Meth Labs pose an additional risk for Property Owners and Real Estate Agents

A staggering number of rented properties in Australia and New Zealand are being used for the illegal manufacture of the drug Methamphetamine turning the home into a clandestine Meth Lab.

The question then arises what steps are reasonable for a property owner and or their real estate agents to ensure the property is free from any contaminate left by such an operation. Some matters It is not always possible to see physical evidence during a routine property inspection.

Is it still reasonable to carry out a physical inspection alone or is it now prudent to carry out a test every time a tenant exits a property before a new tenant is allowed in. Is a home test available from some pharmacies enough? or should an expert in testing for the residue of a Meth Lab be engaged?

Then, of course, there is the question of insurance. Just looking at the Real Estate Agent for a minute, a large number of Professional Indemnity Policies exclude losses arising from contamination. You need to check for any endorsements added to the schedule that may take away the cover that appears to be covered in the policy itself.

I therefore urge insurance brokers to check the policies and schedules they have with their real estate clients and offer such clients to determine if this is an exclusion or not. Do not forget that you can always use the ‘Search by Product Feature” option in LMI PolicyComparison.com for either the Australian or New Zealand policies.

To learn more about the risk caused by Meth Labs please check out Steve Manning’s special report on his Insurance Bites YouTube channel. I enclose a link here for your convenience.

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Address at the ASIC annual forum by the Hon Kelly O’Dwyer MP

With many of us concerned about the loss of trust in the insurance industry by the public, the increasing number of complaints and some of the practices being adopted I thought I would share the address by the Hon. Kelly O’Dwyer MP in her role as Minister for Revenue and Financial Services at the ASIC Annual Forum on 19 March.

I have marked in red the areas that I particularly found of interest.

Check against delivery

Thank you, it’s a pleasure to welcome you to the Australian Securities and Investments Commission (ASIC) Annual Forum.

This is the first time I have officially shared a public forum with the new chair of ASIC since the announcement of his appointment late last year, and I want to congratulate James Shipton on his new role.

Some of you might know that James and I share a fairly quirky heritage in that James’ father, Roger Shipton, was a former Member for Higgins, and I am the current Member for Higgins.

However, we had never met until he was headhunted for this role from the United States.

I am sure James will bring to this important job his considerable experience in corporate regulation, both as a practitioner and in academia, as well as, as a regulator. His unique international perspectives in Europe, Asia and the United States will be an asset.

ASIC has an incredibly important role in Australian business.

Australia’s reputation as a great place to invest, to set up business and to employ people, rests in no small part to the confidence we place in the work of our regulators, especially ASIC.

So it is fitting that the theme of this year’s ASIC Annual Forum is — ‘maintaining trust’.

This is because trust is fundamental to all our dealings in financial services, doing business and investing.

And maintaining trust requires constant vigilance.

It raises many questions — for financial professionals, for regulators, for the industry as a whole.

And the ‘maintaining trust’ theme also poses implications for the Government — ones that we are working hard to address.

So in my time today, I want to make some announcements relating to ASIC, as well as share some thoughts on recent developments and the Government’s priorities in the year ahead.

ASIC leadership

When it comes to the leadership of ASIC the Government strongly believes it’s crucial that the ASIC Commissioners have the right mix of skills, knowledge and experience.

As I mentioned, we have recognized that James Shipton brings a strong set of skills and international experience to the role of ASIC Chair.

And I would like to announce today that the Government also intends to create a second Deputy Chair position in ASIC to build on and strengthen ASIC’s leadership and give ASIC greater flexibility to administer their new powers and increased responsibilities resulting from recent law changes. 

This move will bring ASIC in line with its regulatory brethren at the Australian Competition and Consumer Commission (ACCC).

This important step will also support ASIC to engage more closely with its stakeholders and assist to better communicate its role, its priorities and how its resources are allocated.

I am currently seeking the required approvals under the Corporations Agreement with the States and Territories, and intend to introduce legislation to make the necessary amendments to the ASIC Act in the coming weeks.

