A question that I have answered hundreds of times – the pros and cons of insuring for indemnity

In the last two days I have had very similar questions and thinking about it, it would be one of the most common questions put to me and I am surprised I have not posted an article on it before now.

Good Morning Allan,

Please can you advise if you have an article advising the Pro’s and Cons of insuring Commercial Buildings on an Indemnity vs Reinstatement basis

I have a sawmill client under attack and would appreciate any brief comments (we presently have them on Reinstatement.. the attacking quote is on Indemnity.

I would appreciate hearing from you as soon as possible accordingly

Thank you and Regards

Chris [surname and email provided]


My response to this one is as follows:

Hi Chris,

The only pro in insuring for indemnity is a saving in premium but the issue is at what cost to PROTECTION.

The vast majority of claims are partial losses and in Australia it is more often weather related than any other peril. Having said that, fire is a very real risk for a sawmill.

Let us assume the roof of the sawmill is damaged in a hail or wind storm and requires replacement. I will leave out water damage to machinery for the moment.

If the policy is underwritten on an indemnity basis then the Insured will not get a new roof but will have to contribute to the cost based on the age and condition of the roof. They are in fact their own insurer on every claim for difference between the indemnity value, that is, current replacement cost less an allowance for its age and condition and its replacement value.

As a claims guy, I have learned a couple of things. One, Murphy’s Law dictates that the loss is going to happen at the worst time for the Insured. This means when they are low on cash or are extremely busy and turning back to their machinery and contents they do not have time to mess around looking for second hand equipment and if they do they find there is nothing decent available and after a frustrating delay find they have to put their hand in their pocket to pay for new equipment.

By insuring for full replacement value with extra cost of reinstatement, they can sleep well at night knowing they will not have some hidden cost that could come along any time during the year and bite them should a loss occur to their building or contents but they have the best cover which will replace the items new for old.

The Insurance Industry invented Reinstatement and Replacement not as a gimmick but as a way to provide better protection for their clients, to allow them to recover from an insured event quicker and give them the best chance of surviving the inevitable disruption. Remember it costs insurers more each claim to provide this great coverage.

Insurance has never been cheaper. Fire Service Levy is not imposed in Queensland. Every Insured needs to understand that the cost of the insurance is not the total cost of risk. It is the cost of transferring the risk away from the owners of the business to an insurer in the event something has happened.

When a claim occurs, the Insured will not be thinking about the small amount of premium they saved, they will want the best insurance coverage, the best claims service with an insurer that has the funds to pay the claim.

Business owners the world over are optimistic. The most common thing said to me on arriving at a claim is: I never thought it would happen to me. Bad things happen to good people every day. Looking at the aftermath of Cyclone Debbie, we have heaps of clients who are saying “if only”.

I hope your client takes the prudent course of action and insures for full replacement. I know that I do.




One final point, if you are the attacking broker, please consider the risk you are asking your clients to take on by taking this approach. Are you really acting as a trusted adviser if all you are doing is giving them a second rate product!

I appreciate that not everyone is as risk adverse as I am but we owe it to our clients as professionals to spell out the risk honestly to them.

Let’s make insurance great again.

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How can such a great country as New Zealand get it so wrong?

Kate Sheppard who along with Sir John Hall and Sir Julius Vogel led the fight to get women the vote in New Zealand.

Of all the countries in the world, I admire New Zealand  more than any other. Their political leaders were, in 1893, the first in the world to give women the vote. It is the country that nurtured the pure genius of Nobel Prize winning scientist Ernest Rutherford. No such list would of course include the bravery and determination of Sir Edmund Hillary. Rutherford and Hillary both being childhood heroes of mine. Of course, you cannot overlook sport, where New Zealand more than any other country punches, not just a little, but way, way above its weight.

Source: http://www.mch.govt.nz/perspectives/earthquakes/

Due to the earthquake exposure that the country faces and the huge amounts of foreign capital that has been injected into the country through insurance and reinsurance, you would be hard pressed to find a government that should not understand the benefits of a community that is adequately insured.

So with this short two paragraph opening, I sit here and think where have the great leaders and thinkers, particularly in government and Treasury, gone in New Zealand?

How can just over one hundred years ago, New Zealand be one of the most forward thinking progressive societies in the world and yet today be one of the very last in the world to realise that funding the emergency services through insurance, thereby significantly increasing the cost of such a vitally important service & protecting to the people of New Zealand’s home, businesses, communities and its very economy. It is so very WRONG!

A first-year economics student, if he has not heard it at school, learns that if you increase the price of any commodity or service, people buy less. Governments know this, that is why they tax alcohol and tobacco, so that we consume less and as a community we are healthier and are less a burden on society and the government health system.

