“The Conversation” Article on G20 & Terrorism

conversationThe popular website The Conversation approached me to write an article on the insurance risks around Brisbane hosting the G20 summit. The article was published yesterday and I reproduce here for your convenience. To view the actual published piece please click here.

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When the G20/G8 summits moved on from Toronto in 2010, they left an US$11 million bill in business compensation claims. Brisbane will host the G20 Summit over the weekend of 15th and 16th November 2014. To minimise the effect of preparations on CBD businesses, Friday 14 November has been declared a public holiday for people working in the Brisbane local government area.

A major rally is being planned for Saturday 15th at 11am starting at Emma Miller Place (Roma St) and subsequently march past the G20 summit to Musgrave Park. Other protests may occur as well.

With so many international leaders attending so soon after the decision of many governments to take military action in Iraq against ISIS also has the potential for some political protest of some sort.

All of this creates an increased risk for residents and business owners.

Starting with the public holiday. This will result in a loss of productivity for businesses effected. Should there be a loss of turnover and or profit as a result this loss is not insurable. It is deemed to be a political and or business risk and something no designed for insurance to cover. Similarly, any business disrupted by protestors simply marching by will not be covered for the same reason.

Should any demonstration turn violent then insurance is likely to be there for those with insurance in place. Losses in Australia as a result of riot and civil commotion and or terrorism changed significantly following the attack on the World Trade Centre in 2001.

The current position is that there is not an industry standard exclusion for terrorism, but most are very broad in their application. This means that as the demonstrations around the G20 would be regarded as political the exclusion would apply. Having said that this, with commercial premises, Insured’s pay a terrorism levy that goes to fund a Federal Government Terrorism Pool (the “Pool”), which is designed to provide cover.

In cases where the Federal Government (there is a specific process to be followed) declares an event an act of terrorism, claims for property damage and business interruption losses would be met via a business’s insurance policy. Any claim would be subject to the terms; conditions, sums insured; limits and sub-limits of liability that the policy contains just like say a fire claim. Where the loss is in excess of the insurers retention under the Pool arrangement that is $100,000, the Pool would pay the balance via your insurer.

If a business was not insured then they would not have access to the Pool. Like any other event they would be treated as uninsured.

With home and contents insurance the insurance industry carries the risk. As with business insurance, to be protected the owner of the home or contents has to have a current insurance policy at the time of the loss or damage with the maximum amount payable being the sum insured.

Large Commercial Strata needs special attention. With commercial strata, the insurance that is arranged attracts a terrorism levy, and it works the same as other commercial insurance. With residential strata, the policies typically provide terrorism cover underwritten by the insurer issuing the policy, but not always. Even then, there is no standard cover where the sum insured on the complex is $50 million or more. In such cases special standalone terrorism insurance is required.

If you are in any doubt about your own insurance arrangements you should speak with your insurance broker/adviser before the G20 starts.

The whole issue is difficult in that it can all be bound up in politics. There can be a disconnect between the wording of the exclusion and any government’s willingness to declare an event as an act of terrorism is complicated. Some are of the opinion a government will not rush in to a declaration for a couple of reasons. The first is that it could damage (further damage) tourism to this country that such an event would cause.

Secondly, the Federal Government is taking out a significant amount of dividends from the Pool (a hidden tax on insurance) and this “dividend” may have to be reduced if the pool was seriously eroded by claim payments. For example, when the Cronulla Riots occurred in 2005, this would have fallen under most terrorism exclusions but the government did not declare it as an act of terrorism and so insurers met the losses, (material damage and business interruption) as occurring as a result of the insured peril: riot.

At the end of the day, an insured, other than very high value residential strata which needs special attention, should be covered for damage and disruption caused by riot or an act of terrorism during the G20 summit if they have insurance in place. However they will not be covered for closure or disruption due to the hosting of the event itself

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ABC Radio Interviews Today and Tomorrow

ABC RadioABC Radioabc radio jpegI have been asked to present my opinion on the topic of Community vs Risk Rating on Flood during an interview tomorrow morning, Friday 31 October, on the ABC Breakfast Show in the Northern Territory. The issue is top of mind due to the potential sale of the Territory Insurance Office (‘TIO’).

