Beware the Hot Works Exclusion in Liability Policies

Construction Worker With Angle GrinderThis post looks at the inclusion of a “Hot Works” exclusions as a standard in liability policies regardless of the occupation.

Before I go into the issues I start with what I mean by “Hot Works”. Hot work is any process that can be a source of ignition when flammable material is present or can be a fire hazard regardless of the presence of flammable material in the workplace or home. Common hot work processes are welding, soldering, cutting and brazing. When flammable or combustible materials are present processes such as grinding and drilling become hot work processes.

From the point of view of an small or medium sized business, doing business in Australia today is much more complicated than it was even a few years ago. The regulations continue to change as do Australian Standards.

Typically a breach of a regulation will lead to some sort of penalty.

When it comes to Australian Standards or International Standards they can be used to test whether or not an building or other product or service has been supplied or carried out to a satisfactory level and a breach, if it leads to personal injury,  loss or damage may give rise to a recovery action from a third party. In the vast majority of cases, deliberate acts or understanding the risk and ignoring that risk, ie failing to take reasonable care being the obvious exceptions, most insurance policies are there to protect the Insured from a failure to comply.

Can you image for a moment all the standards that can and do apply to a business operation. I think we can all expect a prudent business owner say in metal fabrication to know the standards surrounding the use of welders, and cutting tools such as grinders. In that case, I have no issue for an insurer to include an endorsement including a warranty or exclusion that requires the work to be done to Australian Standard 1674. I then feel is it is prudent for an insurance broker to bring the exclusion to the Insured’s attention and advise them of the consequences of a breach.

But what about the shop keeper or other occupation that finds that they need to do some maintenance. Say they see a sharp edge on a table and decide to bring their grinder in to make it safe for customers and staff. Is he realistically expected to know.  Add to this the cost. You cannot legally just download the standard for free. The cost is $128.47 at the time of writing.

Should the worst happen and despite what he may think is a safe work practice, the sparks cause a fire and destroy his business assets and that of the landlord. His fire / property policy as they currently stand are unlikely to have any exclusion in respect of the owner’s failure to follow hot works procedures but his liability policy may well have a liability exclusion buried deep in the policy which negates completely the benefit of their liability policy. It is the blanket exclusion written into the policy that I am wishing to bring to the readers attention. I am pleased to say that having this as a standard endorsement is not the norm in the Australian insurance industry based on my check using LMI PolicyComparison.com  If you do not have access to the site and would like to see the entire list please write to hit the contact me button and I will email you the list.

I have learned of two business owners that find themselves in just that position. They have a valid fire and business interruption claim but their liability claim has been denied due to a “hot works” exclusion that they were not aware of in the body of the policy.

A typical exclusion reads something like this:

Excludes flame cutting flame heating arc or gas welding metal grinding or similar operation in which welding metal grinding or cutting equipment is used – except where such use is carried out in strict compliance with all relevant statutes and Australian Standards 1674.1 and 1674.2 or any subsequent amendments.”

The reality is, that the standard referred to is such that very few people comply with it 100% of the time. A lot of people who use grinders would not even know of the existence of the Standard let alone what it states.

There is no doubt that undertaking hot works is dangerous and there have been some very large losses that have arisen when safeguards have been inadequate. Should the risk of this be priced into every non metal working business owners liability policy so as to protect them from an honest mistake. Probably. It is just another example of you typically get what you pay for.

Four lessons I would ask you to take away from this.

  1. Please check to see if the policy you have or you have recommended to your customers has the exclusion.
  2. If it does immediately bring the issue to your client’s attention and stress the need for them to follow the Standard to the letter.
  3. Insurance is complex and potentially full of trips and traps that as in both the cases I am involved in, life changing consequences. Please get expert advice.
  4. Read and understand your policy. If you do not understand something, again seek expert advice.

 

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Why our Industry gets a Bad Name.

travel

This article was passed to me and covers how the insurance industry is featured in the press following the cancellation of a flight, due to a fire on board the inbound aircraft. It is worth a read and will not take long. To do so click here.

While this is an article from the United Kingdom, I am sure that if the same thing happened in our part of the world the same sort of thing would occur.

As I have repeatedly said, while the public focus on price when they go to purchase insurance, reinforced by so many advertisements on insurance stressing it is all about price, the quality of the coverage and the claims service are so very important.

I think the ones that get to me the most is when the same insurer takes a different approach to the same claim. We saw this so often in the Christchurch earthquake claims.

