R.M.S Titanic – Launched 106 years ago today

Today is the 106th Anniversary of the launching of the Royal Mail Ship Titanic in Belfast, Ireland.

As we all know, the 40,000 tonne ‘unsinkable’ ship struck an iceberg on the 14th April 1912 sinking early the next morning, the 15th April 1912 with a loss of around 1,514 lives.

Lloyd’s of London paid out £1,000,000 (modern day equivalent over £107,500,000) within 30 days of the sinking. To put this into perspective, total payouts on all marine claims by Lloyd’s that year was approximately £6,500,000.

Early in my career, I was told that there is no such thing as a prestigious account. The Titanic was marketed as a prestigious account and as a result, a very favourable premium of only £7,500 was charged for the £1,000,000 sum insured (and we think rates are cheap today!).

Being the avid collector that I am, I recently acquired a plate and cutlery which were manufactured for the Titanic but never made it on board. The items were put aside in a warehouse to replace theft and breakages, but with the sinking of the vessel, the items never got to be used. They now have pride of place in the reception of LMI Group’s head office in Melbourne.

Earlier this year, I received a piece of coal that had been recovered from the wreck of the Titanic and I think this is where my collection will finish.

I never thought I would be lucky enough to own a piece of this history, let alone 4. 

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Tianjin Explosion – initial report

Source: BBC News

Source: BBC News

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

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

Aon Benfield have published an initial report on the losses which continue to grow but while the numbers may have been superseded the report does highlight the issues.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

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

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

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

 

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Risk and Insurance Trivia # 1

The archaeologist Hermann Thiersch's 1918 drawing of  the Pharos of Alexandria

The archaeologist Hermann Thiersch’s 1918 drawing of the Pharos of Alexandria

Lighthouses have saved thousands of ships and countless lives over the centuries.

The earliest ones appear to have been towers in which fires were lit and tendered by priests or monks.

The first purpose built lighthouse is believed to have been the Pharos of Alexandria (Egypt on the Mediterranean Sea) built in the third century BC. A top this massive structure the light from a fire was focused on bronze mirrors into a beam which due to the height of the edifice could be seen for 56 kilometres away.

The first lighthouse to be powered by electricity was the Dungeness Lighthouse in Southern England in 1862.

With the introduction of electricity to lighthouses meant that they no longer needed to be manned.

As is the case in most countries, there are no longer any manned lighthouses in New Zealand or Australia.

Lighthouses, nonetheless continue to be a valued risk management measure to the maritime and insurance industries.

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MOP /Stock Throughput Covers – An Analysis – Part 5 – Where Stock is Insured for Full Retail Price do I need Business Interruption Insurance?

bigstock-Business-Interruption-Sign-39078256The simple and firm answer to this is YES YOU DO.

There are a great many reasons for my taking this view.  In summary they include:

  1. If there is no Business Interruption cover in place, the  only time the Insured can claim for any consequential loss of profits is following a loss of stock.
  2. The maximum amount claimable is the difference between the cost price of the stock damaged and the retail price shown on the policy.
  3. If the stock would have been turned over more than once during any period of disruption a significant uninsured loss can ensure as the maximum amount claimable for Business Interruption is the difference between the cost price and selling price of the stock damaged.
  4. Disruption to a business results from many other property losses other than stock. These include: damage to the building, fixtures and fittings, machinery and plant,  and or other contents owned by the Insured or; damage to property not owned by the Insured but used by them at the situation.
  5. On my research going back over 40 years, I estimate that 30% of disruptions arise through no damage to insured property at all. Significant claims can arise and are typically insured in some form under an ISR policy but not a MOP policy. These risks include: Public Utilities outages; Damage to a Complex in which the Insured is located; Prevention of Access; Murder or Suicide; Outbreak of infectious disease; Customers’ Premises (Australia only but can be extend to include overseas as well); Suppliers’ Premises (Australia only but can be extend to include overseas as well)

Other serious concerns with a MOP cover that can be overcome by insuring them separately under an ISR policy are:

  1. There is no Increase in Cost of Working Coverage
  2. There is no Additional Increase in Cost of Working Coverage
  3. There is no coverage for loss management/claims preparation and/or accounting  services.

I hope this is enough to convince you that having the traditional Business Interruption cover is far superior to the very limited interruption protection afforded by insuring stock for retail price.

 

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MOP /Stock Throughput Covers – An Analysis – Part 4 – The Trigger for Business Interruption Under an ISR when an MOP is used to Insure Stock

http://www.dreamstime.com/stock-images-investigation-image27958864A common question asked me of me, that prompted me to write this series (this is the fourth) of articles on MOP / Stock Throughput policies, is “can the Insured still make a claim for Business Interruption when the only thing damaged is stock and this [the stock] is not insured under the business pack or ISR policy?”

