Blog question on Severance Pay

http://www.dreamstime.com/-image11846895The question put was:

In reference to Business Interruption, if the client has not declared any severance pay ( at this point) however insures wages, is there flexibility to utilise/ apportion severance pay in reference to Business Interruption?

Geraldo [surname and email provided]

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My colleague Carl Greenhalgh from our Brisbane office answered the question in the first instance and I thank him.

Dear Geraldo,

The short answer is Yes but!

The cover afforded by Severance Pay can be utilised only for that purpose. As such it is not necessarily an essential cover. There are exceptions to this where there are union or other employment agreements in place that require extraordinary termination payouts and also where redundancy payouts are considerable.

However, Pay-Roll Cover, or Gross Profit Cover (if Payroll is insured at 100%) provides much broader cover that can also be utilised to cover the costs of terminating staff.

Following a loss an Insured is entitled to pay to retain their staff. However, if there is a cost benefit to Insurers to dismiss staff, then there is certainly an opportunity to claim this cost.

An example might be:

  • There has been a substantial loss resulting in the closure of the business for 6 months
  • The Insured’s Pay-Roll is insured 100% within their GP
  • Turnover $100,000 per month
  • Rate of Gross Profit is 60% of which Pay-Roll makes up 50% of their expenses
    • Gross Profit $60,000/month ($100,000 x 60%)
    • Payroll $30,000/month  ($60,000 x 50%)

With a 6 month closure Insurer’s liability in regard to the payment of Payroll would be $180,000 ($30,000 x 6)

Say after the first month the Insured decides to terminate their staff

Potential Total Payroll Claim        $180,000

Actual Payroll Claim

  • Payroll – 1 month             $   30,000
  • 2 weeks’ notice                $  15,000
  • Redundancies                   $  60,000

Claim                                                     $105,000

Savings to Insurer    $75,000 ($180,000 potential claim less actual pay-roll claim $105,000).

In this example it can be substantiated that there is a saving to Insurer’s and as such there is no reason why an Insured cannot be submit a claim in this manner.

The only benefit Severance Pay would have in this scenario would be if the Insured had a very long tenured workforce and as such the redundancy payout ended up resulting in no savings. They would then claim the additional amount under the separate Severance Pay cover.

Just to qualify, an Insured cannot claim accrued benefits such as holiday pay, sick pay or long service leave as these expenses have been accrued before the termination of employment.

Now for the but. Severance pay is of use where the Indemnity is short, and or the staff are very long term ones as the severance pay is based on years of service.

The last point I would make is that severance pay only covers the wages in lieu of notice and not the already accrued such as long service leave, holiday pay and where contracted unused sick leave.

I hope this explains the position.

Regards

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What one client thinks of his underwriting agency and the insurer behind them

Policy Violation road construction barrier sign warning rule regEarlier this week I suggested that the time had come for those handling claims needed to be regulated to ensure that adequate training was being given so that the insuring public were being treated fairly by the industry when they needed the protection of their policy most.

For the past 3 weeks I have been travelling around Australia delivering sessions which looks at emerging technologies and the threats I see facing the industry. I have been overwhelmed at story after story by brokers frustrated to the hilt who are fighting for fair treatment of valid claims.

Let me share just 2 with you and a general observation. The first involves roof damage 8 stories up. The cost of repairs was $80,000 to meet the manufactures specification of the module roof construction. The Insured came up with an alternate solution of leaving the damage as was and just covering the entire strip with a flashing which would be screwed to the building and just beyond the damaged section of roof. The cost $7,500 and the saving therefore $72,500. Rather than be delighted with the result the adjuster said that the installation of the flashing was betterment and refused to pay anything. This is clearly not betterment but a clever way to safely and far less expensively repair storm damage.

The Insured could have insisted on the original repair but walked away from the claim, fixed it himself and changed insurer on renewal. The broker was lucky to retain the significant account. The client will never insure with that insurer again and the broker is loath to use the insurer either. The ongoing loss to the insurer is hundreds of times greater than the amount that claims officer and adjuster think, and probably congratulate themselves on, in saving.

insurer sharksIn another, the Insured is sending out the following image warning people of dealing with his insurer(s). This involves fixtures and fittings fitted by the tenant which the Insurer is saying the landlord has no insurable interest in despite their website saying the exact opposite.

