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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5 reasons why landlords should insist their residential tenants have contents insurance

house with for rent sign

Lately there has been a spate of house fires around Australia where the tenant has been uninsured. Having been doing claims for over 45 years now, I have witnessed countless times the devastating effect that not being insured has on someone.

When landlords lease out their commercial premises it is standard practice to at least have the tenant hold public liability insurance. This is a basic risk management measure to protect the landlord from becoming the last resort for most public liability matters, as these issues can often fall back to them as an occupier’s liability rather than a building owner’s responsibility.

With these two issues rolling around in my head, I have come up with 5 major reasons why I believe that all landlords of residential properties should insist and seek proof of their tenants having contents insurance.

 

  1. With home contents insurance the insured, typically, has $20 million dollars of public liability insurance. It often ranges from $10 to $30 million. The liability coverage afforded by a contents policy can include protection for some claims by a landlord to the tenant for negligence, say leaving something on the stove and accidentally setting fire to your property. The same goes if they leave the plug in the bath and flood your building.
  1. The liability coverage also provides protection to the tenant should someone come on to the property and injure themselves. Such a person would look to the tenant in the first instance and if their insurer sorts out the claim, you as the landlord are left out of it bearing in mind, even defence costs can be expensive and time consuming to you.
  1. In the event of a fire, the tenant’s policy provides coverage to remove the debris from the building. With no insurance, the tenant usually walks away leaving you with the mess. As it is not your property (items damaged in the fire) your insurer may not cover this cost.
  1. A tenant that has insurance shows that they embrace risk management and I would suggest this shows a better quality tenant who will also take other measures to safe guard both their property and yours.
  1. By insisting they have insurance you could be a saviour to them should there be a fire and they have that all important protection.

Contents insurance is inexpensive for most people. Less than $10 a week for approximately $50,000 of contents cover and as I say typically $20 million of that all-important personal and public liability.
Think about it, you could be helping yourself and your tenant!

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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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Beware Another Cyber Scam

Danger Scam AlertOver the past few days, I have received  phoney fax messages sent to my email. The emails, which ask you to click on a link, which causes the damage as soon as you do. Please do not get caught with this or a similar scam. Never click on any link in an email without making sure it is legitimate.

Fax Message [Caller-ID: 1-407-987-4450]

http://ocscexpo.net/inbox/get_message.php [I have disconnected the link]

You have received a 3 page fax at Tue, 26 Nov 2014 12:39:14 +0000.

* The reference number for this fax is chd_did11-16986144087-10416275143-624.

View this fax using your PDF reader.

Thank you for using the MyFax service!

This was an easy one to defect. I do not have a fax program attached to my computer and I did not recognise the US telephone/fax number from which it suggests it was sent. I am not sure at this stage how it got through our junk mail blocker.

cyber with pages #2To learn more about other scams, do not forget to get a copy of Mannings Guide to Cyber Security and Insurance available here. Of course the irony of putting a link into this type of warning is not lost on me. It just shows how much we rely on the net and how easy it is to be caught if you are not diligent.

The risk of cyber attack is real. If you have not arranged insurance on your business please speak with your insurance broker.

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Question on Test for Under Insurance on a Business Pack Policy

bigstock-Questions-And-Answers-8042036The question today was:

———————————————————–

Good Morning Allan,

We would appreciate your interpretation as follows.

Refer attached Sunrise schedule with the sum insured & limit of liability clause a [cluster group] BPK wording.

Building Sum Insured/Declared Value (page x)                    $8,440,000

20% Extra Limit of Liability (page x+1)                                     $10,128,000

BPK Extensions of cover – A (page y)               “we do not pay more in the aggregate than the limit of liability shown”

Under-insurance (page y-1)

We are seeking clarification of the following:

Does this increase the Sum Insured/Declared Value by 20% therefore underinsurance applies to $10,128,000?

Does this increase only apply to Extensions of cover – A therefore underinsurance applies to $8,440,000?

We would appreciate your reply at your earliest convenience.

Feel free to call me on the number below if you wish to discuss further.

Kind Regards,

Paul [surname and email provided]

————————————–

Hi Paul

The simple answer is that the test for co-insurance is based on the lower figure, the one the client pays the premium on.

The 20% uplift is there to allow coverage for things like Removal of Debris and Extra Costs of Reinstatement and also a modest inflation factor should there be one between the start date of the policy and the date the building is actually reinstated. This figure needs to be higher than the declared value or traditional sum insured due to inflation.

The test for co-insurance is a “day one” test with the Insured expected to get this figure right.

The same goes with the 20% natural disaster uplift that some business pack policies now contain following a submission of a paper by LMI on behalf of your cluster group.  This, again, is the insurance industry showing a social conscience wishing to provide coverage to an insured, knowing that through the pressures of supply and demand the cost of rebuilding does go up after a natural catastrophe event.

With this benefit, the test for co-insurance under the policy you are referring to and most (not all) policies is the start date of the policy and, as such, the uplift is not designed to allow under insurance at the start date.