I am also pleased to announce today the reappointment of ASIC’s current Deputy Chair, Mr Peter Kell, and also Commissioner John Price.

I want to thank them for their tremendous work to date, and I look forward to their continued contribution.

The Government will make an announcement regarding the new Deputy Chair on introduction of the legislation.

Statement of Expectations and Competition mandate

In line with the theme of ASIC’s leadership and future direction, it is with great pleasure that I announce the Government has settled on the new Statement of Expectations for ASIC.

The new Statement of Expectations acknowledges that ASIC, as the market conduct regulator, has the challenging task of balancing several objectives aimed at facilitating efficient capital markets and promoting trust and confidence in the financial system.

It reflects the notion that for ASIC to be a successful regulator, it will need to continue to have an open and sound working relationship with its regulated population and counterpart regulators.

It further recognizes how critical it is for ASIC to communicate its key decisions and regulatory outcomes to the public and demonstrate clearly how those decisions and outcomes align with ASIC’s legislative and strategic objectives. This is particularly essential now that ASIC is being funded by industry.

Competition mandate

The new Statement of Expectations will also reflect a new competition mandate for ASIC.

It is my belief that ultimately it is competition – not regulation – that is the best means of ensuring consumers get value for money in financial services.

I think that everyone agrees that both consumers and financial services providers — particularly new entrants — benefit from a more competitive financial system.

To this end, the Government will legislate to add consideration of competition to ASIC’s mandate, consistent with the Government’s response to another of the Financial System Inquiry recommendations.

This new mandate will require ASIC to consider the effect that its work and the exercise of its powers will have on competition in the financial system.

Including competition consideration in ASIC’s mandate complements other key initiatives undertaken by this Government to support competition.

This includes tasking the Productivity Commission to review competition in Australia’s financial system and funding the ACCC to undertake in-depth inquiries into specific financial system competition issues.

The Government looks forward to receiving ASIC’s response to the Statement of Expectations from its new Chairman.

As for recent developments in reforms, there’s plenty to discuss, but I’d like to focus on a few key items.

New financial adviser standards

Earlier last year, the Turnbull Government established the Financial Adviser Standards and Ethics Authority (FASEA) – a body comprising industry, consumer ethics and education experts – to raise the education, training and ethical standards of financial advisers.

Since the appointment of its CEO, Dr Deen Sanders, FASEA has been working hard to provide the industry with certainty on the new requirements.

I am pleased to note that shortly FASEA will be releasing new draft guidance on the education pathways for all existing advisers.

Under the proposal, existing financial advisers will need to undertake a relevant degree or one or more bridging courses, including a specific course on the Code of Ethics that will be developed by FASEA.

Advisers who have not previously undertaken a degree, or who have undertaken a degree that is not in a related field will need to reach degree-equivalent status.

And advisers who have previously completed a degree in a relevant discipline will need to complete between one and three bridging courses, to bring them up to date with current ethical and professional standards. Some advisers will need to complete additional study.

However, it is important to remember why these reforms are necessary – repeated instances of inappropriate or just plain bad advice has significantly eroded trust and confidence in the financial advice sector.

Every adviser has a role to play in rebuilding that trust, and these new educational requirements are a critical step towards professionalising the sector.

Ultimately, the professionalization of the advice sector will be in the best interests of all advisers, existing and new, because it will ensure enduring consumer trust and confidence in the financial advice sector.

The consultation on FASEA’s draft guidance will be open until the end of June this year. I encourage you all to participate.

Whistleblower protections

Now turning to protections for whistleblowers.

In the summer just gone, we introduced a Bill into Parliament to implement significant reforms to Australia’s whistle-blowing regime.

The Bill will provide stronger protections for insiders who break ranks and expose corporate misconduct and, for the first time, establish whistleblower protections for people who disclose information about tax misconduct.

The Parliamentary Joint Committee’s report on whistleblower protectionsmade 35 recommendations to strengthen Australia’s regime and I am pleased to say the Bill addresses the vast majority of those recommendations, and the Government is currently considering those that remain.

