Insurance Bites – a fresh way to explain insurance

insurance bitesWith the marketing emphasis of buying insurance more and more on first of all price and secondly how easy insurance is, my son Steve Manning has embarked on an ambitious campaign to explain the basics and importance of insurance. He has chosen to develop a YouTube channel, LMI, with a series named Insurance Bites to educate the general public in an informative but entertaining way.

He has now filmed and released 10 episodes with very positive reviews, with more to come. One episode is being written, filmed, edited and released per week which despite being a lot on top of his heavy workload is proving doable.

If you have not seen one of them yet please go here for this week’s episode on changes to some motor insurance policies which now include an exclusion where the driver is using a mobile device.

If you have a topic that you would like see covered in the videos please let Steve or I know.

Several brokers and industry associations have arranged for the videos and or my blog posts to be uploaded to their website automatically. The benefit to them is that it keeps their customers up to date and informed and therefore helps as a sales tool, education piece and protector of their professional indemnity program.

Further because their website is being constantly updated on at least a weekly basis it is assisting their website’s ranking by internet search engines. If you are interested in learning more about this for your organisation’s website please let me know by emailing allan.manning@lmigroup.com.

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Solving one problem can create an insurance nightmare

This image is of a spray insulation but it is not the same material as the subject of this post.

I have been working this week with a broker, who has a client located in one of the colder regions of Australia, who arranged and paid to have an insulating foam applied to their iron (sheet metal clad) on steel (steel framed) building.

When the broker saw this during their renewal meeting he immediately advised the Insurer who has advised that they are not prepared to offer renewal.

The material used on this occasion is ICYNENE MD-R-200™ which is is a combustible product and is therefore, consumed by flame, but will not sustain flame upon removal of the flame source. The manufacturer claims it leaves a charred foam residue and it will not melt or drip.

The advertising material states: “ICYNENE MD-R-200™ is subject to all National/State and County (this suggests United States rather than Australian) building codes regarding fire prevention.”

It goes on to say: “requirements for Thermal Barrier and Ignition Barrier coverings must be met as per the applicable building code having jurisdiction.”

The decision by the Insurer has, of course, created a huge problem for the broker and the Insured. How to overcome the problem short of removing the material or installing a sprinkler system is beyond me. Even if they can find an alternative insurer the cost of insurance is likely to be more expensive.

The take-away from this is that before an Insured does any sort of renovation that is more than a replacement like for like, then they ought to discuss it with their insurance broker. An insurance broker is much more than just a seller of insurance, they are a trusted adviser on risk management.

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Blog Question: Increased Cost of Working v Additional Increase in Cost of Working

bigstock-Business-Interruption-Sign-39078256The question that I chose to answer as a post today from the myriad I received leading up to the end of the Financial Year renewal period reads:

Allan,

Is our understanding correct that if a client elects to insure for Additional Increased Cost of Working Only & not cover Loss of Revenue, that a traditional business interruption wording automatically covers both Additional Increase in Cost of Working and Increase in Cost of Working?

We have clients from time to time who do not envisage a loss of revenue if their office premises are damaged or destroyed, but acknowledge that they could have increased operating costs.  The particular client in this instance is a large civil contractor with mobile plant at several sites at any one time.  

In their view damage or destruction at their office, is not going to stop the machines working & therefore generating the same revenue for the organisation. 

I just want to be sure that the item we have insured under the policy labelled Additional Increase in Cost of Working, is also going to cover Increased in Cost of Working & we do not have the insurance carrier and or their loss adjuster splitting straws & paying for Additional Increase in Cost of Working but refusing to pay for the reasonable increased costs = Increased Costs of Working.

I look forward to hearing from you.

Regards

Paul [surname and email provided]

————————————-

Hi Paul,

You are not alone in asking me this question and I would like to have had a dollar for each time it has been asked of me.

The answer is quite simple. No your client will not be caught out. The reason is that the Increase in Cost of Working cover has 5 tests of which 1 is key to this discussion.

If I take the Industrial Special Risks (“ISR”) Policy as an example Increase in Cost of Wording reads at Item 1 (b) under Section 2, Consequential Loss of Profits:

Item 1(b) [Loss of Gross Profit in Respect of an Increase in Cost of Working}.