But general insurance is not a burden on society or government. It is the exact opposite.

All the research around the world shows that when government overly tax general insurance, people buy less. They either reduce their sums insured, and/or fail to insure their contents or business interruption.

So let us take small business as an example. It is a huge employer in every country. The business owner sees the cost of insurance go up and so they do not insure their assets fully and decide that they will take a risk on business interruption. The business has a fire or massive storm. The business fails, the business owners lose their business and perhaps if the home is mortgaged, their home. The employees lose their job. Creditors do not get paid. Who is the winner here?

Now let us multiply this by the number of people in a small town. Everyone is in the same boat. Even if some insure fully but say, the draw card businesses that attract tourists or the big employer businesses are the ones that cut their insurance cost. An earthquake or other natural disaster hits. That community is devastated. The children and or grandchildren who were being funded into schools and universities by the business owners and their employees may no longer have the resources to fund the schooling. They cannot move into the family business because it is no longer there. These people get into a cycle of poverty that they cannot get out of, not just for one generation but many.

The sea of for sale signs following a natural disaster where the owners were not adequately insured

Think I am exaggerating, go and visit some of the small towns in Victoria that were wiped out in the ‘Black Saturday’ bush-fires and see the devastating effect on those communities, brought about by a greedy government that ate the golden goose through heavy unsustainable fire service levy. It took the loss of 173 people, many of whom stayed back to protect uninsured homes, farms and businesses before Victoria removed the levy.

I do not want to labour the point, but in my experience in insurance claims, which is fast approaching a half a century, even a prudent business person who understands the value of a quality insurance program will cut back when they see the price go up substantially. While they may keep their existing sums insured and business interruption insurance they will not increase the existing covers and/or not take out other covers such as cyber insurance which is now vital in our digital age.

Every civilised society needs well-funded, well-trained, well-equipped and well-led emergency services. The brave women and men that undertake this vital work for us deserve our full support.

The simple fact is that every single New Zealander and even those that visit the country benefits from the great work that the New Zealand emergency services provide. Every New Zealander needs to contribute their fair share, not just those that are prudent and risk averse enough to insure.

The broader the tax base for the collection of the funds to meet the cost of running the emergency services, the better. The best way known is through property rates. This way, everyone pays, including the visitors to the country through a small charge on every product and service they consume based on the cost to provide that service.

There are many papers and articles written on the subject on just how regressive taxing insurance is. Here are just a couple if you would like to read more from experts in equitable taxation:

By KPMG: https://home.kpmg.com/au/en/home/insights/2015/12/tax-reform-property-services-tax-stamp-duty.html

By Deloitte:  http://www.insurancecouncil.com.au/assets/report/Deloitte%20Access%20Economics%20-%20Impact%20of%20removing%20stamp%20duties.pdf

Brexit campaign slogan

I am sure that politician’s the world over are looking at what is happening in the world today with Brexit, President Trump, etc and scratching their heads and asking why?

The simple answer is that people are moving away from political parties who are not listening to their genuine concerns, not being honest and not protecting their precious way of life.

Having a hidden tax on insurance is NOT honest, it is NOT protecting the hard-earned wealth of its citizens and it is certainly NOT protecting New Zealand in the way that it deserves or needs in the 21st century.

The great country and its fantastic people of New Zealand deserve better.

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Product Safety Australia – 18/04/2017

This week’s product safety recall notices include the following:

Panasonic Australia Pty Ltd — Panasonic Tablet FZ-G1 (Mk1 to Mk3) and Battery Pack

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Volvo Trucks — Volvo FH(4) & FM(4) Trucks

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Studio Periscope — Gumnut Candle Holder

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Volkswagen Group Australia — Golf, Scirocco, Tiguan, Passat, Transporter, Multivan & Amarok

Read more

Skoda Australia — Skoda Superb

Read more


For more please visit https://www.productsafety.gov.au/recalls/browse-all-recalls

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Business Interruption Issues Series – Part 5 – Time Excesses – Part D – Possible Solutions

After addressing 3 common problems in time excesses last week, I return to the topic with some possible solutions.

What is the Answer?

I would suggest there are several answers to the problems of time deductibles, and would like to explore three with you.

The first is to replace the excess/deductible with a franchise. If the insured business is disrupted due to an event for a period less than the franchise of say 1, 2 or 3 days, then the loss will be at the full expense of the Insured. If it extends beyond the period of the franchise, then the entire amount would be met by the insurer. This would mean that the Insured would carry the risk for minor periods of disruption, but beyond that they would have the comfort of having full insurance subject to adequacy of insurance etc.