The new whistleblower Bill delivers on the Turnbull Government’s commitments in the 2016-17 Budget and as part of the Open Government Partnership – National Action Plan, to provide new protections to tax whistleblowers and to strengthen whistleblower protections in the corporate sector.

Under our Bill, a wider range of whistleblowers will be protected from a wider range of egregious conduct, and for those who do suffer reprisals or retaliation for blowing the whistle, the path to compensation will be simpler and easier.

And we are delivering a framework which will improve corporate governance practices and facilitate effective law enforcement.

Our Bill is a major step forward for whistleblowers in Australia, and we look forward to Labor and crossbench support for these critical reforms.

Financial products

This year the Government is also progressing reforms to address the mis-selling of unsuitable financial products to retail investors and consumers.

In December 2017, we invited comment on draft legislation for new design and distribution obligations for issuers and distributors, and a new product intervention power for ASIC.

The design and distribution obligations will ensure financial products are targeted and sold to the right consumers.

Now let me make clear from the outset, there is more work to do on these critical reforms. The feedback received from the last round of consultation raised a number of issues and the Government is carefully considering these.

When, and only when, these issues have been given full and deep consideration and after additional consultation  the legislative package be finalized and ready for introduction.

Under the new regime, firms will be required to identify the target market for their product, and will need to design the product for that market.

Further, both issuers and distributors will be required to take reasonable steps to ensure that products are distributed appropriately – that is, distributed to the target market only. These are significant reforms that will change the landscape for the sale and distribution of financial products in this country.

However, despite this, as many of would be aware these new obligations are not unprecedented – the reforms that commenced in the European Union in January this year also apply design and distribution obligations to product issuers.

To complement the new design and distribution obligations, ASIC will be given a new product intervention power.

This will give ASIC the power to intervene in the sale of a product, a product feature or practices related to the distribution of a product, in circumstances where ASIC perceives a risk of significant consumer detriment.

The products intervention power, like the design and distribution obligations, is also not unique globally.

The Financial Conduct Authority in the UK has for some time had the power to intervene in the sale and distribution of a financial product, if it is considered to be harmful to consumers.

And, the European Securities and Markets Authority has recently sought comment on proposed product intervention measures for their market.

The design and distribution obligations and the product intervention power are complementary and interconnected, and I am confident that together they will represent vastly improved consumer outcomes.

These reforms were recommended by David Murray in his 2014 Financial System Inquiry report, and the Government accepted those recommendations in full.

Insurance

While I’m here, I’d also like to say a few words about the insurance industry as there are a few major developments on the horizon.

Life insurance report

At the end of this month, the Parliamentary Joint Committee is due to hand down a report into the life insurance industry.

Among the findings, I expect that the report will make recommendations on whether or not there is a need for further reform and improved oversight of the life insurance industry.

It will also focus on the sales practices of life insurers and brokers.

This report has long been awaited by the industry, government and indeed, many consumers.

Unfair contract terms

And, in the first half of this year, the Government will be consulting on changes to apply unfair contract term laws to life insurance contracts, as well as general insurance contracts.

This is in response to the Senate Committee report on the general insurance industry and the Australian Consumer Law Review.

While this will be a significant reform for industry, it is in the best interests of consumers and will bring the insurance industry into line with other financial services.

Mental health

Another issue, the insurance industry is currently contemplating with is claims for mental health related disabilities.

In October 2017, we saw the release of the Actuaries Institute Green Paper on mental health and insurance — a welcome development.

The paper highlights the large array of issues the insurance sector, and in particularly the life insurance sector, need to consider to support the large number of Australians who experience mental health conditions.

The list of issues includes things like definitions, data, rehabilitation and claims processing.

Given the incidence of mental health issues across the population, it is in the best interests of the community that the insurance industry, regulators and government work together to deal fairly and effectively with this issue.

I look forward to seeing further progress in this area.