Below is a list of times relative to each timezone if you would like to tune in:

  • 10.00 am (Melbourne Time)
  • 8.30 am (NT Darwin Time)
  • 5.15 am (Queensland Time)

This afternoon ABC Drive is also scheduled to interview me in Brisbane on insurable risks around the G20 summit. I will post an article tomorrow on this subject.

As an aside, this post marks a milestone, it is 600 article posted to this blog. Thanks for your support.

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New eBook on Cyber Insurance now Available

cyber with pages #2With cyber security and insurance of such interest, Steve Manning and I have carried out research into the subject and share our findings in a new eBook that is available at no cost from today.  Please click here to view your copy.

As with our other eBook titles, it is available in hard copy as well, although there is a fee for this to cover the cost of printing. Either version of the book can be co-badged with your company’s logo and details on the cover and (where appropriate) within the book itself.

The book is the third way in which that LMI has been working on to assist the industry and the wider business community  to understand the risks of cyberspace and the coverage now available. LMI also have Cyber Insurance comparisons that are now available on LMI PolicyComparison.com to subscribers and Cyber Risk has been added to LMI RiskCoach as the 12th class of insurance risk analysed for over 4,000 industries.

With the recent criticism of the insurance industry in the personal lines area, coupled with the announcement of a Federal Government-run comparison website for north Queensland insurance, Steve and I have already started work on a Guide to Home and Contents Insurance to explain the various areas of coverage and the trips and traps that can arise in the various policies and what to look rather than just the price/premium.

In the meantime, please have a read of this latest guide and please share it with your colleagues and clients if you believe it will be of benefit to them.

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Blog Question on Penalty for Under Insurance

http://www.dreamstime.com/stock-image-best-blog-answer-image14136951Here is today’s question:

Hi Allan

I need your expert opinion on the above subject.

It relates to the Underinsurance Clause in Property policies and how it is applied in a loss (specifically losses above 5% of Total Asset Value).

As an example an insured owns Buildings $5,000,000, Contents $5,000,000 and Stock $1,000,000.

The insured decides he can sustain a loss of any sort to Contents and Stock and only elects to insure Buildings. A fire destroys 50% of total property. The question is 2 fold: • Will the insurer invoke the Under insurance Clause, as all property is not insured?

Or  is insured able to select what components of property they wish to insure (i.e.. noted as “Excluded” in the schedule of Total Asset Values) and not have these used in the calculation of a loss? My experience is the insured would be well under insured (in the above scenario) and the insurer would have the right to invoke the under insurance clause; however I’m told the insured can select what property they want to cover.

I look forward to hearing from you and any issues please let me know.

Kind Regards

Anthony [surname and email provided]

I replied:

What you have been advised is correct. If it is clearly shown on the Policy Schedule what is and is not covered, then it would not be reasonable for an insurer bring into play the value of any asset that they would never have to pay out a claim on.

With most modern day business packs and the ISR wordings negotiated by international and cluster group brokers, I note your company is a member of a cluster group, the cut of percentage where co-insurance  is tested is now 10%. Having said this you need to check this fo r the policy you are recommending.

The other point I would make is that there is clearly a sizeable risk to the Insured here by self insuring contents, which would include the removal of debris and perils such as theft and water damage!

Allan

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Congratulations to the Winners of the Territory Insurance Awards

TIC award winners

Winners from left to right Candice Lucas, Sarah Kempton, Dale Demarco, Wayne McDonald, Angela Pilcher, Amanda Derrick.

I had the privilege of being one of judges entrusted to chose the most appropriate winner in 6 categories for the inaugural Territory Insurance Awards held in Darwin last Friday evening.

LMI have been a long term supporter of the efforts of the insurance industry in the Northern Territory and the TIO in particular in the continuing professional development of the practitioners in the Northern Territory.

Being primarily a claims services company and with my own background in claims, as soon as I heard that the awards were to take place I pledged our support and LMI sponsored the award for Property Claims Professional.

Back in the role of the judges you hear judges often say that it was a tough job and in this case it certainly was as, in the main, the quality of entries was very high.

My hearty congratulations to the winners of the awards. You all are great ambassadors and role models for the insurance industry.

