Blog Question: What is Storm Surge?

LAVALLETTE, NJ - JAN 13: The remnants of homes destroyed after HA follow up question to my article yesterday on storm and tempest v storm surge.

Hi Allan

Thanks for your article today. Very informative as usual and I like your style which makes it all sound so simple but I know it comes from a lifetime of research.

Sally [surname and email provided]

Hi Sally,

Sorry I did not explain that yesterday but I felt the posting was getting too long but happy to answer your question separately.

It is usually described as:

“An abnormal rise in the level of the sea along a coast caused by the onshore winds of a severe cyclone.”

I have only handled a few claims in my career from this. The most graphic occurred during severe tropical cyclone Aivu which crossed the north Queensland coast in the Burdekin River delta near Home Hill which is between Townsville and Bowen on 4 April 1989. Aivu caused directly quantifiable damage estimated at $90 million in 1989 dollars (approximately $174 million in 2014 dollars).

The claims I had involved homes, mainly holiday homes and shacks, that were built down on the foreshore. Eye witnesses I interviewed advised that the pressure and wind created by the cyclone sucked the sea out from the shore about two kilometres and then as the cyclone passed over the coast and the wind direction changed, a wall of water came rushing back into land destroying everything in its path and the lightly built dwellings stood no chance and most were written off. Photos of some of the homes by the sea during Hurricane Katerina showed similar damage.

Other times the wind, rain and the pressure can simply create exceedingly high tides, which inundate low lying areas, but without the enormous force that was evident during Aivu.

 I hope that explains it.

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Blog Question: Storm and Tempest v Storm Surge

Flood WarningThis is not the first time I have been asked this sort of question and so it is long over due that I answer it on the blog

Hi Allan

How can an insurer not pay for storm surge when the proximate cause is storm and tempest which is insured?

Can you please explain how all this works?

Simon” [surname and email provided]

The same sort of question could be asked in respect to flood losses and many other types of loss circumstances.

First let me explain that while Proximate Cause is a term referred to in the insurance industry I am yet to see a policy with the words ‘proximate cause’ in it.

Next I would explain that whole books have been written on the subject and I have written several chapters in different books to explain the concept and so I give as short a version here as possible and some further reading at the end if you want to explore more.

The simplest definition of proximate cause is that the cause is the ‘direct’ cause.

Most policies, particularly those that are loosely described as ‘Accidental Damage’ policies cover all losses other than what is excluded. Even a Defined Events policy have exclusions that limit the coverage even where there is damage from more than one cause.

Few policies are worded the same and this adds to the confusion but typically an exclusion will start with a preamble such as:

The Insurer(s) shall not be liable  in respect of:

 x.         physical loss, destruction of or damage to the Property Insured

             (a)        directly or indirectly occasioned by or happening through or connected with …….”

The inclusion of the words ‘indirectly occasioned by or happening through’ move the exclusion from having to be the proximate or ‘direct’ cause to a much broader remote cause. Therefore the concept of ‘proximate’ cause no longer applies.

The next thing to get our heads around is what happens when there is damage from two or more causes. This can occur with a storm blowing a roof off a building and flood water filling the basement. The building has been damaged by two causes with the basement wet from both flood water and rainwater pouring in from the open sky above due to the roof being blown off.

For the sake of our discussion there are three broad types of peril. They are:

  • Insured Perils
  • Uninsured Perils; and
  • Excluded Perils.

Over the several hundred years of Common Law the following rules have been developed and they have been in operation, virtually unchanged for over 100 years. Dinsdale, (1960) clearly set out the way it all works in Principles and Practice of Accident Insurance, [P Buckley, London].

In summary, if an insured peril and another peril operate together and the damage can be clearly identified then the damage by the insured peril is paid by the insurer while the damage from the uninsured or excluded peril is not.

If the damage cannot be separated then where the damage has been caused by an insured peril and an uninsured peril then the insurer pays the entire amount.

If the damage cannot be separated then where the damage is caused by an insured peril and an excluded peril  then the entire damage is not paid by the insurer.