It is for this reason that I developed and launched LMI ClaimsComparison.com. Next month when the 30th June silly season is over, I will be sending out a survey to see how brokers rate the various insurers in all the product classes compared in LMI PolicyComparison.com  I am really looking forward to seeing the results and sharing them.

Thanks to Adam Matteson from Arch Underwriting at Lloyd’s for sharing.

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Some things do surprise – 115 changes on BIcalculators!

BIcalculatorWith year end approaching I was running through some of the statistics of usage and the like of the various LMI eServices.  #businessinterruption #bi #insurance

Some of the numbers surprise me such as:

  • 1,800 policies reviewed and new comparisons completed for use by subscribers
  • 400,000 comparisons completed by subscribers
  • 3,000 current policy comparisons available at any one time

But the one that really stood out to me was that we had to make 115 changes to our Business Interruption calculators on LMI BIcalculator.com due to changes in policy wordings. Some are only minor but others were major. For example, one insurer changed their wording 3 times in 6 weeks.

The good thing for the users of the service is that as soon as LMI PolicyComparison are advised of a new business pack or stand-alone BI wording, then it goes to Steve Manning as the Product Manager and he and or Angus Stewart review the wording and make any changes necessary to the calculator. This way a broker or Insured is assured of calculating the sum insured or declared value in accordance with the policy wording.

One of the reasons for the change is that 5 insurers have agreed to waive co-insurance if LMI BIcalculator is used. The only change to the system is that the revenue figures used must be drawn from the client’s BAS statement.

These are just the changes to the calculator. The entire BI explained and training modules (Coach’s comments) have been reviewed and revamped as well.

I am proud that the take up of business interruption has increased since the introduction of BIcalculator, with longer Indemnity Periods and more additional benefits sold. It is for this reason, coupled with the insurers desire to see more businesses fully protected that so many insurers are now waiving co-insurance where BIcalculator is used.

Without wishing for a minute to tempt fate, it is still true that no broker has successfully been sued for professional negligence in arranging business interruption insurance where they have used BIcalculator.com.

 

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Introducing New LMI Team Members

I am pleased to announce that two new team members have joined LMI in Australia.

Russ Nicholas - State Manager LMI Queensland

Russ Nicholas – State Manager LMI Queensland

The first is  Russ Nicholas as the new State Manager of  Queensland. Russ is a qualified electrical engineer and experienced loss adjuster with over 30 years experience. I have known Russ for over 35 years and am pleased that he has joined me at LMI.

Fabio Trisera also joins LMI today as our latest developer in our IT department. Fabio’s first assignment is to undertake a complete rewrite of our Business Continuity Management Planning System (ContinuityCoach.com), as we wish to strengthen the risk management module of the program.

LMI continues to invest in our business to deliver the highest quality services both in consulting and on line.

 

 

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Government Committed to Fund Engineering Assessments of NQ Strata Title Properties

Rezoning can create Extra Costs of Reinstatement Issues

Rezoning can create Extra Costs of Reinstatement Issues

The following is an extract from the 2014 /2015 Federal Government Budget papers. (#nthqueensland #strata #insurance)

“The Government will provide up to $12.5 million over three years from 2014-15 to the Queensland Government, to provide grants to bodies corporate to undertake engineering assessments of strata title properties in North Queensland. The assessments are to identify risks that can be mitigated.

“The assessments will provide better information to insurers, which will enable them to set premiums that more accurately reflect individual property risks. The assessments will also help residents of strata title properties to be fully aware of the risks to their properties from natural disasters. This will provide bodies corporate with an opportunity to take necessary action to mitigate those risks and reduce their risk assessment by insurers, and ultimately reduce insurance premiums in some cases.

“The costs associated with this measure and the related expense measure titled Addressing Insurance Costs in North Queensland — establishment of an insurance comparison website, will be offset by savings of $72.2 million over two years from 2013-14 from the cessation of the National Insurance Affordability Initiative.

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Second Report by Australian Government Actuary on Strata Pricing in North Queensland

strata report 2

On 19th May, I mentioned that the Australian Government Actuary had released a report into the cost of strata insurance in North Queensland. http://www.allanmanning.com/report-into-strata-pricing/

Today I learned that a second report has now been issued. Quoting from the Executive Summary, the Government Actuary states:

“This current study has confirmed my earlier findings that the steep premium increases experienced in NQ, particularly over the few years leading up to 2011-12, were a result of:

  • historical under-pricing;
  • increases in the cost of reinsurance and a shift towards a more risk-based
  • allocation of the cost of reinsurance; and
  • losses caused by a number of natural disasters which highlighted both the extent of the under-pricing issue and the challenges associated with an accumulation of risk that a strata insurance portfolio in a weather-exposed region entails.

