Alarming Trends – Part 2: Reinstatement and Replacement Conditions vs Indemnity Conditions

Previously, we have addressed the topic of indemnity periods and I expressed my concern on the number of questions I have had come through from Insurance Brokers and Underwriters where the indemnity period for a client was being reduced in this time of increasing rates.

Another issue which has resurfaced as a result of these rate increases is the move to reduce the cover from reinstatement replacement conditions, to indemnity conditions.

Up until the late 1960’s and early 1970’s, the vast majority of insurance policies were settled on indemnity conditions. One of the great innovations and improvements in insurance was to move to reinstatement and replacement conditions, also known as ‘new for old’. This proved, and continues to prove, to be an enormous benefit to an Insured who in the event of a partial or total loss, does not have to find the funds to make up the difference between the, let’s call it market value for the sake of convenience, than the actual cost of replacement.

Subsequently, the insurance industry went one step further by introducing extra costs of reinstatement, which meant not only did we bring the asset back to a condition as new, but also brought it up to date where required to meet any statutory or regulatory requirements.

Not only is there a significant financial benefit to the Insured in the event of a loss, there is also a significant saving in time for there is no need to have the haggle to agree indemnity value which in most cases is based on the replacement value, less an allowance for its age and condition (again, I stress that this is not universally across).

I find that in my discussions with Insureds that wish to consider this option, that they are thinking of a total loss situation and they are factoring in what I call the “it will never happen to me” syndrome. Most losses are partial, and the most common type of loss, say to a building, is not a fire but rather storm damage.

So, let’s say that an insured owns a commercial property and there is a hail storm and the roof requires replacement. If the Insured is reluctant to pay the premium on insurance, how will they feel when they have to meet the cost differential between the cost of a brand new roof, particular if it requires upgrading to meet requirements, and the depreciated replacement value based on the age and condition of the old roof.

If the building is only a few years old and there is going to be no depreciation anywhere, there is no benefit in insuring for indemnity conditions for the value between the replacement value and the depreciated replacement value will be negligible in any event. It is only when the building is older that there is any benefit in premium, but then the question is, at what cost to protection?

Another scenario that crops up is that an Insured, particularly in the manufacturing sector, makes the claim that if there was a total loss and they lost 46 production machines, they would move their operation to China and therefore there is no benefit in having reinstatement and replacement conditions. I again point out that most losses are partial. What happens if fire or water damage makes only 1 or 2 machines irreparable? Would the Insured move their operation overseas having only lost a small portion of the equipment in Australia? Invariably, the answer is no.

In my discussions with insureds where we have a meaningful discussion about the additional risk that is being accepted by the insured by moving from reinstatement and replacement to indemnity conditions that in the vast majority of cases when the Insured considers all the facts, they elect to remain with reinstatement and replacement conditions.

I can not recall a single claim that I have handled in my 45 year career where the Insured has been insured for indemnity conditions and where it is proved to be a good outcome for the business or the principal stakeholders.


Read Me View comments

Alarming Trends – Part 1: Indemnity Periods

Over the past month or so, I have been inundated with questions regarding moving from reinstatement and replacement conditions to indemnity, in reducing Sums Insured and reducing indemnity periods. Over the next couple of days, I will address each of these and I will start today with Indemnity Periods.

Back when I first wrote my blue book on Business Interruption insurance in 2001, I was often confronted with indemnity periods of 3 or 6 months and my aim with the book and training sessions, was to move to 12 months being the minimum. Since that time, it has become more and more apparent that 12 months is not sufficient even for many risks, particularly property owners and manufacturing risks. When I say property, this includes infrastructure such as airports and tourism resorts.

If you add to this the complexity of a natural disaster, where the resources of the insurance industry, along with builders, engineers, right down to town building and planning departments, this only exasperates an already crucial problem.

As such, over the last 5 – 10 years, I have really been pushing for indemnity periods, particularly on larger risks which are insured under an ISR, to have a minimum of 24 months or at least 18 month indemnity periods. Speaking to underwriters and brokers, it has been pleasing to see that this advice has been accepted by many insureds.

What is alarming me, is that with the rate increases which are filtering through of late, many clients and/or brokers are reducing the indemnity periods back to 12 months. Yes, there is a premium saving, however, at what risk?