And of course if the damage is not caused by an insured peril but either an uninsured and or excluded peril then the loss is not claimable.

In Australia the fact that an insurer does not have to meet a claim where there is damage and the caused cannot be separated out between an insured loss, say storm and tempest and an excluded peril say storm surge or flood is known as the Wayne Tank Rule[1]  but the case to my mind did not come with any surprises but affirmed the existing position.

The rules apply to most forms of insurance, material damage, business interruption, construction risks etc.

If you would like to read more on the subject, I have written a very detailed treatise on ‘Proximate Cause’ in my book titled Mannings Six Principles of General Insurance. A link to the book can be found at: Yellow

One final point. Every claim is different and this article was written with no single claim in mind. The facts of every claim has to be considered and the actual wording of the policy considered. One word being changed from say an ‘and’ to an ‘or’ can make a huge difference on how a policy responds. All I am doing is outlining the basic principles that I use when considering a claim under any policy. It also reminds me why it takes me so long to draft a wording to ensure that it reflects the intention of the coverage.

[1]     Wayne Tank and Pump Co Ltd v Employers’ Liability Assurance Core Ltd (1974) 1 QB 57.

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Tax Agents are Being Warned they are a Target of Thieves and Cyber Crime.

bigstock-detailed-illustration-of-a-Cy-61690667 [Converted]The Australian Tax Office has sent out a warning to tax agents that criminals are targeting tax practitioners to steal details of their business and their client base.  A link to the warning, which includes a video on the issue can be found at:
These thieves have used this stolen information to, among other things:
  • create false payment summaries;
  • lodge fraudulent returns; and
  • obtain fraudulent GST refunds.
As a result, this can result in financial loss for tax agents and their clients. The ATO reminds tax agents that it is important that tax practitioners take reasonable care to safeguard their client information. This is particularly relevant now many are working predominantly online. Cyber risk is certainly an ever increasing risk for business and the introduction of cyber security insurance is a welcome addition to the suite of protection offered by the insurance industry.
To assist brokers and their clients, LMI and I personally are working on two projects. First, will provide comparisons of the features and benefits of the major policies in the marPicture1ket. To develop this is taking longer than we thought, as the policies are so different, but we are committed to launching the new feature by May 30.
Secondly, following the success of the recent eBook guides to Business Interruption and Contract Reviews, Steve and I are working on a guide to Cyber Security and Insurance. I will post a note when it is released.
In the meantime, tax agents are not the only target so every business owner is urged to review their risk and discuss insurance protection with their insurance broker.
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Blog Question: Is There any Difference Between These Two Additional Increase in Cost of Working Clauses?

The word Translate on a red computer keyboard key or button to iI received this question on  the wording of Additional Increase in Cost of Working covers.

Hi Allan I have 2 wordings I am trying to compare :


 Item 3. Increased Cost of Working.

 The Cost of further expenditure not otherwise payable under this Section, necessarily and reasonably incurred during the Indemnity Period in consequence of the Damage, for the sole purpose of avoiding or minimising a reduction in Gross Income or resuming or maintaining the normal operation of the Business. 


 2. Additional increase in cost of working

the increase in cost of working (not otherwise recoverable under this Policy) necessarily and reasonably incurred during the Indemnity Period as a result of the Damage for the purpose of avoiding or diminishing reduction in Gross Revenue and/or resuming and/or maintaining normal Business operations and/or services.


Paul [surname and email address provided]

Hi Paul

In this case, while the two wordings have different headings, in that CGU call the optional coverage Increase in Cost of Working, while Allianz add the word Additional in front of it; the intention and extent of  coverage is, to my way of thinking, exactly the same.

While Allianz use the term Additional Increase in Cost of Working in the heading, the word does not in fact appear in the wording of the coverage provided. This is exactly the same in the Industrial Special Risks policies.