I appreciate the insurance industry need not be there to protect short term, what we call working losses. The cost of doing so in just calculating such losses often proving they are not real losses in any event but just delayed sales would increase the cost of business interruption insurance prohibitively. However, the cost of working out a time excess can be significant and cause the Insured to feel cheated. I know that is how I feel every time I put in a health insurance claim when I consider the premium I pay each year.

I would rather see the client get the amount rather than it go to loss adjusters and claims prepares trying to agree an equitable allowance.

Some underwriters are worried that an insured can manipulate the stop time and so get a claim paid. I think in disruption such as in failure of public utilities, or closure by public authority, the Insured has no chance to influence when the issue is resolved. As such, I do not see this as an issue. It has certainly not come up in the claims I have handled under business packs where time franchises are more common under high quality wordings.

The second solution is to apply a monetary deductible, which both the Insured and insurer know and understand in advance. I would suspect that this would be easier for the underwriter to underwrite and the Insured would be in a much clearer position as to the effect of the deductible in the event of a claim. It would also reduce the stress and claims handling costs following a loss.

The third alternative is simply a combination of the first two. The monetary deductible would apply after the franchise period had lapsed or it could be the “greater of”.

1.2                 Summary of Chapter

Space limitations have only allowed three case studies to be provided. Underwriters, claims staff and Insureds who lodged a claim following any business interruption claim with a time deductible can provide similar examples of complications arising from their experiences of the interpretation of time deductibles.

At the very least, time deductibles need to be reviewed to incorporate clear details in the policy as to how they should operate. Alternatively, they should be replaced with a franchise, a set monetary deductible, or a combination of both. Food for thought to improve what, in the main, is a very good product.

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Business Interruption Issues Series – Part 4 – Time Excesses – Part C


Insurance should not be a game of Russian Roulette

This is the third post in this series on time excesses and the fourth on common business interruption issues that started on Monday 10th April 2017.


I continue the examination of time excesses using another case study.

Case Study 3: The Policy will not Cover Losses within the First 48 Hours

The third case involves a wording that states the policy will not cover losses within the first 48 hours. In many cases of smaller commercial and industrial premises, the Insured was not advised to shut down their gas until after 5.00pm on Friday, 25 September 1998. 

If they had no planned production within the next 48 hours, they suffered no losses and, as such, the time deductible did not apply. Had the shutdown occurred at the same time on Sunday, Monday, Tuesday, Wednesday or Thursday, then the same time deductible would have applied, but this time with a financial penalty being borne by the insured business.

On the other hand, taking restaurants for an example, Friday and Saturday evenings are often their busiest nights. They, therefore, were penalised by pure chance due to the fact that the disruption caused by the Longford Gas Explosion occurred on a Friday. For them, if it had occurred on a Sunday or Monday, the reduction in the claim due to the application of the deductible would have been much less.

Rather than know their respective positions when a loss occurs, it could be said that the insurers and operators of businesses that do not operate 7 days per week are both playing Russian Roulette with a revolver holding 5 bullets in a 7-chamber gun. That is, 5 working days in a 7-day week.

Tomorrow is Good Friday and as it is a religious holiday for many, coupled with the fact that many in the industry have been working their tails off with the cyclone claims, I, while not wishing to follow the approach of a TV soap opera, will hold off till next Tuesday to provide some alternative solutions.

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Business Interruption Issues Series – Part 3 – Time Excesses – Part B

Today, we continue our discussion on time deductibles. As I did yesterday, I draw on a case study to explain an issue.

Case Study 2: 24 Hours after Cessation of Supply

This case study involves another large manufacturer. In this case, the wordings for the time deductible is contained within the Public Utility clause provided that cover does not commence until “24 hours after cessation of supply”.

To avoid major damage to the insured plant at a large production facility, the gas supplier allowed the Insured to implement a staged shutdown of the gas supply over the site, which took 11 hours. In other words, it took 11 hours from when gas supply was cut to the first machine, until it was cut to the last machine. Does this mean that the Insured in fact suffers a 35-hour time deductible? That is, 24 hours from the cessation of supply, plus the 11 hours of disruption they suffered during the phased shutdown. The wording of the deductible did not match the intention of either the insurer or the Insured.

In this case, using the Departmental Clause, it was possible to identify the loss by machine, and the claim was settled by applying the 24-hour time deductible on a machine-by-machine basis. A much more difficult adjustment and negotiation would have been required to achieve the agreed intention of the time deductible had the method of claim calculation used not been possible.

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Business Interruption Issues Series – Part 2 – Time Excesses – Part A

Following on from yesterday’s article on part insuring a standing charge, I move to time excesses for the rest of this week.