The general observation  is that a number of clients that have a small business interruption claims and have been put through the wringer with the usual standard over the top document list and when this information is provided another even longer list of questions and documents is received. They tend to give up, feel business interruption is a waste of money as it does not respond when it is needed and refuse to take it out on renewal.

Not only is this lost premium to the insurers but reduces the protection afforded the Insured. Urrr!

We have to remember that a customer who has a bad experience tells 10 times as many people as someone who has a good experience.

All of this is reflecting extremely badly on our industry. Of course this is not just me. The study by Queensland University of Technology that I covered earlier in the year saying that the claim process was more stressful than living through the floods is a sad indictment on our profession and is leading to the lowering of the trust the public has in brand insurance.

Bring on the regulation with penalties for those that do not honour valid claims as they should.

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Insuring Trusts

Turn Knowledge into PowerFollowing on this week’s theme for the blog of who to name on the policy, I focus today on trusts. I do this before I tackle liability and financial lines policies where trusts are common place.  The important issue to remember is that a trust is not a separate legal entity, it is a relationship where the trustee is under a legal obligation to administer trust property for the benefit of the beneficiaries or for a specific purpose.

Any dealings and litigation are brought by and against trustees in their representative capacity on behalf of the trust. I have seen many cases where say a trustee company is named as the Insured but the Insurer has refused to accept that this brings in the trust as the trustee company also does other functions and the fact that it is a trustee has not been listed as an occupation.

For this reason, I would suggest that you name the trustee company as one insured and then the same entity a second time but adding the words “as trustee of the [insert trust name in full] trust.

Finally include trustee as one of the occupations.

 

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Writing for China Daily

asia magI was recently interviewed by China Daily Asia Weekly, a weekly supplement of the China Daily newspaper on the subject of insurance in developing economies including the opportunities for insurers.

I always prefer to have a final proof read of what they are going to publish and while I did not have the opportunity on this occasion most of what I wanted to get across was included.

2-20150911-007 2-20150911-006 2-20150911-005 2-20150911-001

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Naming the Insured – Business Interruption policies

bigstock-Business-Interruption-Sign-39078256Today’s post is an extension of yesterday’s on the importance of naming all the insured entities to be protected by the policy on the Schedule.

When it comes to business interruption insurance,  which is the focus of today’s post, two things come to mind when it comes to ensuring that all the legal entities are listed as named insureds.

The first is that when it comes to a group of companies it is important that all the revenue and expenses of all the entities that are to be included are included and that the entities involved are then named on the schedule. Many times in claims I have seen a group say XYZ Group Pty Ltd as the named insured and the revenue of say three subsidiaries are included in the calculation of the Sum Insured / Declared Value but when I did my review I found that the group had many more revenue generating companies in the group.

Where it is a business pack those unnamed entities will, under many such policies, simply not be covered.

It is different under and Industrial Special Risks (“ISR”)  policy where as I explained yesterday if any named insured has more than 50% of the voting rights in another entity then that subsidiary is automatically insured.

As co-insurance is tested across the group as a whole for business interruption. This is different to the property /material damage section of the ISR where the test is at the situation. As such to miss the insurable gross profit of even one subsidiary can cause a reduction in a valid claim due to under insurance.

The second issue centres around loss of rent where one member of the group owns the building(s) and another entity is an operating company and is a tenant.

As I have often explained in previous posts, it is important to insure rent as an Insured Standing Charge. If you have missed these articles and want more on this topic please visit BIcalculator.com under the heading: How  should I Insured for Loss of Rent?

The point that I wish to reinforce here is that the operating company should have rent insured. This is done under the Difference Method used by most Business Packs and ISR policies by not showing rent as an Uninsured Working Expense.

The bit that is often missed is that in the event of damage that makes the building untentanable, the tenant operation moves out and uses their insurance and ongoing sales to fund paying an alternative landlord for fresh premises.

But where does this leave the entity that owns the building. They no longer are earning rent and may well have finance arrangements in place. As such loss of rent ought to be seperately insured under the group program for this entity as well. This in effect means that rent is insured twice. Once by the tenant entity and once by the landlord entity. This way all members of the Group are protected.

This is the same situation if the landlord and tenant are unrelated parties. Just because they are related does not change the situation when it comes to rent insurance.