Another difference that does not really effect cover is that the CGU wording includes the words ‘sole purpose’ as part of the criteria for being able to claim under the benefit. These words are typically found as one of five tests under a traditional Increase in Cost of Working cover, as found under an ISR policy. While this is not an issue here, the wording goes on to say that they expenditure can be claimed if it is for ‘ resuming or maintaining the normal operation of the Business.’ 

The important thing to keep in mind is that the word before these in both clauses is ‘or’ not ‘and’.  As such, as long as the expenditure under either policy is reasonable and incurred by the Insured to  resume or maintain  the normal operation of the Business, it is claimable. I can see no difference in coverage under either wording.

I hope this helps.

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Blog Question: Customers Goods Under an ISR Policy Allan,

 Just wanted some advice on the below.  This is my cluster group’s standard ISR sub-limit schedule. [note I have withheld the full list as it is commercially sensitive information]

 Customers Goods is sub limited to $50,000, I was wondering the reason for this?  I would have thought the description of Stock includes Customers Goods.  Is there a good reason why the standard sub limits then restricts the policy to $50,000? I would have thought that this is unnecessary and is actually restricting the policy and this should be deleted, or am I missing something?

 Your thoughts?

David” [surname and email provided]

This is a good question. The reason that it has been included is that an issue that continually crops up after a loss has occurred, is whether the Insured is responsible for the customer’s goods. If so, then they need to include it in the Declared Value and the overall Limit of Liability. The trouble is, more often than not, this is not considered at the time the insurance is arranged and the Insured is upset that they have to advise clients that they are not insured, which causes damage to the reputation of the business and the customer goes elsewhere, feeling let down.

It must be understood that under an ISR Policy, or any that I can think of, the property insured is not all the property of anyone, at the situation, but rather in the case of an ISR, which is wider than most:

 “all real and Personal Property of every kind and description (except as hereinafter excluded) belonging to the Insured or for which the Insured is responsible or has assumed responsibility to insure prior to the occurrence of any damage, including all such property in which the Insured may acquire an interest during the Period of Insurance.”

As I said, it is my experience, in the vast majority of cases, the issue of customer’s goods are not considered before the loss. Further, if the Insured does not have the necessary proof that they were to insure the property; i.e. assumed responsibility to insure the property and so a claim for customers goods is denied under the ISR and it becomes a third party claim under the liability program, which may or may not respond, depending on the circumstances of the loss. As you know, while the Insured would be regarded as a bailee, this does not create strict liability. If the Insured were to be a innocent third party and had taken reasonable care of the customer’s goods, they may well not be found legally liable for the loss of the customer’s goods

By insuring a small amount of customers’ goods as a sub-limit, which is designed to cover customers’ goods not otherwise insured, then the Insured provides some cover, not subject to co-insurance, that covers up to the sub-limit customers’ goods and the fact the cover has been arranged, shows that they have assumed to insure some customers goods (not otherwise insured) up to that sub-limit. The cover is a first loss limit across each location.

The sub-limit selected is the minimum of what the insurers will ‘throw in’ at no charge, but is designed to start a conversation between the broker and Insured as to what exposure exists, who is to insure what and if so, for what amount. The amount is then increased to cover the worst case scenario of customers goods, should the worst happen. The insurer rates it accordingly. The reason the endorsement includes the proviso regarding ‘not otherwise insured’ is to avoid unnecessary dual insurance situations, particularly where there are a heap of customers all with the goods insured. To work this out for, say, a transport company, could be a nightmare.

For the sake of completeness, I reproduce the standard Customers’ Goods Endorsement, Endorsement Code SALESXB4:


The policy extends to insure goods belonging to the Insured’s customers at the Premises, to the extent that such goods are not otherwise insured.

As you say, if the issue has been addressed and the insured has documented proof that they are responsible to insure the customers goods you could delete the sub-limit which gets rid of the “unless otherwise insured” proviso and include the value of the customers goods as part of the declared value at each location.”

I hope this explains it for you.