Australian Financial Complaints Authority

Before I finish, I’d like to share some insights on the Australian Financial Complaints Authority (AFCA) — the new one-stop shop for all financial and superannuation disputes.

It will be landmark year for dispute resolution in Australia.

Parliament has passed legislation to establish the AFCA and we are currently putting in place the governance structure that will enable AFCA to start accepting disputes no later than 1 November 2018.

I recently announced that the inaugural Chair of the AFCA Board will be the Hon Helen Coonan.

And once a company is authorised to operate the AFCA scheme, I will make further appointments to the AFCA Board.

When the AFCA is up and running, consumers and small businesses will have access to free, fast and binding service to resolve all financial disputes.

The advantage of the new regime is that there will no longer be uncertainty, consumer confusion and cross-referral of disputes between dispute handling bodies.

Where a complaint covers multiple providers within the financial system, managing these complaints will be smoother under a one-stop shop.

What’s more, the AFCA scheme will also allow more small businesses to access external dispute resolution.

We have relaxed the definition of ‘small business’ so that in the case of a dispute related to a credit facility of less than $5 million, a business with fewer than 100 employees will be able to lodge a dispute with AFCA.

On top of that, AFCA will operate with significantly higher monetary limits than the existing external dispute resolution ombudsman schemes, so that those who have wrongfully suffered a loss will receive fair compensation.

We believe this will provide real outcomes for consumers and small businesses.

Closing remarks

Over the past 12 months there has been a lot of work done by the Turnbull Government in the regulatory space, and further work, as I have outlined, will continue this year.

Collectively, the initiatives that I have mentioned today will make a big difference.

They go to integrity and they go to transparent processes. And most importantly, they go to consumer trust.

We know that there is much to do.

However, it is at forums such as this where new ideas and experiences can be shared.

Our goal is not regulation for regulations sake.

Our goal is to provide the best regulatory structure for the free enterprise system to work as it should.

This will ensure that our country is seen as the best country in the world to invest in, and that our businesses and most of all our financial consumers can look forward to a prosperous future based on trust in that  regulatory framework. 

So, on that note, it is my pleasure to officially welcome you all to ASIC’s Annual Forum for 2018 and I look forward to your deliberations.

Thank you.


For my part I will continue to argue that builders, investigators and others handling claims are regulated so as they have at least a basic understanding of the fundamental principles of insurance, including the principle of Utmost Good Faith and understand the products that they are making decisions on coverage.

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Phones and driving do not mix

Over the past month, 3 relatives and friends have been involved in motor vehicle accidents where at least one of the drivers has admitted to texting or doing emails while driving.

As well, there was the tragic accident involving two police officers who were severely injured whilst setting up a random breath testing station in Sydney. Another case in the last month where the driver admitted to being distracted by their phone.

This is a serious problem that is confronting society and the insurance industry and I support the decision by more and more underwriters to include an exclusion in their policy, giving them the ability to deny liability in the event that the insured driver was texting whilst driving and the accident occurred.

Clearly the police alone cannot address this situation, which to my mind, is only becoming worse.

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When is it time to stop pretending to care about customers and actually start?

I reported on two claims recently which were completely and utterly off the rails. The first being a home where this would be the 4th Christmas the Insured would be out of their home despite having their insurers top of the range product. It was a bush fire situation and there was no suspicion of arson, it was just a case of the panel beater builders completely letting the Insured down. After 15 months of trying, we finally got a common-sense solution, but it has now been 6 weeks that the release has been stuck in legal. How to draft a release was one of the first things I learnt as a claims officer when I was 17 years old and I cannot understand how a claim that has been so terrible handled is dragged on so that it cannot be resolved before Christmas number 4.

I was equally dismayed this morning to see a comment in The Age (21st December 2017) where an Insured has said

“The insurance companies are hopeless I won’t use them, I’ll just try and sell these”

This is a response to the recent hail storm we had in Melbourne.