“The inclusion of 2005-06 in the investigation period for this expanded study meant that the claims experience associated with Cyclone Larry was captured in the data.

This additional experience provided further evidence that historical premium rates were simply too low for the risk that was being carried. As well, one NQ insurer was able to provide more complete NQ experience data for this investigation than for the
2012 investigation. This additional data again highlighted the accumulation risk associated with a residential strata portfolio in a weather-exposed region.

“Comparison of prices across Northern Australia and other centres  I have found that prices being charged in east coast centres (Brisbane/Gold Coast, Sydney, Melbourne and Adelaide) are much lower than NQ prices.

“According to the data provided to me, premium rates in these other east coast centres in 2012-13 were, on average, around 20 per cent of NQ premium rates.

“The volume of residential strata business in Darwin is smaller than in NQ and so some care is needed in interpreting the data. Nonetheless, prices being charged in Darwin appear to be significantly lower than in NQ (on average, around 40 per cent
of NQ rates).

“A very limited volume of pricing data was provided in relation to north-west Western Australia. This data suggested that prices being charged in that region are broadly comparable with those being charged in NQ.

“Reasonableness of price variations between NQ and other east coast centres (Brisbane/Gold Coast, Sydney, Melbourne and Adelaide)

“Claims costs in NQ were both higher and more volatile than those in other east coast centres during the 8 year period of the investigation. These other centres are not exposed to cyclone risk in the same way as NQ. Thus, the actual claims experience data provides evidence of a substantial difference in insurance risk between NQ and these other east coast centres.

“This difference explains most of the price variation but in my view there is a reasonable likelihood that a small part of the difference can be attributed to the presence of competitive pricing pressure in east coast centres and the absence of competitive pricing pressure in NQ.

Anyone with an interest in the subject is encouraged to read the full report. A copy can be downloaded from here.

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Storm Surge – How big can they get in Australia?

Storm Surge – How big can they get in Australia?

LAVALLETTE, NJ - JAN 13: The remnants of homes destroyed after HThis was a question that came up during a training session I was delivering earlier this week.

Before I go into the large ones to hit Australia, I would start with a brief explanation as to what constitutes a storm surge. The term “storm surge” may be defined in a policy, say, as part of a policy exclusion.  An example is:

Excludes actions or movements of the sea including rises in the level of the ocean or sea sea waves high tides king tides or storm surge except for storm surge which occurs at the same time as a storm”

Please note the the wordings do very between insurers. In ordinary, non scientific definitions, it refers to the rise of water associated with the storm, plus tide, wave run-up, and freshwater flooding. 

The largest storm surge I have heard of accompanied Cyclone Mahina, which struck Bathurst Bay, near Cape Melville in North Queensland on 4 March 1899, killing over 400 people. The cyclone and storm surge caused the largest death toll of any natural disaster in Australian history.

A Constable Kenny reported that a 48 ft (14.6 m) storm surge swept over their camp at Barrow Point atop a 12 m (40 ft) high ridge and reached 3 miles (5 km) inland, the largest storm surge ever recorded. However, scientists Nott and Hayne have recently reviewed the evidence for this and on their model it should only have been 2 to 3m high. They also surveyed the area looking for wave cut scarps and deposits characteristic of storm events but found none higher than 5 m. Of the 48 ft surge they suggest the ground level cited may not be correct, or that terrestrial flooding was also involved.

During Cyclone Yasi, a storm surge estimated to have reached 7 m (23 ft) destroyed several structures along the coast and pushed up to 300 m (980 ft) inland.

The worst affected areas were around Tully, Tully Heads, Silkwood, Mission Beach, Innisfail and Caldwell.

Western Australia had a storm surge that caused wide spread damage at Koombana Inlet near  Bunbury in 2012, despite a barrier being installed some years earlier.