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Accidental Damage v Unspecified Damage v Specified Damage

Submitted For ReviewThis is the second in a series that looks at just some of the issues that I found in reviewing a ISR schedule for an Insured. During my review I noticed that under the Limits of Liability there was what was supposed to be a Sub-Limit of Liability for $1,000,000 for Accidental Damage with no definition for ‘Accidental Damage’ on the Schedule and then later under the heading of Sub-Limit of Liability there was a sub-limit, with a definition for Unspecified Damage, $1,000,000.

Was this a double up or was it intended that 2 separate limits were to apply and if so were they to be aggregated or work concurrently. This was not clear to me but had been accepted by both the broker and underwriter.

It is not of course not unusual for an underwriter or broker to include a Sub-Limit for Accidental Damage. The problem is that neither the Mark IV Advisory or Modified wordings (nor the Mark V wordings for that matter) provide a definition of Accidental Damage. Therefore, Accidental Damage would take on its ordinary, everyday meaning. What is ‘accidental’? The Macquarie Dictionary[1] defines it as: “happening by chance or accident, or unexpectedly…”.

The fact that the words will take their ordinary meaning has been strengthened by the introduction of the Insurance Contracts Act (1984)[2] and, in particular, Section 37 – Notification of Unusual Terms.

Fire, impact damage and many other perils that are otherwise insured by the ISR policy, would fall within the ordinary meaning of the words ‘accidental damage’.

Therefore, I recommend that the term not be used either to explain the type of cover provided or to impose a Sub-Limit or Deductible.

Another reason is that just like the industry did away with the term ‘all risks’ and ‘contractors all risks’ as it was confusing and may fall foul of the Competition and Consumer Act (formally the Trade Practices Act).

The Mark V modified policy overcame both issues by introducing a new term ‘Unspecified Damage’. The version that I recommend is reproduced below.

UNSPECIFIED DAMAGE, for the purpose of any Limit or Sub-Limit of Liability or Deductible as shown in the Schedule, means damage caused by any peril or circumstance not more specifically covered or excluded by this Policy other than fire, lightning, thunderbolt, explosion, implosion, collapse, earthquake, subterranean fire, volcanic eruption, impact, aircraft and/or other aerial devices and/or articles dropped therefrom, sonic boom, theft, breakage of glass, loss of money, the acts of person taking part in riots or civil commotions or of strikers or locked-out workers or of persons taking part in labour disturbances or of malicious persons or the acts of any lawfully constituted authority in connection with the foregoing acts or in connection with any conflagration or other catastrophe, storm and/or tempest and/or rainwater and/or wind and/or hail, water or other liquids or substances discharged, overflowing or leaking from apparatus, appliances, pipes or any other system at the premises or elsewhere.”

Note that if the policy is to include flood or any other additional peril and it is not the intention to have a loss arising from that peril to be subject to the Unspecified Damage Sub-Limit or Deductible, then the peril(s) needs to be added to the above definition.

I would explain, that the Mark V Advisory wording introduced the term ‘Specified Damage’, which was altered to ‘Unspecified Damage’ in the Modified wording as it is technically more correct. I agree that this was a good change and as I say, I use this term in any ISR policy that I draft.

I believe the double up in this case where there is both an Accidental Damage and Unspecified Damage Sub-Limit has occurred due to the fact that the brokers cluster group has recently updated their ISR policy and he has taken bits from the old wording and tacked them into the new wording without appreciating that they are in fact one and the same thing under a different name.

Having said this, whatever it is called, it should be treated as a Sub-Limit with a definition attached and never shown as a Limit of Liability.

Many clients, brokers and underwriters engage me to review larger more complex ISR policies finding that a fresh pair of eyes uncovers issues which are much better found before a claim than after. This is certainly the case here.

[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.11.
[2]     No. 80 of 1984.
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QBE revise the Fire Service Levy

Let's give Fire Service Levy the chop!

Let’s give Fire Service Levy the chop!

I learned today that QBE Australia had revised its Fire Services Levies (FSL) for risks located in the areas protected by the New South Wales authorities effective 15th March 2014.

The announcement advised that any new business quoted by QBE on or after that date will have the new FSL rates applied.