“The additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in Turnover which, but for that expenditure, would have taken place during the Indemnity Period in consequence of the damage, but not exceeding the sum produced by applying the rate of gross profit to the amount of the reduction thereby avoided.”
[emphasis mine]
The test of interest is known as the Economic Limit Test. In simple terms, it means that an Insured cannot claim more as an Increased Cost of Working item than was saved by way of avoiding a claim for loss of insured Gross Profit.
We test this by comparing the expenditure incurred (say $25,000) to the loss of insured Gross Profit avoided. Where insured Gross Profit, Gross Rentals or Gross Revenue is not Insured then the expenditure fails the test and nothing is able to be claimed as an Increase in Cost of Working.
Any amount not paid as an increased cost of working may be considered under the wider cover of Additional Increased Cost of Working, if this is insured up to the Sub-Limit as recorded on the Policy Schedule.
Most Business Pack policies operate the same way with similar words or words with the same meaning but it is always important to check the actual wording involved.
Additional Increased Cost of Working 
The cover provided by Additional Increased Cost of Working is much broader than that provided by Increase in Cost of Working as is clear from the following definition, which again has been taken from the ISR Mark IV wording.
Item 4 [(Additional) Increased Cost of Working]
 “The insurance under this item is limited to increase in cost of working (not otherwise recoverable hereunder) necessarily and reasonably incurred during the Indemnity Period in consequence of the damage for the purpose of avoiding or diminishing reduction in Turnover and/or resuming and/or maintaining normal business operations and/or services.”
This wider cover allows increased costs that maintain the business or service, but which do not necessarily reduce or avoid a Loss of Turnover during the Indemnity Period.
Further, the Additional Increase in Cost of Working cover is not subject to the Economic Limit Test mentioned above.
By definition, any reasonable (reasonable being one of the 5 tests mentioned earlier) increase in cost of working from $1 up is claimable as an Additional Increase in Cost of Working.
From experience, I and the team at LMIG find this to be a very valuable cover. It allows an insured to make quicker decisions as they do not have to justify expenditure before incurring it. If it is prudent and reasonable then it should be covered by the Policy.
One final benefit is that the Additional Increased Cost of Working cover is not subject to any adjustment for under-insurance. In all policies where you can insure for it, the Sub-Limit or sum insured is a first loss limit. However, it is important that the cover is adequate to allow the businessperson to take all reasonable steps to protect their business during the period of the crisis.

Additional Increased Cost of Working Cover only

As you suggest some Insureds believe that they do not require full business interruption insurance as they will not lose any sales but may incur some additional expenses to maintain sales and customer service. This may be true for some service companies. They claim that they can quickly relocate or have their staff work from home. If this is true then this cover, purchased as a stand alone cover may be appropriate.
We would certainly not recommend this for a manufacturer or retailer. In most cases, it is found that the cover does not adequately indemnify a wholesaler.
If the office or service risk involves specialised equipment such as a dentist, again we would recommend the business take out full business interruption cover.
A word of warning. When it came to major events, such as for example the interruption of a public utility, it may not cause any damage to property but could result in a significant loss of insurable Gross Income as we saw with the Longford Gas Crisis in Victoria,  which cost industry $1,300 million, and the Mercury Power Crisis  in Auckland and countless similar events across Australia and the world, that businesses that thought that they only needed Additional Increased Cost of Working found that they did lose significant revenue and therefore insurable Gross Profit that they did not expect that they would.
Before making the decision, the business owner is strongly encouraged to discuss the pros and cons with their insurance broker or adviser.
On this issue, I have found that to purchase full business interruption cover with a reasonable Additional Increase in Cost of Working Sub-Limit is often not much dearer than just purchasing a high Level of Additional Increase in Cost of Working bearing in mind you do not have to purchase as much with full business interruption due to the coverage afforded by Item 1(b) Increase in Cost of Working described above.

Conclusion

 This is one of those areas of the business interruption cover that is quite complex. The overview provided above has been given to give you a good grasp of the cover. The points to take away are:
  • Increase in Cost of Working should never be sub-limited.
  • Increase in Cost of Working Cover is subject to 2 main tests, the “Sole Purpose” and “Economic Limit” tests and is also subject to average.
  • Every policy should have some coverage for Additional Increased Cost of Working.
  • While Additional Increased Cost of Working only cover does have it place its use should be carefully discussed with your insurance broker or adviser.
greenTo understand it more, particularly in a claim situation please read Understanding the ISR Policy (Manning, 2006) Volume 1, Section 8.1.1(b) pages 152-157.