When I wrote the first edition of my book on Business Interruption, time excesses were relatively new, except for particularly large risks, especially in the mining industry.

The large number of business interruption claims that arose from the gas crisis in Victoria, Australia in September 1998 highlighted the inherent problems associated with time deductibles. Many of the issues have again been seen following the Western Australian gas crisis 10 years later, in June 2008 as well as natural catastrophe claims and the 2014 Sydney Hostage Crisis.

The purpose of the post today and the next few days is to highlight through case studies, some of the many problems that can arise with the interpretation of a time deductible. And second, equally important, the purpose is to offer suggestions for alternative forms of deductible that may assist each party to the insurance contract in understanding their respective position in the event of a loss.

Case Study 1: 3-Business Day Time Deductible

The first case example is in respect of a large manufacturer that has a Section 2 Deductible of “3 business days”.

The loss of 7 days’ production caused by the gas outage was made up by the Insured through working weekends and public holidays between the date when the gas supplies resumed and the end of the Indemnity Period. The loss was confined to the Increase in Costs of Working associated with making up the lost production.

The position that should be adopted with such a disruption being considered under a policy with a time deductible is that regardless of when the costs are incurred, they should be matched to the benefit that the increased costs have generated. For example, if within the first 3 days the Insured had incurred significant costs, say several million dollars, to convert their production facilities to run on LPG rather than natural gas, but the benefit of this expenditure was not realised until after the first 3 days and was therefore to the entire benefit of the insurer, then the insurer should, in equity, meet the entire cost of the Increase in Costs of Working. This is logical even though it was incurred during the first 3 days.

Conversely, any costs associated with making up lost production suffered during the first 3 days, for instance by way of overtime etc, should be at the expense of the Insured; the first 3 days being the period of time deductible.

This is in line with not only the generally accepted accounting principle of matching revenue with expenses, but also with the spirit of the underlying principle of indemnity which, as we have discussed elsewhere in the text, is to “put the Insured back, as near as money will allow, to the same position that they would have enjoyed but for the loss” [1].

In this case, an accountant acting for the Insured as a claims preparer, argued that there were no lost sales during the first 3 days and, as such, there was no loss suffered by the Insured. They went further to argue that as the Insured ‘stood down’ employees during this period, there were savings made. However, as these were made during the 3-day deductible, these costs should not be taken into consideration in adjustment of the claim. If this was to be accepted (and it was not), it would have converted the deductible into a positive benefit to the Insured. This is because the insurer was being asked to meet all the additional costs to make up the lost production, but was not being granted any benefit of the savings made during the period.

This is a nonsense argument that goes against the underlying principle of business interruption insurance as explained above. What this case study does, however, is highlight the problems that can arise in adjustment of a claim involving a time deductible.

The lesson to be learnt from this case is that the policy must clearly state how the deductible is to be applied.

To learn more please refer to Business Interruption & Claims, Chapter 18.

[1]     Castellain v Preston (1883) 11 QBD 380.

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LMI Mining attending claims due to Cyclone Debbie

There has been a good deal of news regarding the effect of Cyclone Debbie on the supply of coal to the world. We at LMI have been keeping a close eye on this and assisting many mining clients to calculate their business interruption losses as a result of the damage.

What many readers do not know, is that LMI have a specialist mining division that specialises in mining claims, risk assessment, policy and endorsement drafting and review.

Headed by Murray Rowley, with 50 years experience in mining losses, and backed by a team of on staff qualified mining engineers and accountants, the team are handling several losses arising from the closure of the rail lines in Queensland due to damage that occurred during Cyclone Debbie.

I myself, am proud to be part of this team, having handled mining losses since the mid 1980’s including some of the world’s largest claims. My MBA Thesis was on the Closure of the Bougainville Mine. My experience, however, is far outweighed by Murray’s.

Mining, perhaps more than any 0ther industry, requires a great deal of knowledge and experience. There is often a great deal of money at stake and it is certainly not an area for the generalist or amateur. While Murray and his team are based in Queensland, he and his team have and continue to handle losses all around the world due to their extensive expertise in this industry.

LMI Mining is just one of the specialist divisions we have at LMI that provide expertise for specific industries such as tourism, packaging, manufacturing, energy risks, motor trade, crop, retail, and property management.

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Business Interruption Issues Series – Part 1 – Insuring a Business Expense/Standard Charge

Last week LMI’s Max Salveson and I had the rare privileage of meeting a some of the best underwriters and technicians in Australia when it comes to the Industrial Special Risks (“ISR”) Policy.