QBE also advised that the levy for NSW includes the statutory contributions system for the funding of the NSW State Emergency Services (SES).

Any reduction in this tax has my full support and like many in the community I wish the New South Wales State Government would simply remove that tax and follow the example of all the other state governments rather than continue with the disincentive to insure.

Here are the new rates as published along with the old rates for your convenience.

Levy NSW
Fire / ISR / Consequential Loss 28%
(previously 31.5%)
Construction Risk 28%
(previously 31.5%)
Householders & House owners 15.5%
(previously 17.5%)
Motor 0.5%
(previously 1.0%)


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Limits of Liability v Sub-Limits of Liability v Schedule of Declared Values

Review Character Shows Assess Reviewing Evaluate And ReviewsI was recently appointed by the Chief Financial Officer of a company to cast a fresh pair of eyes over their insurance program. As I was going through the Industrial Special Risks (“ISR”) schedule I noticed a number of issues that needed to be remedied. Without wishing to embarrass anyone, I will discuss a few of these over the next few posts, particularly those that I see crop up quite often.

The first point I noticed was that the Schedule included a definition of “Buildings”, and another for “Machinery & Plant” etc. As I explained in 2 recent posts this is not necessary and if anything undoes some of the benefit of the ISR policy.

Rather than repeat myself, I attach a link to the two articles which not written for the particular concern, explain the reason why a definition is not required. If you are still not sure please let me know and I will go over this in more detail.

The next and more important issue is that under the heading Limits of Liability, the Schedule listed what in effect was the Declared Values for the building at each location, the stock values, machinery and plant etc. This is simply not correct.

An ISR Policy is not a Business Pack Policy with sums insured or limits for each category of asset. There are several types of amounts to be shown on the Schedule. Limits of Liability, Sub-Limits of Liability and Declared Values. They should not be confused.

The Schedule of Declared Values is what the premium is primarily based upon and which the test for co-insurance will be made against. It was never designed to be a Limit or Sub-Limit of Liability.

On the first page of the ISR just after the Operative Clause (the clause that sets out on what conditions the policy will respond. The actual words read:

Whereas the Insured named in the Schedule has paid or agreed to pay to the Insurer(s) specified below the Premium shown on the Schedule, now the Insurer(s) agree(s), subject to the terms, Conditions, Exclusions, Memoranda, Warranties, limitations and other provisions contained herein or endorsed hereon, to indemnify the Insured as specified herein, against loss arising from any insured events which occur during the Period of Insurance stated in the Schedule or any renewal thereof.”

The very next clause of the Policy sets out the extent to which the Insurer will meet claims. This reads”

Provided that the total liability of the Insurer(s) at any one Situation shall not exceed the appropriate Limit or Sub-Limit(s) of Liability as stated in the Schedule or such amount(s) as may be substituted therefore by endorsement or memorandum hereon or attached hereto and that each Insurer specified below shall only be liable to contribute to any loss covered by this Policy that proportion of the loss as is specified beside its name.” [emphasis mine].

No where in this clause does it refer to Declared Values only to the Limits and Sub-Limits of Liability.

For reasons that I have stress in my ISR Master Class, the Limit of Liability should always be higher than the value of Declared Assets at the largest location. There are two main reasons for this.

After any property or business interruption claim, once the claim has been calculated in accordance with the relevant basis of settlement the claim is subject to three tests.

First a test for under insurance. Under a standard Mark IV or Mark V ISR property claims are tested with  85% co-insurance. whereas business interruption is tested with 100% average or co-insurance.

The second test is against any Sub-Limits. A good example is flood. If the loss after the application of co-insurance is greater than the Sub-Limit then the claim payment is limited to that Sub-Limit.

The third test is the Limit of Liability. Here the total liability of the Insurer is capped to the Limit of Liability. Additional benefits provided by the policy such as Removal of Debris or Extra Cost of Reinstatement are not paid in addition to the Limit of Liability but out of it.