The trigger for a Business Interruption claim under an ISR policy is damage to property owned or used by the Insured at the situation caused by an insured event.

The following is the trigger clause under the Australian Mark IV Advisory Industrial Special Risks (“ISR”) Policy.

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.” [emphasis mine]

The issue from this clause is that the loss or damage to stock must be at “the Premises”.

There is no definition of Premises in the ISR policy other than what is recorded on the Schedule and /or in the Schedule of Declared Assets against the heading: Situation and/or Premises. Therefore I recommend that the following wording after all the Insured’s locations are listed:

Principally ……….and any other situation/premises in Australia owned or occupied by the Insured for the purposes of the Business or elsewhere in Australia where used by the Insured or where the Insured is undertaking work or has goods or property (including where goods or property are stored, or undergoing processing, repairs, maintenance, overhaul or improvements).”

The Policy will not, without agreement with the Insured, provide coverage for Business Interruption arising from loss or damage to stock overseas.

For Australian based stock, where the above wording  has been used, the Business Interruption section will be triggered but there is a second test, this is known as the Material Damage Proviso.

This Proviso reads as follows:

 Provided that the Insurer(s) will not be liable for any loss under this section unless the Insured’s property lost, destroyed or damaged is insured against such Damage (loss arising out of destruction or damage by explosion of Boilers and/or Economisers excepted) and the insurer or insurers by which such property is insured shall have paid for, or admitted liability in respect of, such Damage unless no such payment shall have been made or liability shall not have been admitted therefore solely owing to the operation of a provision in such insurance excluding liability for loss below a specific amount.” Emphasis mine 

You will note that the Proviso does not require the property damage that gives rise to the disruption to be insured under the ISR, but any policy will do and this, of course, includes a MOP or Throughput policy.

What is required is that the stock is insured, that the stock loss is met under the other policy and that the ISR policy does not have an exclusion, such as flood, that would exclude a Business Interruption claim in any event.

greenTo learn more please read pages 148 and 149 of volume 1 of my book, Understanding the ISR Policy – the Mark IV.

A note of warning: many business pack policies are not as wide and require the stock to be covered under the same business pack policy that provides the Business Interruption coverage.

The issue can be very complex where there is a prevention of access or other factors also involved as we are seeing in Christchurch and elsewhere but that is a book in itself.

I finish my series on the MOP / Stock Throughput policies tomorrow where we look at whether we need to insure business interruption at all if we insure the stock for full retail under an MOP or similar policy.

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MOP /Stock Throughput Covers – An Analysis – Part 3 – Where and What is Covered Under a MOP Cover

Flood WarningThis is article three in a short series explaining Manufacturers Output policies / Stock Throughput policies. Today we start with, “where is the stock covered?”

As I always say, no two policies are the same so please check the policy you are contemplating using but often the locations include:

  1. Worldwide coverage
  2. Insured’s own location
  3. Retail locations
  4. Warehouses, Processing locations and Distribution Centres
  5. Exhibitions
  6. Unnamed locations
  7. Third Party Locations

This certainly has appeal and  provides a wider geographical cover than a standard (“Industrial Special Risks (” ISR”) policy.

The breadth of coverage is similar to that of an ISR in that it covers all loss or damage, except that which is excluded. The big difference is typically that flood is insured as standard under some, NOT all, MOP policies.

As a claims person, I have come to the conclusion that just about everywhere in Australia can be affected by flood.

In summary, the benefits of the policy are purported to be that it is a single, all-inclusive, worldwide policy covering goods, whether finished or otherwise, in transit or otherwise, on what we used to call an  “All Risk” basis.

  • Coverage for goods in Storage / Detention /Processing without time limitations.
  • Policy is typically rate against sales turnover. This is a “Non Reporting” Policy.
  • Typically they have low Deductibles on goods in Storage /Detention. (Please remember the Insured may end up with two deductibles to pay if the building or contents are damaged in the same incident and insured under a separate policy.
  • Limits of liability for Storage / Inventory in excess of $100 million per location are available which may assist when you, have a problem with capactity
  • Rating as I explained in the first of these articles is often more competitive.
  • Stock can be  insured against “Selling Price (as a claims adjuster, I can attest that this can increase the morale hazard with some insureds).
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MOP /Stock Throughput Covers – An Analysis – Part 2 – The disconnect in rating between the Marine and Fire Underwriters

Unloading Cargo Truck At Warehouse BuildingThis article is the second in a short series and follows on from one yesterday which you will see immediately below.

As fundamentally a claims specialist, I struggle at times to understand how underwriters, often in the same company can offer such different rates for the same risk.

For example, I often see an ISR underwriter rate stock in an warehouse facility constructed of sandwich panel, that is 2 pieces of metal either side of expanded polystyrene (“EPS”) with no flood cover at a certain rate and then a marine underwriter provide the transit cover which to me is often a higher risk, as well as the static risk in the EPS factory and provide flood coverage at a rate 25% or even more, less than the ISR underwriter.