As I continually say, we are all students of insurance and despite all I have read, and written on the policy not to mention the 1,000 plus claims I have calculated under this policy I still learned many things and changed my view on a couple. While many improvements to the policy that Max and I proposed were accepted, some of the changes that I asked to be included I did a complete 360 on. This is despite the fact they have already been rightly adopted in quality Business Packs. The reason is that business packs are designed to cover small to small/medium businesses where as the ISR is for larger often more complex risks.

In many ways the ISR remains a world class product offering great protection to business when it comes to property damage and business interruption. As with any general insurance product, it just needs to be set up correctly from the start.

The fact that the vast majority of the people who attended the meeting had a genuine desire to protect their clients and our communites was fanstastic and reminded me of the original commmitte that drafted the Mark IV way back in 1987.

It was also great that so many experienced experts from different insurers were willing to share their experience and knowledge for the common good and listen and like me walk away with a different view on some points.

With this background, I thought I would share with readers some of the issues that we discussed in the business interruption space that was discussed.

I start with the problem that can arise where an insured (or their broker) decides to insure only a percentage of an expense rather than the full amount.

For example, let us say an insured elects to insure 10% of electricity. This means that 90% of the expense is automatically deducted when it comes to determining the insured’s claim when you multiply the insured rate of Gross Profit by the shortfall in Turnover.

What can happen when an inexperienced adjuster or forensic accountant is involved is that they deduct all the savings from the claim not appreciating that 90% has already been excluded from the claim.

This in effect means that the insured is paid 10% of 10% of their claim for wages which of course is totally wrong.

Gordon Southern in his book “Consequential Loss and Risk Insurance” addressed the issue very well. I attach an extract of his book which addresses the issue in detail.

Uninsured Working Expenses part 1

Uninsured Working Expenses part 2

To overcome this inequity, I attach an endorsement that Max and I drafted that does not change the ISR wording but simply sets out the formula that should be used when calculating an insured loss where there is  a percentage of an Uninsured Working Expense is in fact insured. Endorsement

Tomorrow I will continue to the series moving to one of my pet hates, I appreciate that is a harsh word, Time Excesses.


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Happy Birthday Blog

Today marks the 3rd birthday of this blog starting on 10th April 2014.

Since then, 950+ posts have been published and by sharing it on LMI and my own personal Linked In, Twitter and Facebook pages over 10,000 subscribe and over the total reads has been over 1,000,000.

The posts that get the most attention are when I have a rant but this cannot and should not be faked and so they do not come along too often.

Over half have been answering questions put to me and these have come from 6 continents and just under 50 countries. I do not post all the questions and answers for a variety of reasons but where appropriate I do.

The accountant in me records the time I spend on the posts as I soon realised that writing a blog post takes a lot more time than I thought. Checking today, I was staggered to see that if I were to charge for the time at my standard charge out rate the cost in writing the blog has been over $250,000 plus the cost of subscribing to Bigstock photos so that I do not breach copyright with any images.

The way I look at it is that each time someone reads a post the investment is around 0.25cents but more importantly if just one client is better protected, one Professional Indemnity claim is avoided, if the general insurance industry is better regarded and understood, then the investment is well worth while.

The blog is not a chore as I write on topics I love and the thought of helping people is extremely satisfying. I too learn from the experience as I do not always know the answer of a question off the top of my head and then I go and research it and so am better off for it as well.

For the budding blogger, please use a good system. Mine has had 96,410 malicious attacks and the worst bit until I put a spam filter on the site is that you get bombarded with spam comments. Since I put on the filter about 18 months ago, it has blocked 46,628 spam comments.

I do have to be careful to ensure that I know where the question comes from and that I have all the facts particularly where I sense it is a live claim. I do get frustrated when the person asking is just using me and claiming it as their own work or they have engaged an expert for a fee who has not been able to answer the question and then expects me to address some complex issue for free. I do expect to be treated fairly and not just used.

I am looking forward to posting my 1,000 post in a month or two, a milestone that has been reached a lot quicker than I thought and I have no plans to stop just yet as there are no doubt heaps more questions to answer and just as many issues that will pop into my head that I wish to share and debate.

So keep the questions coming.

PS, several people have contacted me saying that surely it has been more than 3 years. It turns out that the system I use only records the last 3 years. When I went back and looked at the first post, it was 4th October 2011 so it is really 5 1/2 years of blogging. Talk about time flying when you are having fun.

I double checked the other stats and except for the total number of posts and subscribers which are correct as reported above, the reads, attacks, spam comments etc are only for past three years. It is therefore more widely used that I realised.

Thanks to all that have contacted me via email etc to say how much you enjoy the articles.


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