  • Candice Lucas from Allianz won the Casualty Claims Professional of the Year, sponsored by eReports
  • Sarah Kempton from OAMPS won Broker Professional of the Year, sponsored by TIO
  • Dale Demarco from Lumley won Sales & Underwriting Professional of the Year, sponsored by TIO
  • Wayne McDonald from Claim Central won Property Claims Professional of the Year, sponsored by LMI Group
  • Angela Pilcher from Vocational Management Services won Service Provider Professional of the Year, sponsored by TIO
  • Amanda Derrick from Allianz won Young Insurance Professional of the Year, sponsored by mlcoa.
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Question on Test for Under Insurance on a Business Pack Policy

bigstock-Questions-And-Answers-8042036The question today was:

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Good Morning Allan,

We would appreciate your interpretation as follows.

Refer attached Sunrise schedule with the sum insured & limit of liability clause a [cluster group] BPK wording.

Building Sum Insured/Declared Value (page x)                    $8,440,000

20% Extra Limit of Liability (page x+1)                                     $10,128,000

BPK Extensions of cover – A (page y)               “we do not pay more in the aggregate than the limit of liability shown”

Under-insurance (page y-1)

We are seeking clarification of the following:

Does this increase the Sum Insured/Declared Value by 20% therefore underinsurance applies to $10,128,000?

Does this increase only apply to Extensions of cover – A therefore underinsurance applies to $8,440,000?

We would appreciate your reply at your earliest convenience.

Feel free to call me on the number below if you wish to discuss further.

Kind Regards,

Paul [surname and email provided]

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Hi Paul

The simple answer is that the test for co-insurance is based on the lower figure, the one the client pays the premium on.

The 20% uplift is there to allow coverage for things like Removal of Debris and Extra Costs of Reinstatement and also a modest inflation factor should there be one between the start date of the policy and the date the building is actually reinstated. This figure needs to be higher than the declared value or traditional sum insured due to inflation.

The test for co-insurance is a “day one” test with the Insured expected to get this figure right.

The same goes with the 20% natural disaster uplift that some business pack policies now contain following a submission of a paper by LMI on behalf of your cluster group.  This, again, is the insurance industry showing a social conscience wishing to provide coverage to an insured, knowing that through the pressures of supply and demand the cost of rebuilding does go up after a natural catastrophe event.

With this benefit, the test for co-insurance under the policy you are referring to and most (not all) policies is the start date of the policy and, as such, the uplift is not designed to allow under insurance at the start date.

I hope this explains the situation.

Regards

Allan

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Blog Question: Gross Rentals Where There is no Rent Abatement in the Lease

Review Character Shows Assess Reviewing Evaluate And ReviewsThe question put to me was:

Hi Allan

No need to respond now but if an insured is the landlord and tenant with a lease with no abatement clause do you need to insure Gross Rentals.

Kind regards,

Carl [surname and email provided]

Thanks for your question Carl.

In most cases the short answer is no, but it has to be appreciated that there is always a risk when a landlord is relying on a lease without the protection of the insurance policy. From the landlord’s perspective, there is always a risk that the disruption that causes the premises to become untenable, causes the tenant’s business to fail.

Another risk is if the tenant breaches some policy condition or warranty with the landlord, which would have been covered, had they had their own insurance.

If either of these situations occurs, where does this leave the landlord?

Even if the tenant has signed a personal guarantee, it is not possible to get blood out of a stone and the landlord has no rights to claim direct from the insurer. As soon as the tenant stops actually paying the landlord rent, then this becomes a saving deducted from the end insurance claim. In many policies, the cessation of business or business going into liquidation terminates the Business Interruption claim.

The risk is lower, of course, if the landlord and tenant are, in effect, the same people, just using different legal entities to separate liabilities from assets, or for taxation or other purposes.

What this sort of arrangement means is that if the tenant wished to rent temporary premises elsewhere, then from $1 upwards the rent is an Increase in Cost of Working. To fully protect the policy where the rent does not meet the economic limit test found in the Increase of Cost of Working cover, I would have a good look at what Additional Increase in Cost of Working cover is required.

The final thing I can think of is the outgoings. Is it clear as to who is responsible for them during a period where the building is untenable, due to an insured event?

Being the conservative accountant that I am, if it were my property, i.e. I was the landlord, I would arrange the insurance on both the building and gross rentals (including outgoings) myself and have the tenant pay the premium. That way, I have control over my own destiny and not be dependant on any tenant, no matter how good and financially sound I thought they were.

I hope this helps.

Regards

Allan

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Blog Question on Building Valuations

Claims File Contains Insurance Applications Or PaperworkThis is the second question asked by Peter as part of his email to me where I answered question 1 in yesterday’s post.