I know that some brokers play one  ISR underwriter in one state off against another in a different state so I should not be surprised at the fact that some marine underwriters offer lower rates. At some stage this must catch up with them though.

This is not just confined to EPS risks. I have seen grain insured in tarpaulin covered concrete bunkers by a marine department where the same company’s ISR underwriter refused to quote it.

Another area is general liability where some marine departments are writing general liability covers.

I appreciate that people have budgets to meet and capacity flows in and out at different times. All I am questioning marine underwriters here is: are you charging an adequate premium against the full values and all the risk to which the stock is exposed?

This article is not meant to be a pick on Marine underwriters but I would suggest that there is perhaps a higher risk that you are thinking/realising on some of the placements I have seen of late on some of the throughput /MOP covers.

Not all ISR underwriters cannot throw stones here as they are often doing the same underwriting machinery and electronic breakdown cover with flow on business interruption cover, stripping premium out of the engineering or accident department and offering the coverage at a much lower rate than the engineering experts.

The fact that stock can be insured under a MOP cover for a lower rate at certain places in the insurance clock (hard softening, soft, hardening market cycle) explains why MOP policies have come and gone in popularity.

While I went a bit off topic today, I will be back on MOP covers tomorrow should you wish to join me.

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MOP /Stock Throughput Covers – An Analysis – Part 1 – the history and wording

Blurred forklift driver warehouseToday I start a short series of daily articles on Manufacturers Output Policies /Stock Throughput coverage . The reason I have chosen this as a topic as we head to the end of the financial year in Australia.

Some brokers are seeing the use of this type of policy as a cheaper option to insure stock. They are concerned about the coverage, and what effect it has on the business interruption coverage.

Today I look at the development of the product, its rise and fall and now rise again in popularity in this country.

Tomorrow I look at why they became popular and then lost their appeal as I see it.

Day 3 I look at where the stock is insured and the breadth of coverage including flood.

Day 4 I look at some of issues that are found with the policies and possible solutions.  I will look at how the business interruption policy will respond to a loss of stock under a MOP cover and on Day 5 I look at the argument as to whether it is prudent to rely on the MOP coverage for the all important business interruption protection.

Development:

The Manufacturers Output Policy (“MOP”), sometimes called a Manufacturers Throughput Policy, Stock Throughput or some similar name is in broad terms an “all risks” policy that provides a combination of commercial property and commercial inland marine cover.

It was developed in the mid-1950’s as a method of insuring in a single policy stock both during the manufacturing process and in transit. Because the MOP’s combination of commercial property and commercial marine coverages met the needs of many different types of organisations, MOP eligibility also expanded over time to include many industrial, processing, and commercial operations. In recent years, the term “commercial output policy” and the “COP” acronym have begun to replace the term “manufacturers output policy” and the “MOP” acronym in the commercial insurance arena since they more accurately reflect the wide range of organisations that can be insured under this type of policy. The term Stock Throughput Policy also has found a following. For the rest of this article and the ones that follow on this subject I will use its original acronym of MOP.

Primarily it is a policy to cover the stock not the profits arising from the stock. Over time it has been modified to provide coverage based on the stock’s selling price rather than the traditional cost price, (direct labour, direct materials and direct factory overheads in the case of a manufacturer); or cost, insurance, freight (“CIF”) plus 10% offered under a inland marine policy. I will come back to this issue in the articles over the next few days.

There are various definitions of what is included in a throughput or MOP program.

The broadest would be:

The Marine Stock Throughput Insurance Program is an all-inclusive Policy covering goods from the time an Insured/Assured assumes an interest in the goods until their interest ceases. An example of the insuring clause of a MOP policy is:

This insurance hereunder attaches from the time the subject matter becomes at the Insured’s risk or the Insured assumes interest and continues while the subject matter is in Transit and / or in Store, on Exhibition or elsewhere, including while held as Stock and / or at the Assured’s Stores and / or Outlets and / or in Consolidation / Deconsolidation Points and / or Processing. Assembly, Renovation and Repair whether or not in the due course of transit.”

There is also what is known as “Cradle to Grave Coverage”: This would include ocean transits (air or vessel), inland transits, at processors, at warehousing, at exhibitions or trade shows, and at retail locations.

Come back tomorrow and we will continue or discussion on this class of insurance.

 

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The pitfall of relying on overseas supplier’s marine insurance

I am working with our Abu Dhabi office on a claim involving a piece of machinery that was purchased in Europe by an Australia based contractor and was being shipped to the Middle East for installation into a new commercial building.

The purchaser of the equipment, my client relied on the marine cargo insurance arranged by the seller. This cover turned out to be Fire, Theft, Collision and Overturning only for the land component.