It is comments like these and the negative feedback from the Insured in the claims that I wrote about recently, which they are saying to their friends and relatives, which caused the great doubt of trust in our industry. An industry which has as its core principles, Utmost Good Faith.

If we don’t address this situation we will suffer as an industry in the long term.

Source: The Age Newspaper, Melbourne, 21 December 2017

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When does the Indemnity Period end?

At LMI Group, we have an issue which comes across, almost in waves, in regards to a number of claims which needs to be addressed before the next flavour of the month adjustment to reduce an Insured’s claim.

The one we have just overcome is where the adjuster has made a “notion” adjustment, without explaining the basis for it. Now, we have come across on a number of claims, particularly involving restaurants, clubs and hotels is for the indemnity period to be cut off by the loss adjuster and then the Insured being asked to prove that the loss extends beyond the period allowed by the adjuster and then also prove that the ongoing disruption is as a direct result of the damage or other insured event which gave rise to the initial claim.

One of the great frustrations for us is that often this judgment call is being made by a Forensic Accountant or an adjuster who has not been to the site, met the insured, or if they have, it has been only one short visit. Without understanding the insured’s business, their assumption that the business should have been back to normal may well be completely ill founded and at times appears to be linked to the fact that the initial reserve placed on the disruption by the adjuster or forensic accountant has proved to be inadequate. That means the claim is then being adjusted within the confines of that initial reserve.

With this background, I thought that it was appropriate to review the typical Business Interruption cover and in particular, to look at the onus of proof issue.

There are differences in the market with business interruption policies and so, for the sake of this exercise, I will use the Industrial Special Risks (“ISR”) Mark IV Modified wording.

The trigger for a claim under Business Interruption under the Mark IV ISR reads:

In the event of any building or any other property or any part thereof used by the Insured at the Premises for the purpose of the Business being physically lost, destroyed or damaged by any cause or event not hereinafter excluded (loss, destruction or damage so caused being hereinafter termed “Damage”) and the Business carried out by the Insured being in consequence thereof interrupted or interfered with, the Insurer(s) will, subject to the provisions of this Policy including the limitation on the Insurer(s) liability, pay to the Insured the amount of loss resulting from such interruption or interference in accordance with the applicable Basis of Settlement.

Assuming that the loss falls within the triggering provision of the policy, it advises that the claim will be settled in accordance with the “applicable Basis of Settlement”. The Basis of Settlement reads:

The insurance under this item is limited to actual loss of Gross Profit due to: (a) Reduction in Turnover and (b) Increase in Cost of Working and the amount payable as indemnity thereunder shall be:

(a)   In respect of Reduction in Turnover:

the sum produced by applying the Rate of Gross Profit to the amount by which the Turnover during the Indemnity Period shall, in consequence of the Damage, fall short of the Standard Turnover.

(b)  In respect of 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.

In both Section (a) and Section (b), the policy makes note that the Insured is to be indemnified during the Period of Indemnity. It is therefore important, that we look at the definition of Indemnity, which reads:

INDEMNITY PERIOD: The period beginning with the occurrence of the Damage and ending not later than the number of months specified in the Schedule thereafter during which the results of the Business shall be affected in consequence of the Damage.

In Summary, this definition states that the Policy starts on the date of the Damage, which may be before any disruption to the business starts and ends when the business is no longer effected in consequence of the Damage, or the number of months stated in the Schedule.

Often, it is a case of res ipsa loquitur which simply means, the facts speak for themselves.

Naturally, as part of the calculation and/or assessing process, the person preparing the claim and/or assessing the claim, would carry out tests to determine whether or not some other factor has arisen which has caused a downturn in the business, and for that matter, may have caused an upturn of the business, unrelated to the Damage which would have taken place had the Damage not occurred.

The reasoning behind this, is that at its heart, the traditional business interruption policy is a contract of indemnity. That is, of course, to put the Insured back to near as money will allow to the position they would have enjoyed but for the loss. I stress that this is the underlying principle of the majority of business interruption policies in the market, however, there are some policies which are in fact agreed value policies, where the Policy stipulates a formula which may well over or under indemnify the insured.

