautions that need to be taken, the costs involved in the removal of asbestos, necessary for the decontamination, are considerable.

The wording of the base cover under a Mark IV Advisory or Modified ISR wording 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:…

 (f)        Costs and expenses necessarily and reasonably incurred in respect of:…

 (i)        the removal, storage and/or disposal of debris or the demolition, dismantling, shoring up, propping, underpinning or other temporary repairs consequent upon damage to property insured by this Policy and occasioned by a peril hereby insured against.”

The word ‘debris’ is not defined in the Mark IV policy wording. Its ordinary meaning as recorded in The Macquarie Dictionary[1] is: “the remains of anything broken down, or destroyed; ruins; fragments; rubbish…”.

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

Following a major fire, the police, fire brigade investigators or the state forensic scientists and the Insurers’ 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. In this example, let us assume that the Insured decided deliberately to underinsure. 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 six figure sum.

While the Insured made have made a conscious decision to underinsure their 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 underinsured. 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 2005 for the removal of the debris, increased from $300 to $1,800 once asbestos became involved. This is a six-fold increase in just a portion of the Removal of Debris cost. In addition, 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 a third of what is required. It is nearly 20% of the full replacement value of the building in my example case.

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

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

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

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

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

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

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

I have spent a great deal of time on this three-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:…

 (f) Costs and expenses necessarily and reasonably incurred in respect of:…”

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

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

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

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

I would 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 also 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 consequential 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) (refer Sub-Clause 3.2(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 on 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 suggests, this is why the activities listed in Sub-Clause (f)(i) are linked to Removal of Debris and not Sub-Clause (d) (see Sub-Clause 3.2(d)) above, which covers:

“(d) Costs and expenses necessarily and reasonably incurred for the temporary protection and safety of property hereby insured pending repair or replacement consequent upon damage recoverable hereunder;”

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

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

Let us consider the position using the rules of document interpretation.

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

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

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

The third rule is that the intention of the parties must prevail. In the Mark V wording, the draftsperson(s) split “temporary repairs” away from the other activities, so that it stands alone.

3.1.5.3 the demolition, dismantling, shoring up, propping or underpinning of the Property Insured or the carrying out of other temporary repairs to the Property Insured as a result of the Damage;”

In this format, many believe that there is absolutely no doubt that temporary repairs” in the context of the Mark V policy would be read by the Courts in its widest meaning. That is, they would allow an Insured to claim any type of temporary repairs as long as they were necessarily and reasonably incurred”.

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

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

I have purposely gone a long way round to discuss this 4-line sub-clause.[9] It must be remembered that:

The human mind is like a magnifying glass: It exaggerates. A simple rule of thumb: Whatever you’re looking at is not as big a deal as you think it is.”

Daniel Meacham (1985)[10]

The reason for my circuitous route is to demonstrate that it is easy to read what you want to into some wordings. The Courts, however, take a far simpler approach.

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

“The fundamental rule of interpretation, to which all others are subordinate, in that a statute is to be expounded according to the intent of the Parliament that made it; and that the intention has to be found by an examination of the language used in the statute as a whole. The question is, what does the language mean; and when we find what the language means in its ordinary and natural sense, it is our duty to obey the meaning, even if we think the result to be inconvenient, impolitic or improbable”.[13]

It is only if this rule cannot be applied to provide a single meaning due to some ambiguity or confusion, that the other rules discussed earlier are applied.

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

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

Demolish: 1. to throw or pull down( a building, etc.) reduce to ruins, 2. to put an end to; destroy; ruin utterly.”

Demolition: 1. the act of demolishing, 2. the state of being demolished, destruction”.

In conclusion, 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 – Consequential 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, Part A, titled ‘An Overview of Document Interpretation and Drafting’ in my book, Understanding the ISR Policy. http://www.lmigroup.com/content.aspx?artId=63

For those of you with a subscription to LMI RiskCoach please go to the short course on this topic: http://www.lmigroup.com/RiskCoach/ShortCourses/ShortCourse.aspx?scid=8

 

 


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

[2]     Nothing untoward is being suggested with this statement.

[3]     Goodlad D., 1996, “Augmented List of Endorsements”, The ISR Book – The 1996 Supplement to the Mark IV Edition, Risk Technologies Pty Ltd, The Patch; and as Endorsement 1A1j in Goodlad D., 1993, The ISR Book: A Working Guide for Insurance Executives and Risk Managers, Mark V Edition, Craftsman Publishing Pty Ltd, Burwood. p.4.2.

[4]     Davidson C., 1871, Precedents and Forms in Conveyancing, 8th Edition, W Maxwell, London. p.43.

[5]     The full maxim is verba chartarum fortius contra proferentem accipuntur, See Part A of Volume 3 of this Guide for a comprehensive list of the rules for document interpretation.

[6]     Osborn’s Concise Law Dictionary, 8th Edition, edited by Rutherford L. and Bone S., 1993, Sweet & Maxwell, London, p.88.

[7]     Marks F. and Morgan T., 1991, Guide to the 1990 ISR Advisory Policy Wording, Dunhill Madden Butler & Robins GAB, Sydney.

[8]     Goodlad D., 1993, The ISR Book: A Working Guide for Insurance Executives and Risk Managers, Mark V Edition, Craftsman Publishing Pty Ltd, Burwood.

[9]     It appeared as four lines in the original policy wording.

[10]   Meacham D., 1985, The Magic of Self Confidence, Simon & Schuster, New York.

[11]   This rule applies equally to other contracts and to the interpretation of Acts of Parliament.

[12]   Amalgamated Society of Engineers v Adelaide Steamship Co. Ltd (1920) 28CLR 129 at 161.

[13]   Impolitic means: inexpedient; injudicious (The Macquarie Dictionary, Revised 3rd Edition, edited by Delbridge A., Bernard J.R.L., Blair D., Peters P. and Yallop C., 2001, The Macquarie Library Pty Ltd, Sydney, p.953).

[14]   The Macquarie Dictionary, Revised 3rd Edition, edited by Delbridge A., Bernard J.R.L., Blair D., Peters P. and Yallop C., 2001, The Macquarie Library Pty Ltd, Sydney, p.509.

[15]   Ibid.

For further details, please refer to the Short Course covering this topic.

 

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