 

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Latest ClaimsComparison.com survey results

ClaimsComparison.com has just released the latest results from their survey showing the current star rating of Insurers Claims Departments across 22 classes of general insurance.

Normally, we would like to have had this updated well in advance of the 30th of June renewal period, however there has been so many respondents and so many ratings have changed that we needed to triple check before posting the latest ratings.

While it is pleasing to see some Insurers have improved their rating, it is disappointing that some have gone backwards and hopefully this will be a trigger for them to review their processes and practices to regain their old position.

In the comments section of the survey, the stand out was the number of complaints against Loss Adjusters for their slowness and lack of empathy.

Due to the popularity of the site, the site will have a revamp during the next quarter based primarily on user feedback.

The methodology for our rating has remained unaltered and is shown in the “how we rate” section of the site. If you would like to be included in the survey in future, please contact Ashleigh at ashleigh.white@lmigroup.com or use the “have your say” button on www.ClaimsComparison.com.

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Blog Question to better understand co-insurance under an Industrial Special Risks Policy

Hi Allan,

Thank you for your very informative article below:

http://www.allanmanning.com/accidental-damage-v-specified-damage-v-unspecified-damage/

I am regularly asked about the Asset Schedule by my team members

  1. “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.”
  2. If the insurer is immediately looking at the Asset Schedule as a test of co-insurance, does the co-insurance test apply to the total declared value across all situations or is it applied specifically to a line item, for example stock at situation 1?
  3. The client may be correctly declaring situation 1 & 2 at day one but for operational reasons relocate plant, machinery and stock from 1 to 2.
  4. As per your article I have encouraged staff to get the sub-limits and combined limits correct to fully protect the Insure but have seen some very “Business Package” approaches adopted by insurer claims staff to the items in the Asset Schedule

 

Any clarification you can give would be greatly appreciated.

Kind regards,

Malcolm [surname and email provided]

____________________

When it comes to insurance, advice is much more important that price!

When it comes to insurance, advice is much more important that price!

My reply was as follows.

I answer each of your questions using the same numbering system below.

  1. You are correct, the standard Mark IV (and Mark V for that matter) Industrial Special Risks (“ISR”) policy is subject to this level of co-insurance or average. Although, LMI has worked with some brokers to have this changed to 80% on each Section (that is Material Damage, Section 1, and Consequential Loss of Profits, Section 2) of the Policy in line with most companies’ business packs.
  2. The old Mark III version of the ISR had the test across all locations but there was mass under declaration which was so rampant that the Insurance Council of Australia (“ICA”) and the National Insurance Brokers Association (“NIBA”) worked together and moved the test to “at the Situation”. That is, the test for Material Damage, under the Mark IV, is at the situation where the loss or damage occurs but across all locations for BI as there can be interdependence between locations. To compensate Insured’s for this move, the tolerance for being under insured moved from 90% to 85%, where as you said, it remains in the standard ISR Mark IV. All this occurred back in 1987.
  3. This is one of the reasons why the test for co-insurance is what is known as a “Day 1 test”.  That is, the test for average / co-insurance is on the first day of the Policy Period and not the date of the loss. This means that, so long as the changes are picked up at renewal, there should be no problems. If not co-insurance can and will be applied. This is an important point that you are right to remind your team about and for them in turn to discuss with their clients.
  4. This shows a lack of training in that particular insurers claims area. The drafters of the Mark IV and Mark V ISR policies showed great social conscience and thought to protect the client and we often see that the policy is not read by an adjuster or claims officer and but for the diligence of the broker or claims preparer the client would be disadvantaged and under paid.

Emergency2If you or your team ever get stuck on any of this, I or any of the LMI Claims Team are here to help. Although we do prefer to get involved from the start of a claim than when it goes pear shaped.

greenWhen it comes to drafting issues, I am sure you have my ISR book in your office and this will assist with examples and the like on the issues we have discussed.

I hope this all makes sense.

Regards

Allan

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Apps are the new battlefield for hackers

App Icons Downloading Into Smart PhoneAs reported in the latest edition of  Risk Management magazine, many of us now use our smartphone to provide a single point of access to personal information such as financial data, medical records, photos and  videos, as well as work-related email, calendars, documents and other business information. Unfortunately, hackers know this and far too many people have inadequate security on their phone. Hackers naturally see the phone as a way in.