To ensure that the principle of indemnity is maintained, the policy contains what to me is arguably the most important clause in the contract of insurance and the one that creates the greatest conflict between the insured and the insurer.

This clause is the adjustments clause, which reads:

Adjustments shall be made to the Rate of Gross Profit, Annual Turnover, Standard Turnover and Rate of Pay-Roll 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.

While the Indemnity Period is not specifically mentioned in the clause, what is in effect occurring when the indemnity period is being cut short, is that the insurer or their agent is suggesting that the turnover that would have been achieved had the business not been affected by the Damage, would have been reduced for some other event, and as such, the period of disruption caused by the Damage is at an end.

Just as an insurer would take a dim view of an insured who came along with an unsubstantiated request to increase the standard turnover of the business, I’m of firm belief that if the insurer or their agent suggests that there is a special circumstance that reduces the standard turnover, then the onus of proof is on the insurer to prove this and not simply make an unsubstantiated claim that the business ought to have been back at that point.

I’m the first to admit that the adjustments clause is not an exact science and that no one can ever be 100% certain as to what the business would have achieved but for the loss, other than in the rarest of circumstances. There is always room for negotiation but both sides ought to provide some logical reason for any adjustment that they wish to make to the standard turnover. For the sake of completeness, I include the definition of standard turnover which reads:

STANDARD TURNOVER: The Turnover during that period in the 12 months immediately before the date of the Damage which corresponds with the Indemnity Period.

To further put this into perspective, the position I hold is that it is inappropriate for an insurer or their agent to simply say that the business should have been returned to normal, say a week after a restaurant reopens when the business had a track record of performing well prior to the event and has recovered to their pre-damaged position at a period longer than was expected by the insurer for the Indemnity Period to be cut off unilaterally and the Insured required to prove that the ongoing disruption beyond their stipulated cut off point is as a result of the Damage.

In fairness, how can this ever be proved?

It leaves the insured in a helpless position, starved of cash and with no logical way they can prove the ongoing loss, other than for the fact that their revenue has not returned to normal. Whether I am acting as a loss adjuster or claims preparer, my role would be to carry out an analysis and look at industry figures, the possibility of new competitors entering the market and all other factors to see whether the position I have adopted in my calculation of the claim is fair and reasonable to all parties concerned.

I have never attempted to cut off an Indemnity Period without any reasonable foundation for doing so. It appears that we will be taking at least one of our current claims to court to examine this whole issue of onus of proof and I look forward to the outcome which may resolve this, to me, inequitable position that many insureds are confronting.

 

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Australia’s failing infrastructure

Recently, I wrote about issues with electricity infrastructure not keeping up with development. The same issue is occurring with storm water drains.

Water damage arising from storms is one of the greatest causes of property insurance losses in Australia, so it should be of great concern to see that our councils and water authorities do not seem to be investing in the infrastructure to protect our homes and businesses.

There are three main issues. The first is councils should simply not allow developments in known flood zones.

The second is that they need to invest in upgrading the storm water systems if they are going to reap the reward of extra rates from new developments. In Camberwell, where our Melbourne office is located,  one development alone has two underground storm water pipes that are around 450mm in diameter, but the council drainage system that it will flow into is less than ¼ of that capacity.

Due to all the additional hard surfaces that are a direct result of turning homes on ¼ acre blocks with a yard into multistorey apartments that take up much of the block and what is left is concreted, means water that was previously soaking into the ground is now surface water, and the existing council drainage system simply cannot cope.

Add to this the fact that developers are not required to bund their construction sites to stop excavated soil and building materials such as sand, gravel etc from being washed into the drains. If they are required to do this, our local authority is not policing it. As well as the odd dodgy builder who just washes down concrete slurry in the roads and lanes, and of course, you get localised flooding.

It appears that the council has also reduced the clearing of the drains despite all the new development and this only compounds the problem. Even if it is the same frequency, it is not sufficient to deal with the extra debris the new developments have created.