With the landlord, remember to include the outgoings paid by the tenant to fully protect the landlord entity. Again this is the same whether the entities are related or  not.

ebook BIIf you wish to learn more about business interruption please have a look at the free eBook Mannings Guide to Interruption Insurance

That is it for today. I will come back tomorrow and look at liability /financial lines products and at the request of readers I will come back and look at trusts and innocent insured’s later in the week. Thanks to those that have written on this topic. Clearly the posts are timely.

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Is it time for those that handle insurance claims to be regulated?

I chose this image on purpose as the old logo of the Chartered Institute of Loss Adjusters was the scales which was to show they were impartial. In far too many cases this is no longer the case.

I chose this image on purpose as the old logo of the Chartered Institute of Loss Adjusters was the scales which was to show they were impartial. In far too many cases this is no longer the case.

Yesterday The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Bill 2015 was passed through parliament.

The Bill, which at the time of writing has not received Royal Assent (the signature of the Governor General), will extend the unfair terms protections for consumers in the Competition and Consumer Act 2010 and Australian Securities and Investments Commission Act 2001 to those businesses with less than 20 employees.

This I think most of us would see this is a good thing as some large firms do use their power to force the smaller party to accept unfair contract terms. The protections relate to the terms of standard form contracts valued at less than a prescribed threshold.

As we see more and more of this behaviour creep into insurance claims in this soft market I have been asked several times over the past 24 hours as to whether this legislation will effect insurance claims.

Disappointingly, it appears not as Section 15 of the Insurance Contracts Act of 1984 states:

 

INSURANCE CONTRACTS ACT 1984 – SECT 15

Certain other laws not to apply

             (1)  A contract of insurance is not capable of being made the subject of relief under:

                     (a)  any other Act; or

                     (b)  a State Act; or

                     (c)  an Act or Ordinance of a Territory.

             (2)  Relief to which subsection (1) applies means relief in the form of:

                     (a)  the judicial review of a contract on the ground that it is harsh, oppressive, unconscionable, unjust, unfair or inequitable; or

                     (b)  relief for insureds from the consequences in law of making a misrepresentation;

but does not include relief in the form of compensatory damages.

The concern as to the way some clients are being treated is real and is of increasing concern to many of us within the industry, not to mention the insured’s themselves.

How can it be that brokers and other advisers who arrange the insurance need to have a certain level of education and are subject to regulation when anyone with absolutely no experience or insurance qualifications can make decisions on claims and can adversely effect home and business owners with life changing consequences.

As the Financial Conduct Authority [“FCA”] (United Kingdom) stated, correctly in my mind, that claims are generally
considered to be the moment of truth for the policyholder.

The FCA found that many of those surveyed felt their claims had been delayed and unfairly handled. In my own study 1 in 4 respondents felt that loss adjusters withheld payment to force them into a lower settlement.

This is a very real concern that I share and I have come to conclusion that the way we are handling claims is broken and the customers need more help and their needs to be harsher penalties for those that unfairly delay or refuse to pay valid claims. The start is to have regulation to control who handles claims and ensure they have training on ethics and policy coverage.

 

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Blog Question on naming the legal entities on an insurance policy

Vector Chart on Whiteboard with Marker PenI start with an apology to readers as I have been on the road speaking at conferences, PD days and seminars back to back for well over a month and on top of my normal workload the blog has come off third best.

The questions have continued to come in but my colleagues have been helping out and writing direct answering the question.

Even though I am still travelling and will be doing so till early December, I am getting back on top of things and so I am keen to get the blog ramped up again. I start with a question that came in last week and that Steve Manning and Max Salveson replied to. Thanks guys.

The question centred around the need to name all the legal entities on an insurance program. I now reproduce their answer along with a few comments of my own.

An insured can be an individual, a group of individuals seperately named or a corporation. A corporation is a company (in Australia a Priority Limited [private company] or Limited [pubic] company  or group of companies authorized to act as a single entity and recognized as such in law.

I do not intend going into every type of structure in this blog and will cover off trusts in a future post but I do want to stress that a trading name is not a legal entity and as such should not be shown as a named insured in its own right. For example,  if John Smith is trading as Smiths Cleaning it should be recorded on the policy schedule as John Smith trading as Smiths Cleaning. It is common practice for “trading as” to be shortened to “t/a” although I personally believe that it is far better to spell out all words rather than use abbreviations. i have seen abbreviations be misconstrued and cause far too many disputes.