The image at the end of this post is a screen shot of a message a professional photographer who I know received, which turned out to be completely bogus. I am glad he contacted me before doing anything.

To learn more about this real threat and mitigation strategies, I would refer you to the full article which can be found here. I have taken something away from this article which I will now ensure is actioned at LMI Group.

hacker

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Unoccupancy

Vacant building being damaged by vandals

Vacant building that has been damaged by vandals

Clearly, there is a risk when a residential or commercial property becomes unoccupied. It is a magnet for graffiti artists, vandals and thieves and at LMI Group we are instructed on a number of claims, particularly around the theft of metals.

There are a number of basic things that a landlord should consider to minimise the risk of damage.

  • Keeping up good maintenance of the property;
  • removing any graffiti;
  • mowing lawns;
  • stopping the mail;

These are just some of the basics.

Having security cameras I find is a great deterrent, however often landlords turn off the electricity as a cost saving measure and to reduce the risk of fire. There are battery operated cameras that can be used and while I have not researched it, there may be the possibility of some solar powered ones as well.

I also think the use of security lighting is important, I’m not in favour of leaving the lights on constantly, however having a system where the lights come on when someone approaches the building. This is a far greater deterrent in my experience for thieves and vandals than having a light on all the time.Thief alert vector illustration.

Finally, a good quality alarm system that is monitored 24/7 is again a great deterrent and if there is an attack or break in there is a greater chance of the thieves leaving before any real damage or theft occurs.

In one matter I am involved in, the thieves broke into a premises and there was a security camera aiming right at the door in which they broke. As the thieves walked in, the lights went on and we have a fantastic photograph of one of the thieves pointing to the camera while gesturing to his accomplice. The two then immediately turned about face and left but leaving us with a great photograph.

Yet another recommendation is to keep the property clean and this means a regular visit by a responsible person. At this time, security alarms, fire alarms, security cameras etc should all be tested.

One of the real issues with unoccupied claims is as I mentioned earlier, the theft of metals. We typically find two situations under an ISR. First, burglary and theft is defined and in other cases there is no definition and therefore the ordinary, everyday definitions of burglary and theft apply. The Sub-Limit is typically $20,000 and of course that goes nowhere when electrical cabling within an office or factory complex is stolen. Of course, it is not only the copper wiring, but copper pipes which can include fire protection systems and the like.

Thieves don’t particularly care about what damage they do and it can be malicious damage or water damage caused by the cut pipes. What constitutes theft and what constitutes malicious damage has to be addressed on a case by case basis. I have developed a careful methodology to address this which has been rolled out to all the claims team within LMI Group. The takeaway point for all brokers and property owners finding themselves in the situation with an unoccupied property is to ensure that the theft sub-limit is adequate to fully protect the insured in the event of one of these all too regular attacks.

While this post is particularly about the theft sub-limit, I feel it is important that all sub-limits be reviewed at each and every renewal or when there is a significant change in a risk, such as it becoming unoccupied.

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Blog Question on Loss of Rent

For Rent Red 3D Realistic Paper Speech BubbleI have received a number of questions about loss of rent leading up to the 30 June busy renewal period. This one has a common theme with many of the questions on the subject and was chosen as it expands on my post of yesterday.

Hi Allan,

What is the situation for covering Loss of Rent under and ISR MKIV where the Landlord’s property has just become vacant and the policy is about to be renewed.

The property in question is on the market to be re-leased and it will likely take some time to find a new tenant. Should the client insure loss of rent while the property is unoccupied?

Would the insurer pay for Loss of Rent if the premises were damaged and not able to be tenanted because of that damage, if this occurred during this unoccupancy period?

Karl [surname and email provided]

The business interruption (consequential loss of profits insurance to use the term in the policy) in the Mark IV Industrial Special Risks Policy is designed to put the Insured back in the same position as they would have enjoyed but for the loss.

If the Insured were to sign a lease tomorrow and the client was moving in say in September and the property burnt down in August, the client could claim the loss of rental income and the outgoings on the building under the policy from the date that the premises started earning income again.

The first question that comes to mind is, could you find yourself as the broker with a client who rents out the building and forgets to advise you that a lease has now been signed and rental income will flow from such and such a date.