As a result, several of our neighbours have had water inundation 5 times this year, when this did not occur in the past.

The trouble for business of course is that unlike residents we have no vote or say in local elections despite most of us spending more time in the electorate than at home and paying significantly more rates than an individual home owner.

Clearly the insurance industry needs to help the insuring public and start a discussion with local authorities in an effort to address this serious problem which is clearly only getting worse.

Alley way next to LMI Melbourne, where during a recent storm the water reached approximately 3 inches deep due to not draining properly.

Building site near our office demonstrating no bunding and the ability for the soil, sand and other materials to wash into the drainage system and block it.

 

 

Image demonstrating a large piece of concrete debris washed down from a building site blocking almost the entire drain which resulted in the alley flood.

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Learning from the past to protect against today’s hazards

During the very hot summer of 2008-2009, that included the Black Saturday bush fires, our Melbourne office was left without power due to both the fires and the inadequacy of an electrical sub-station across the road.

As it is imperative for us to provide our claims services during periods of natural catastrophe, so we are able to assist people in need we installed a backup generator in our building. Some within the business questioned the cost of installation and the ongoing maintenance, but I felt that as part of our risk management and business continuity management plan installing the generator was the way to go.

We have had reason to call on it only about 4 times until this year. Due to power outages, often associated with storms, it has meant that recently we have been able to maintain phone, email and web services at a time of high demand.

This week the generator has come into its own. With the apparent uncontrolled or at best inadequately proliferation of high rise developments in the area, now that Melbourne has had its first taste of summer, the infamous sub-station across the road caught fire and will not be replaced for at least a week from the time of failure. Whether the privatised carrier simply puts back the same size unit or upgrades it to cover the increased demand no one can advise us.

The apparent reason for the failure was that at after 5pm there was an electrical demand surge when everyone came home and turned on their air conditioners and the system could not cope.

In any event the ongoing outages of power to the area have not effected LMI due to our addressing the issue when it first arose nearly 9 years ago. The generator kicks in every time there is a black out or equally damaging brown out.

Of course, we are not the only business in Melbourne feeling the effect of the infrastructure not keeping pace with development. I heard on the radio this morning that homes and businesses in Blackburn and/or Box Hill have power outages. South Australia had their own issues recently.

Bearing in mind, this is only the start of summer, this issue is clearly not going to be an isolated case and all businesses are encouraged to revisit the business continuity plan and if they do not have one, consider creating one.

The issue of inadequate infrastructure is not just limited to electricity. Storm water and telecommunications are also proving inadequate and I will share examples of this issue in upcoming posts.

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Cheapest is not always best – Lessons for procurement officers

I spend much of my time speaking at conferences for various industries, where I encourage the business owners not to purchase their business insurance on price, but to carefully consider how important their insurance program is and the protection that it offers.

Increasingly, over the last few years. I have been questioning the true value of a procurement officer, for regardless of what the tenders say, it seems to come solely down to price, without considering the true value that a good service provider to the insurer provides, nor the cost of what getting it wrong does to the average claims cost and potentially to the brand of the insurer and insurance in general.

I will give two examples to demonstrate what seems to be happening more and more.

The first involves a couple in their 70’s who have had their home destroyed during a bushfire over 4 years ago. Clearly, the builder that won the rebuild never expected to win the job and thought the matter would be cash settled. They were then horrified to find that they in fact had won the tender to rebuild. After 2 years, work had not started on the property and the Insured, naturally, complained. The builders found themselves busy at that time and engaged another building firm to do the work and it went along swimmingly until the first progress payment went in from the second builder to the first and they realised that they were going to lose more money in having someone else do the work than they themselves completing it. The first builder, original tender winner, dismissed the second builder and took the project on. Sadly, they did not start doing any work since the dismissal of the first builder, by which time I was then asked to get involved rather than the client go to the media.