After being offloaded from the ship, the machine was being taken by road to the construction site for craning into position. On the way, the machine moved, the holding ropes failed and the machine literally fell off the back of the truck.

With the type of insurance in place there is no cover for the damage sustained and the carrier is relying on their conditions of carriage. At this stage it looks like the client is out of pocket some €80,000.

I always advise that a purchaser should not purchase CIF from overseas suppliers. It is far better to buy the stock or capital equipment ex-factory and arrange their own insurance.

If the insurance was included in the sale price and could not be removed, I would then advise to purchase their own insurance on top of this at the level of cover they require with a Difference in Conditions clause.

This means that those losses that are insured under the seller’s marine cargo insurance are paid by that policy without any dual or double insurance issues but with the added protection of having wider cover should the claim not fall within the scope of the sellers insurance.

Such insurance in the current insurance climate is very inexpensive and yet provides great peace of mind.

I know that such cover is available through Zurich and other good quality marine insurers.

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Blog Question: Interpretation of ITC Hulls Ports Risks Clause

Singapore Harbour, one of the busiest in the world. Source: LMI Singapore

I recently received this question which marks my 150th post to this blog:

Dear Mr Allan Manning

I want your interpretation of clause 9.1.1 in ITC Port risks clause ( 20-7-87 ) which reads as under :

‘loss of or damage to any fixed or movable object or property or other thing or interest whatsover, other than the Vessel arising from anycause whatsoever in so far as such loss or damage is not covered by clause 7……’ [emphasis mine]

My question is : the word “other than the Vessel ” in  the above paragraph,  does it refers to Insured’s Vessel OR any Third party vessel ?

M.A. Niranjan” [email provided]

First up, I would explain that “ITC” stands for Institute Time Clauses.  In the 19th Century, Lloyd’s of London and the Institute of London Underwriters, developed standardised clauses for use in marine insurance. These clauses have been updated and maintained ever since and are known as the Institute Clauses. These clauses cover all areas of marine insurance including but not limited to marine hull, including machinery, and cargo insurance.

The Institute Time Clauses, which afford coverage for a specific period, (usually 12 months) are the most important clauses in marine hull insurance policies. Depending on the nature and degree of risks, there are three categories of ITC:

  1. Institute Time Clauses (Hull), which provide maximum coverage (i.e. perils and other losses and expenses covered);
  2. Institute Time Clauses (free partial average), which provide similar coverage to that of the Hull’s clauses, but excludes coverage on machinery damages, and
  3. Institute Time Clauses (total loss only), which provide coverage only in the event of a total loss. This clause is usually extended to old vessels.

The Institute Time Clauses Hulls – Port Risks Clauses covers many more types of liability than would be normal in the usual hull and machinery clauses and is rather a
combination of a hull policy and protection and indemnity insurance (known as P & I) policy. As P & I cover is only available for larger vessels, it is essentially concerned with small vessels such as harbour tugs, launches, pilot vessels, tenders and the like, which are not seagoing and carry no cargo and are unlikely to do so because of their small tonnage, are unlikely to incur large liabilities to other parties.

For those unfamilar with marine insurance I would explain that protection and indemnity insurance, (“P&I insurance”), is a form of marine insurance provided by a P&I club. A P&I club is a mutual (i.e. co-operative) insurance association that provides cover for its members, who will typically be ship-owners, ship-operators or demise charterers. Unlike a marine insurance company, which is answerable to its shareholders, a P&I club is the servant only of its members.

While I have handled marine claims since 1981, I thought it best to double check my answer to this specific question with my colleague, Associate Professor Neil Myhre a very experienced ex-marine underwriter now Chief Knowledge Manager at LMI Group.

Neil advises that:

ITC Port Risks (20/7/87) refers all the way through to the “Vessel” (capitalised) to describe the insured vessel under the policy. See for example clause 1 Navigation, 2 Termination, 6 Pollution Hazard and so on.

Clause 7.1 – 7.1.3 of ITC Hulls Port Risks deals with collision liability i.e. the liability of the subject Vessel for loss or damage caused to any other “vessel” (note: not capitalised).

Clause 9 deals with P&I coverage i.e. third party liability other than that arising from Collisions as outlined in Clause 7.

Clause 9.1.1. extends the coverage for third party liability to situations not addressed by Clause 7. The reference to “Vessel” is therefore in relation to the subject matter insured – the insured’s own vessel (i.e. it is excluding from the coverage provided by Clause 9 damage to the insured’s own vessel, insured separately for the perils listed in Clause 4). If it referred to another vessel it would contradict the cover provided by clause 7, and in any case is not capitalized in the printed Policy form.

I hope this helps.

==============================================================================

Mr Niranjan replied:

Dear sirs

Thank you so much…

M.A.Niranjan”

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