Going beneath 12 months, I believe, is complete folly for the rating of business interruption insurance is not simply a pro rate based on the length of time set for the indemnity period.

Statistically, my research shows that about 75% of business interruption losses have a period of disruption of 3 months or less. As such, if a client was to insure for a 3 month indemnity period, no insurer in their right mind would charge 1/4 of the premium that 12 months cover would cost, for they are going to pick up 75% of the claims, and even with claims which extend beyond the 3 months, they are likely to pick up the biggest burden during that first 3 month period.

Typically, the difference in premium for a 6 month indemnity period and 12 month is less than 10% of the fire rate applied to the full 12 months Insurable Gross Profit figure.

When considering the indemnity period, I have set out under the heading “How long should I insure for?” in the BIExplained section of the LMI Business Interruption Calculator all the things that should be considered when setting an indemnity period. You will note, the cost of insurance is not one of the criteria.

Speaking to underwriters about the situation, one of the reasons they have had to increase the premium rate, is that they are not getting the growth in premiums that they require. This is because we are not increasing Sums Insured as we should each year. If we are going to reduce cover, this is only going to create more problems moving forward as insurers are forced to increase rates again to make up for the lost revenue of people reducing their coverage. I know in the property insurance for LMI Group, there is two things about the program, the first is that we tend to over insure for we see first hand what happens to businesses when they under insure and we would rather pay a little extra premium rather than risk not being fully indemnified in the event of a loss. Secondly, we review our insurances every year, this being the case, we have found our rate has been retained.

Next post, I will go into a bit of detail about the risk of moving from reinstatement and replacement to indemnity conditions.

Read Me View comments

California wild fires

In what is the end of the Northern Hemisphere’s summer it is terrible to see the impact in areas of California, including the Napa Valley, as well as East of Los Angeles Metropolitan area, being affected by bush fires.

The full details of the catastrophe are still coming in, but the early reports indicate that over 1000 structures have burned with 1000’s more under threat. Reports so far put the death toll at 13.

The cause of this fires is that it has been the especially dry conditions, similar to what we have experienced for much of our winter here in Australia, a long with strong winds. Australia is heading for another hot summer, and it is a reminder to any of us who live in bush fire areas to carry out a risk management audit of their property and review their evacuation procedures.

PHOTO: Wildfires whipped by powerful winds have swept through northern California. (AP: Jeff Gritchen/The Orange County Register)

Read Me View comments

Another fire in one of the world’s tallest buildings

Images from social media

I posted an article back in March 2015 on a fire in a residential tower block in Dubai.

Back then, as a precursor to the terrible Grenfell Tower fire, the combustible cladding was blamed for the rapid fire spread.

Firefighters have just brought yet another fire at this tower, ironically called, the Torch, under control.  To read one of the many news articles go here.

This building is the 65th tallest in the world.

With the police in the United Kingdom predicting a charge of corporate manslaughter against council representatives and the building managers following the Grenfell Tower fire, I hope that we see an immediate end to not only the combustible cladding but all non-conforming building materials.

In the meantime, there has to be some brand damage for those who have invested in these huge tower blocks when it comes to occupancy and resale. Particularly if there is a need to replace the cladding or any other non conforming building products.

Read Me View comments

Blocked sewage pipes – the curse of the baby wipes

Here as some wipes that clogged pipework and caused an overflow situation. You can see there is no sign of them breaking down.

Just one of the many brands of baby wipes on the market that may cause a problem if not disposed of correctly.

LMI Claims have seen a number of water damage claims arise due to blocked pipes. While tree roots used to be the most common cause, the cause now is often baby wipes.

Most are not biodegradable and therefore not suitable for flushing down the toilet.

We have even seen the ones that claim to be flush-able causing problems.

With an overflow from sewage it is not a simple mop up and move on, especially if carpets or other soft furnishings are involved.

Following the old adage that prevention is better than cure, I hope this short post stops this from occurring at your home or place of work.

Read Me View comments

Latest claims rating now available

As an addendum to the Mansfield Awards which were presented last week in Sydney (see here for article), I am pleased to advise that the latest claims ratings as determined by complaint data recorded by the Financial Ombudsmen Service, where appropriate, and insured feedback and our regular survey are now available at

As always, I encourage people to consider the claims service when purchasing insurance and not relying on price alone.

Policy coverage and claims service and financial strength rating are all VERY important criteria when choosing the insurance program that is protecting your assets or those of your client. 