I carried out an inspection of the property and then attempted to meet with the claims officer concerned to express some very valid concerns of the Insured and items that I had seen during my site visit. My first email was ignored, so I sent a follow up one setting out just some of the issues, three of which were:

  1. Between the second and first builder, the floor had been propped up in the centre of the home with nothing more than a piece of 19mm x 35mm pine framing. This may have been acceptable while the home was being built to floor level, but once the upper level was on it, the floor had bowed by at least 10mm and I was concerned that when the home was jacked up to be made level again, any works inside including plaster finishes, tiling etc may crack.
  2. The builder had held discussions with the Insured and it was agreed that the home would be rendered at the Insured’s expense. No credit however had been given for the fact that the builder would therefore be able to use seconds bricks rather than first quality as originally quoted/agreed.
  3. Because the home had been left without a roof covering for so long, there was mould clearly visible on the floor, framework and particularly between the floor plate and the floor.

I got a very disappointing reply back suggesting that to the untrained eye the timber prop may appear dangerous, but it wasn’t, and secondly that the bricks were not seconds but mixed, and thirdly they completely ignored the mould.

Ultimately, an engineer confirmed that not only was the timber ‘support’ dangerous as I predicted, but was so weak that it may have caused the entire home to collapse. The claim officer had also misunderstood the difference between seconds bricks, being that they were not first, and second hand bricks which means they came from another site. The day after they received my letter, the builder was advised and immediately sheared up all the framework, hiding the mould that I had pointed out, without treating it first. Because of the hype around mould at the time, coupled with the age of the Insured’s (I would remind you they are in their 70’s and the wife quite frail), I thought I would have it tested. I then received a note advising I had vandalised the home.

I took the entire issue to the national head of claims for that particular insurer and while someone with more experienced was appointed, it still took a full 15 months to get resolved with the insurer agreeing to cash settle the claim. The cost of the claim had blown out by several hundred thousand dollars, combined with the fact that they will be paying rent until they can get a new home built themselves.

Insurance should be there to help people in their time of need.

This was a completely innocent fire from the Insured’s perspective (it was clear it was from the bushfire) and they will have been without a home for coming up to their 4th Christmas. This is unacceptable in anyone’s language.

The second example, involves an insured who had water damage in their home. Rather than engaging a loss adjuster to oversee the claim, the insurer decided to save money and send out a restoration company. It took 8 days for the company to even attend site, and rather than take a detailed inventory, they simply packed everything up, put it into a shipping container and assured the Insured that it would be unpacked at their warehouse, separated between wet and dry and that the wet items would be cleaned carefully and sterilized.

6 months later, it was found that the items were still in the shipping container and a vast majority of the contents, even those that were not originally damaged by water, had become affected by moisture and mould etc. Some antique furniture which had been beautifully French polished had been stripped back and sprayed with a cheap lacquer. Here, the insurer is trying to distance themselves from their agents, which of course, is unconscionable. Here again, a claim has blown out dramatically due to poor service delivery.

These are just two claims that have come across my desk, and for every one that does, I question how many others are out there. In both of these cases, how many people have these insureds discussed and expressed their disappointment with the insurance industry and the particular brands involved. The first one I had to get LMI Legal involved to resolve, and it appears from the approach on the latest water damage case, I will have to do the same, for at this stage there still appears to be absolutely no empathy for the Insureds position whatsoever.

While I am annoyed with the claim process, I think it all starts at the procurement stage. Buying services is not like buying washing machines. If you have a highly competent professional who has studied, has years of experience, then of course their hourly rate is going to be slightly higher if they are honest and only charge the hours they work. The existing procurement process, appears to favour the shortcut takers, or those who cheat the hours. Either way, the insurer misses out on engaging the right person for the job.

What disappoints me, and I feel should be called out more is that despite this being a huge dispute, the Insured has not been given any advice of the internal complaints procedure, their rights with the Financial Ombudsmen Service (FOS) etc. This confirms one of the many examples I have that some insurers are able to obtain a better rating with FOS.

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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.

 

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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.

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