The second question is, if before the lease is signed off on, the Insured and or their real estate agent has a prime candidate to rent the property and are likely to do so but before they get in to sign their is a fire. The potential tenant and the estate agent both advise that it was a done deal but with no gross rentals coverage in place there of course can be no claim.

To fully protect the client, the Gross Rentals specification, which is where I would insure such a risk, has the following Adjustments Clause:

To which such adjustments shall be made to Standard Gross Rentals and/or Annual Gross Rentals as may be necessary to provide for the trend of the business and for variations in or other circumstances affecting the Business either before or after the Damage or which would have affected the Business had the Damage not occurred, so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the Damage would have been obtained during the relative period after the Damage. [emphasis mine]

So with the benefit of this standard clause in the policy, which was included to fully protect an Insured and deliver an Indemnity under the traditional insurance definition of putting the Insured back in the same position as near as money will allow to the position they would have enjoyed but for the loss, would be able to claim rent and outgoings from the start or expected start date of the new tenant albeit there is no rental income at the start date of the policy.

So to summarise your question, neither you nor I should be making the buying decision for the client. I would explain the foregoing to the client and let them instruct you whether they wish to pay the premium, which would be effected by both the soft market and the fact the property is currently unoccupied and have cover in place should an event happen or carry the risk themselves. It comes down to the client’s risk appetite.

Having said that, if I was the client, knowing the increased risk that an unoccupied property poses, I would be insuring it.

Great question Karl and an important one for many clients at this time. I plan a further post tomorrow on the issue of un-occupancy.

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12 months Indemnity Period for a property owner simply doesn’t cut it

Insurance written on Golden Keyring.I read this morning that the un-occupancy rate in Perth and other mining towns around Australia are significantly lower than they were just a few years ago.

For any client who has a good tenant in their premises, perhaps on a lease that had been signed up at the peak of the mining boom, should more than ever be considering the Indemnity Period that they have on their loss of rent/gross rentals cover.

With any significant loss, it is going to take more than 12 months to get council approvals, trades in place and the reinstatement completed. If the tenant abandons the lease, the length of time it will take to get in a new tenant, albeit at a lower rental will need to be considered.

Another consideration would be the level Additional Increase in Cost of Working. It may be prudent to pay trades over time to get the building reinstated quicker and there may be a necessity to have some sort of rent inducement, such as a rent free period, to attract a new tenant within in the indemnity period.

The take away point from this article is that while 12 months may be a traditional standard for Indemnity Periods, it is in my experience not adequate to fully protect an insured in the event of a major loss, bearing in mind that I have not even raised the issue of disaster situations, and each risk should be considered on a case by case merit using my personal adage of ‘hoping for the best, but planning and insuring for the worst’.

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Good to see an alternative view point on beach erosion

sea bridge of Gromitz, groin in foregroundOn the 8th June I wrote an article venting my frustration that the media was focusing on the half dozen or so homes that were damaged by the action of the sea and therefore in all likelihood not insured and not the tens thousands of home and business owners who were having their claim promptly and fairly handled. See http://www.allanmanning.com/another-storm-another-pasting-by-the-media-of-the-insurance-industry/ 

My position was and remains that these homes were built in the wrong place originally and it is not the role of the insurance industry to continually fix the problems of developers, local authorities and/or state governments.

While I set out my grievances then including a suggestion that the insurance industry not advertise on free to air television or radio while the unbiased reporting continues, it is important that I also write to congratulate those that do look at both sides. On Friday, Channel 9’s Today show, who was one of the primary shows I was venting at, aired a segment where an expert in land care and beach erosion explained just how foolish it was to build homes in areas along the Australian or any coastline which is subject to large and sudden erosion. This is of course what any thinking person knows and understands.

He further explained a point that I was not aware of but had seen in Queensland during other similar events, and that is, that while rock groins (groynes)  work as intended, sand moving along the beach in the so-called down-drift direction is trapped on the up-drift side of the groin, causing a sand deficit and increasing erosion rates on the down-drift side. This well-documented and unquestioned impact is widely cited in the engineering and geologic literature.

I picked up from the segment that the homes and other structures effected where in this down-drift side of groins built some time ago.

While I applaud Channel 9 for this segment, it would have been nice to have it a day or two after the event and certainly before the tirade against the industry and the hundreds of loss adjusters, claims preparers and claims officers doing their best to handle the claims promptly and fairly for the good of our clients, communities and economy.

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