Read Me View comments

It is not just combustible paneling that we ought to be worried about

As readers will be aware, not only have I been writing often about the issue of combustible paneling in high and low rise apartments, but also the importation of electrical cabling that does not meet Australian Standards and also building products that contains asbestos.

I have now learned through my son Steve, who is over in London at the moment meeting our major clients, that the same block of apartments that was the scene of the tragic fire this week, (Grenfell Towers) narrowly averted a major fire disaster in 2013 when residents experienced a period of severe power surges that were subsequently found to have been caused by faulty wiring.

It is disappointing to me that the insurance industry is not leading the fight to have these products banned from being imported into Australia and insisting that buildings that contain such materials remedy the ticking time bombs.

I am aware that experts approached the Insurance Council of Australia on the issue of the paneling after the Melbourne Docklands fire and their request to work together with the industry were dismissed. This, to me, is disappointing as I believe that our industry has an obligation to our communities to assist in loss mitigation both in loss of life and property. This of course results in fewer or lower value claims, which in turn is to the benefit of the industry as well as the insuring public.

It appears that only the Victorian Government is doing something positive on the issue of the below standard paneling and without government and/or the insurance industry as a whole addressing the issue seriously then I fear it will be left a ticking time bomb until we experience a serious event in this country.

From an insured’s point of view, as the importer, distributor and or installer there is a potential exposure that may, in the case of a product recall, not be insured.

From a developer or owners perspective, like insurance itself, cost should not be the primary criteria for choice. Please make sure any building materials used conform to or exceed Australian Standards. They are there to protect YOU.

Turning back to the issue of price, do you think the people who made the decision on the cladding are now rejoicing on the saving they made by using it. Similarly, will the various organisations that will be relying on their insurance program, whether this be property, product liability or professional indemnity will be considering the premium they paid. Of course not, they will be focused on the quality of the coverage, the extent of any policy exclusions and the claims service they are about to deal with.

Food for thought when reviewing your insurance program!

Read Me 1

Please have your say on claims – it counts towards the Mansfield Awards

The winners of The Mansfield Awards which recognises Claims Excellence will be announced on July 13. To have your say and rate the insurers you deal with on their claim service please go to

The Awards are a not for profit initiative of the LMI Group and InsuranceNEWS, after concerns within both organisations that there was no recognition in Australia for claims personnel.

Having been in the claims space for over 45 years, this did not sit well with me as it is the only real test of the insurance promise.

To learn more about the award please visit

In August 2013, LMI Group launched as a free service to brokers and the public showing the star rating of the claims services of Australian Insurers. The thought process behind this service was three fold.

1. Move the major criteria for buying insurance away from price to protection. was a natural adjunct to the already popular which compares the various policies features and benefits.

2. To acknowledge those insurers and their claims staff that do the right thing by the customers.

3. To drive some positive change in claims at a time when more and more people complain about poor claims service including the media, government, insurance brokers and of course Insureds.

This current survey of claims is more important than ever with this round being used as the measure for success or otherwise for The Mansfields.

Therefore, please take a few minutes and complete the survey honestly and to the best of your ability.

Thank you in anticipation.

Read Me View comments

Profiting at other people’s expense

The Courier Mail reported on builders massively overcharging victims of Cyclone Debbie and the floods that followed further south. Click here for the article.

This sadly occurs after every natural disaster to some extent and while some as the Insurance Council of Australia state is due to demand surge, some clearly is a giant rip off.

Every trained loss adjuster and claims preparer will be carefully reviewing the scope of works and the costings to ensure they remain fair and reasonable to ensure that insurance remains sustainable in areas likely to be effected by natural disasters. This does take a bit of time but it is necessary for the good of the entire community.

Typically we find that the local builders who wish to remain in the area after the event treat their communities better than the fly by nighters who move in for a quick buck and leave with full wallets and often dodgy work.

The approach LMI is taking wherever we can is to use local builders known to the insured or the brokers. We are finding we are getting better service, better quality and better pricing.

All of us in the insurance industry have a roll to pay in this issue and weed out and black ball the crooks who are preying on people while in a vulnerable state. At the end of the day we will all be paying for it with higher premiums while those in high risk areas may find it difficult to get insurance at all. View full post…

Read Me View comments

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.

Read Me View comments