I attended the loss of property following a storm surge in Home Hill in far North Queensland that destroyed ten or more sea side cottages during Cyclone Aivu in April  1989. None of the policies had cover for storm surge. An eye witnesses I spoke to advised that the sea was sucked out by the pressure and wind accompanying the Cyclone for up to 2 kms and then, when the Cyclone passed over a wall of water, it came rushing back in about 3 m (10 ft) high. The damage was devastating and the lightly constructed homes/huts were completely destroyed.

A storm surge is not just a sub-tropical phenomenon; occurrences associated with high winds have been recorded in southern coastal areas of the Australian mainland.

Storm surge is risk that should not be ignored. While not all insurers offer the cover, some underwriters do. Do not forget to use www.policycomparison.com as a quick check for what cover is offered under what policy.

 

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Those Chilling Words: “if only” #businessinterruption #insurance #lmigroup

Risk Management.It always gives me great pleasure when I hear a story that one of the research or comparison services that LMI have developed have won an account or proved to have provided the right advice when it was tested at claims time.

On the other hand, it fills me with a combination of disbelief and remorse when it could have averted a major problem, but was not used even though they had access to the service.

Recently, it has been reported to me that a broker doubled the Indemnity Period for a client. Looking at this in isolation, this is a good thing for we find at LMI that far too often the Indemnity Period is not long enough in the event of a major claim. The problem here was that the broker, as it was reported to me, failed to double the Declared Value/Sum Insured. As such, the client found they were significantly under insured (50%) and, as such, instead of thanking their broker for the right advice, sued their broker.

The matter has since been resolved, but it meant a significant payout by the broker’s Professional Indemnity Insurer. This could have been avoided if only the broker had either run the calculation through BIcalculator, or had the client input the data. The system does all the calculations automatically once the simple smart form has been completed. A process that takes less than 5 minutes could have saved literally a million dollar plus payout.

Last month marked the 7th year anniversary of BIcalculator and with 10’s of thousands of calculations done on the site, not one broker has been successfully sued who has used the site. It has, in fact, protected them in twelve documented cases against brokers.

Seeing the benefit to all concern, several insurers have started to waive co-insurance where  BIcalculator has been used and a copy of the calculation sheet generated on the site retained on the broker’s file. Talk about a great risk management measure. Use the site and greatly reduce the risk in more ways than one and you will avoid being caught with a similar trap.

Those that provide this benefit will be shown shortly as a new feature on PolicyComparison.com

If you have any good news stories from using any of the LMI eServices please let me know.

 

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Is the Queensland Government’s $51 Million on Flood Relief too Little?

Flood WarningWhile it is pleasing that some funds have been ear marked for flood mitigation, I question just how far such a relatively small amount for such a big problem will go.

My greatest fear is that it will be wasted on consultants doing studies that will be ignored as in the past and not actually fixing the massive problem facing the state.

If you think I am being unfair, if we take Gympie as an example, after the 2011 floods the only money spent, and it was a minuscule amount, was for such a study. It was only when the city was flooded again in 2013 that any remedial works were finally commissioned.

Governments at all levels ignore risk management and flood mitigation at their peril. To keep ignoring it means that they continue to set up the people of their state or local authority to fail when the next flood occurs.

In the US, I read with interest that Zurich, whose North American Head Office is just outside Chicago, has launched legal proceedings against twelve local authorities for ignoring climate change. It will continue to read this story with interest and post comments along the way.

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ACT Government to be Congratulated #insurancetaxes #insurance

http://www.dreamstime.com/-image8155938I join the Insurance Council of Australia and others in congratulating the ACT Government in honouring their commitment to remove stamp duty on general insurance. In the current budget, see budget paper 2, page 8, Stamp Duty will be cut by one-third this year, and be abolished by 1 July 2016.

Thank you Jan [InsuranceNEWS] for sharing the document with me.

I continue to hope, forlornly it appears, that other states like Queensland who have seen massive increases in some classes of Property insurance would do their part in making insurance more affordable and thereby help the economy and the people they are entrusted to protect.

Even more so, the neighbouring state of New South Wales could learn a huge lesson. Not only will it be better to own a home or operate a business in the ACT than New South Wales when it comes to Stamp Duty on general insurance, ACT residents also avoid Fire Service Levy on their insurance, which has a triple tax effect when you factor in both GST and Stamp Duty – both of which are imposed on top of the insurance premium and Fire Service Levy.

When I see this nonsense continue and the raft of different laws around Australia, I really think it is time to consider abolishing the state governments completely as they make it increasingly difficult to do business by adding unnecessary complexity and cost.

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