Today I will address property policies and cover off on business interruption and liability policies later this week.

With property insurance, every person or party (Company) with an interest in the property and the insurance needs to be named in the policy as the named insured otherwise their interest will not be covered except one or two exceptions, the Australian Industrial Special Risks {“ISR”} Policy being a case in point. I will come back to that shortly.

Many businesses  have the operating entity and the ownership of the building in different names.  This is for risk management reasons in the management of assets and also because it makes sound financial sense to buy the building through the Super Fund or a separate Trust where what’s left of the rent after expenses becomes income for the Super Fund or Trust or whatever entity owns the building.

The corporate tree of even relatively small businesses can be quite complex and I find that many owners do not understand their own ownership structure and I therefore recommend that a copy of the corporate tree be reviewed to ensure that all entities are are listed on the policy as they ought to be.

I will cover off the rent issue in this situation tomorrow under the heading of business interruption.

Turning back to an Australian ISR I recommend adding the following wording after the list of identified entities to be insured under the policy.

and

  • subsidiary companies, organisations and other associated companies as defined under Section 50AAA of the Corporations Act 2001 (Commonwealth), and
  • social and sports clubs (including the committees and officers from time to time of unincorporated bodies)and the trustees of the Insured’s superannuation and pension funds and welfare organisations, and
  • all organisations and other entities to whom (whether mortgagees, lessors, joint ventures or other parties with a legal or equitable interest in the Property Insured) the named Insured has a responsibility to maintain insurance;

all for their respective interests, rights and liabilities and to the extent that they are not more specifically insured, but excluding.”

 The ISR automatically picked up any entity that any of the named insureds have more than 50% of the voting rights in. Despite this broad protection, I nevertheless recommend that all the entities are identified and named.

Because of this automatic inclusion of subsidiary companies, there can be an occasion where a separate ISR policy is arranged for one of the entities say due to it having a much higher risk profile which would drive the rate up for the balance of the program. In such a case, the legal entity which has its own program should be named at the end of the above wording after the words: ‘but excluding”. This avoids possible double insurance or co-insurance issues with the primary policy.

If there are no legal entities to be excluded then I recommend either deleting the words: “but excluding” or adding the word “nil” after “but excluding.

One of the benefits of the ISR policy is that the policy has a Waiver of Subrogation clause in both the Advisory and Modified versions. This reads:

“SUBROGATION WAIVER

The Insurer(s) agree (s) to waive any rights and remedies or relief to which it / they may become entitled by subrogation against;

(a)       any corporation or organisation (including its directors, officers, employees or servants) owned or controlled by any Insured named herein or any co-owner of the property insured hereunder.

(b)       any Insured named or described by this Policy (including its directors, officers, employees or servants).”

The last point I would make on the ISR wording is that while it covers subsidiary companies named in the schedule, it does not cover sister or parent companies unless they are named.

Clearly this is a complex issue and it is just one part of getting the insurance program correct. It is for this reason that I continue to urge business owners to seek the advice of a experienced and qualified insurance broker.

I will continue this topic in tomorrow’s post.

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Tianjin Explosion – initial report

Source: BBC News

Source: BBC News

The explosions at Tainjin in China is the largest man made catastrophe loss in many years. The estimate of insured losses continues to grow and at last account was in excess of USD3.3 billion.

Putting aside the terrible loss of life and injuries caused by the explosions, the event once again highlights two issues, accumulation risk and supply chain risk.

Aon Benfield have published an initial report on the losses which continue to grow but while the numbers may have been superseded the report does highlight the issues. I attach a copy for those interested.Event Report – Tianjin Explosion (FINAL 20150819)

Another issue not really addressed in the report is the removal of debris. The costs if done correctly /safely will be enormous.

All these issues arise, albeit it in a much smaller way in most large fire losses and should be kept firmly in mind when an insurance program is put together or reviewed.

However, as businesses import and export more, the supply chain risk needs special attention. For example, while many ISR policies are endorsed to include port blockage coverage, the standard endorsement only covers the local port and not overseas ones. The importance of a quality marine insurance program with an insurer you know and trust and importantly  has also been highlighted with this event.

 

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