My second question is: where there is a major or total loss and the underwriter obtains a valuation in respect to the damaged property by a Quantity Valuer or qualified valuer to establish the Reinstatement & Replacement value, what is produced is a valuation based on “book value” [I have some concern that they also include a tolerance factor to avoid any potential PI issues].

The insured’s claim is assessed against this “book value” but we all know that, but the construction work required for repair or reinstatement into the building market, and it would be expected that a more competitive amount for the work to be done, will be obtained – which could positively alter an under-insurance issue for insured. Should we challenge a professional “book” valuation using a market competitive tender basis to establish a replacement/reinstatement cost?    

If the valuation is being obtained just for a test for under insurance and the insured is going to have the repairs done, I always  ask the builders who are quoting it for a indicative reinstatement value as a cross check.

A basis rule is that you do “compare apples with apples”. The test for the cost of repairs / actual reinstatement needs to be done on the same basis as the valuation for the test for under insurance.

Remember with your [cluster group] ISR or business pack you have 20% tolerance (80% co-insurance) which is a pretty big factor anyway, 15% under an standard ISR.

What can cause a problem if the engineers or architects fees are not included in the insured’s own valuation to set the Declared Value (sum insured under a business pack).

Turning back to the quantity surveyor or the valuer appointed after the event. If he or she has included an uplift for inflation for any period beyond the start date of the policy I as a claims preparer or loss adjuster would back that out as the valuation for the purposes of co-insurance is a “day one” (inception date of the policy) test.

(Again this is not universal as some, only a few, business packs test for under insurance on the date of the damage.  As I suggested with GST,[yesterday’s question you can quickly check this on PolicyComparison.com)

I would also back out any allowance for removal of debris or extra costs of reinstatement, council fees etc which are not subject to the co-insurance test.

I hope this adequately explains your questions Peter.

Allan

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Blog question on GST

http://www.dreamstime.com/-image14992208Hi Allan,

I  have 2 questions.

A ISR client has queried whether GST should be included in Gross Rentals – GST is not mentioned anywhere in the ISR policy – and the underwriter involved could not give me an answer!  

Warm regards

Peter [email and surname provided]

The answer is this one is you do NOT include the GST. Under Section 17 of the Goods and Services (a new tax system) Act, insurance payments are exempt from GST. This means that should your client’s premises become unable to be tenanted, and they make an insurance claim, the money received from the insurer should not be treated as rental income but insurance proceeds. The money here is subject to normal income tax rules though.

The same goes with the building. If the Insurer were to reimburse a client for any damage covered by insurance it would be paid net of GST. The Insured claims the GST on their BAS as an input Tax Credit and the insurance monies are again treated for accounting/tax purposes as insurance proceeds. For income tax purposes the revenue is off set by the expense and so is tax neutral.

Please take special note that this applies to standard ISR Policies and good quality business pack policies. There are some policies in the Australian Market where the Insured is required to insure for GST. I feel this is a breach of the principle of utmost good faith as the insurer is asking for the insured to insure something that they will never pay out on.

PolicyComparison.com is a quick way to check if the policy requires the Insured to include GST or not but you are safe with a GST unless it has a special endorsement. I have never seen one.

For home and contents insurance or where the client is not registered for GST you need to include the GST as there is no right for the Insured to a input tax credit. There is for an insurer where they pay the builder or supplier direct.

The tax laws around GST are complex and you need to keep in mind what is GST exempt and what is not.

[While I have also answered via email Peter’s second question I will reproduce the second question and my answer in tomorrow blog post]

I hope this adequately explains your questions Peter.

Regards

Allan

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Looking forward to catching up at the Territory Insurance Conference

tioI have just flown into Darwin for the third Territory Insurance Conference.

TIO have been most generous in their support this important Industry event, which this year  includes an Awards Night to celebrate the great contribution made by many in the local industry.

LMI have supported this well run educational conference, which gets bigger and better each year, from the start, with Steve Manning and I  speaking again this year. Steve on the topic of Risk Management and I on Cyber Insurance. We are just two of many speakers on a wide range of insurance and risk management topics.

While up in Darwin, Steve and I are also conducting 3 business interruption and policy reviews between us of major risks for 2 brokers.

We both look forward to catching up with the friends we have made over the years in the insurance industry in the Northern Territory during the conference.

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