On the subject of additional benefits, not all items claimed are subject to average and removal of debris, extra cost of reinstatement, and employees clothing and tools of trade are but a few. This is one of the two main reasons that the Limit of Liability should always be higher than the total of the Declared Value at the ‘target’ or largest location.

The second major reason the limit should be higher than the Declared Value is that there may be some escalation of costs between the start date of the policy, the time period against which the adequacy of the Declared Values will be tested by the Co-Insurance test and the date of the final repair. With a loss perhaps occurring 364 days after the start date of the policy and you then add a reasonable period to reinstate the asset it may be several years later. Having a separate an higher Limit of Liability is a great benefit introduced by the drafters of the ISR wording. These underwriters and brokers clearly had protection for the Insured top of mind.

Having the Declared Values listed as Limits of Liability under the ISR does away with one of the major benefits of this great policy, the Australian ISR.

I am often torn between explaining an issue in sufficient detail to make it clear but at the same time, I am mindful that readers do not like long articles. If you would like to learn more please read chapter 2 of my book, Understanding the ISR Policy volume 1 – the Mark IV.

As with any policy, the schedule needs to confirm with the structure of the policy wording and certainly not unintentionally limit what is standard coverage. To do so makes for a very uncomfortable time in the witness box.

In my next post I will discuss the difference between Accidental Damage, Specified Damage and Unspecified Damage.

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Introducing LMI Forensic

forensicsFollowing on the overwhelming success of LMI Legal, a legal practice specialising in insurance issues, I am pleased to announce the launch of LMI Forensic, a specialist unit within LMI, trained and experienced in  both finance and accounting in all things insurance.

The team is headed by Revell Weightman who has been with LMI for the past 4 years in LMI Claims Services before being promoted to head this elite team.

LMI Forensics will provide both pre loss and post loss services, either independently, in conjunction with LMI Legal,  as the case requires:

Pre-Loss Services

  1. Business interruption Sum Insured/Declared Value Reviews – Platinum Service (which includes a review of the Indemnity Periods,  Limits of Liability,  Sub-Limits and Endorsements)
  2. Business Interruption Desktop reviews
  3. Business impact analyses
  4. Maximum foreseeable loss
  5. Contract reviews

Post Loss:

  1. Loss Management, quantification and claim preparation
  • Property/Material Damage, Stock Reconciliation, Business Interruption
  • Business interruption
  • Advance Consequential Loss of Profits/Delayed Start-up
  • Fidelity Insurance
  • Public Liability
  • Product Liability/Recall
  • Professional Indemnity
  • Directors and Officers Liability
  • Cyber Risk
  • Economic Loss Calculations
  • Analysis for a financial motive

2. Litigation SupportCapture

  • Breach of contract and/or warranty
  • Professional negligence quantum
  • Uninsured loss recovery

As with LMI Legal, LMI Forensic Services are offered from all our LMI Australian and New Zealand offices.

Whether it is pre or post loss it is all about insuring that the numbers are right and that is the role of LMI Forensic. To contact Revell or any of the LMI Forensic team please email or phone your nearest LMI office. A copy of a brochure can be found at

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Co-Badging of eBooks proving popular

Picture1Since their launch in the third quarter of 2013, a number of brokers have sought to co-badge/dual badge the books with their logo and to have the brokers name incorporated into the text throughout the book.

LMI charge the very modest fee of $250 ex GST per book to do this work and it is then able to be hosted on the brokers website. The brokers who have made the investment have reported back very positive feedback on the reaction from their clients and importantly increased sales.

From LMI’s side, the fee covers the cost of our graphic artist to make the changes and to fund other titles in the series.

One broker wished to go further and produce a hard copy of a co-badged version for their clients at an industry conference. The quote from a local printer to print, cut to size and bind 250 copies was around $8 per book. They elected to print the books in house which is acceptable but the finish is understandably not quite as good.

Downloads of the original eBooks are available at no cost at (you may need to scroll down a little to see the links) and you are most welcome to send out a link(s) as is.

If you would like to explore this topic of co-badging further please drop me an email at

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