I hope this explains the situation.

Regards

Allan

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Should “No Frills” Home Policies Still Provide Full Protection in the Event of a Major Loss?

Business Ethics and Guidelines as a ConceptThis is a question I have been asking myself my and more as I check wordings for people when they ask me if their particular home policy is okay when they hear what I do. I typically go to LMI’s PolicyComparison.com on my iPhone, iPad or laptop. Most times I point out areas that are of concern such as very low limits for removal of debris, loss or rent, architects fees or other areas where I see the home owner has a major uninsured exposure.

With a 60% increase in man made and natural disasters since I started in claims 43 years ago, it is not surprising that more and more friends, family and total strangers ask me this type of question.

I am all for everyone protecting their home rather than going uninsured. If we make the reasonable assumption that many who elect to purchase the no frills, (let us be frank) cheaper policies, are the poorer in the community it is equally reasonable to assume that they will not have the funds or the means to borrow funds to make up for the shortfall in the coverage.

I am all for cutting out some of the nice to have “bells and whistles”, even things like glass and fusion. I am also in favour of larger excesses which are explained to the Insured.

But should the home burn down, then in my firm view, the policy should provide full protection and not have what I feel are hidden clauses, with ridiculously low sub-limits for the often forgotten extra costs of removing the debris, temporary protection and or loss of rent.

I mention I have been in insurance for 40+ years. I am saddened to realise that in many cases companies have lost their social consequence, which was a core value of the General Accident Insurance and many others that my friends within the industry worked for. I also feel that these sub-limits that any self respecting underwriter knows are completely inadequate are a breach of the insurers duty of utmost good faith.

Call me old fashioned, but I think the industry should be there at a time of real need for the customer. As it is now, customers feel far too often they have been tricked and cheated and the trust that our industry had and could justifiably be proud of is fast disappearing.

I would ask any home and contents underwriters to have a good look at the coverage your policy provides. Have the sub-limits been reviewed recently? Are they adequate to genuinely protect your customer. If not, do you job and provide the proper cover in the event of a major loss. I would ask the same of any broker who is developing a ‘no frills’ policy to combat the direct players.

If you want to sell purely on price that is fine but at least give the Insured the option to purchase the important add ons and which would bring the inadequacies to the customer’s attention.

Another way of  saying this is that if someone knowing the facts deliberately under insurers then they ought to lie in the bed they made for themselves. What is wrong is when the policy has, if we are honest with ourselves, hidden sub-limits that do not provide adequate protection no matter what sum insured is taken.

I say this as the most recent domestic claim that I mentioned in yesterday’s blog had the Insured crawling through her fire damaged (and very dangerous) home at night by herself trying to salvage what she could; photographs and the like, as she had no cover for temporary protection. It was only when my son Steve rang her that he learned what she was doing and warned her of the physical danger she was exposing herself to with a building likely to collapse at any time and with an asbestos risk. We owe it better to the insuring public no matter what policy they buy.  Neither Steve nor I want someone like this stressed out lady injuring themselves unnecessarily on our conscience.

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Limits of Liability v Sub-Limits of Liability v Schedule of Declared Values

Review Character Shows Assess Reviewing Evaluate And ReviewsI was recently appointed by the Chief Financial Officer of a company to cast a fresh pair of eyes over their insurance program. As I was going through the Industrial Special Risks (“ISR”) schedule I noticed a number of issues that needed to be remedied. Without wishing to embarrass anyone, I will discuss a few of these over the next few posts, particularly those that I see crop up quite often.

The first point I noticed was that the Schedule included a definition of “Buildings”, and another for “Machinery & Plant” etc. As I explained in 2 recent posts this is not necessary and if anything undoes some of the benefit of the ISR policy.

Rather than repeat myself, I attach a link to the two articles which not written for the particular concern, explain the reason why a definition is not required. If you are still not sure please let me know and I will go over this in more detail.

http://www.allanmanning.com/blog-question-definition-of-building-under-a-isr-policy-1/  

http://www.allanmanning.com/blog-question-definition-of-building-under-a-isr-policy-2/

The next and more important issue is that under the heading Limits of Liability, the Schedule listed what in effect was the Declared Values for the building at each location, the stock values, machinery and plant etc. This is simply not correct.

An ISR Policy is not a Business Pack Policy with sums insured or limits for each category of asset. There are several types of amounts to be shown on the Schedule. Limits of Liability, Sub-Limits of Liability and Declared Values. They should not be confused.

The Schedule of Declared Values is what the premium is primarily based upon and which the test for co-insurance will be made against. It was never designed to be a Limit or Sub-Limit of Liability.

On the first page of the ISR just after the Operative Clause (the clause that sets out on what conditions the policy will respond. The actual words read:

Whereas the Insured named in the Schedule has paid or agreed to pay to the Insurer(s) specified below the Premium shown on the Schedule, now the Insurer(s) agree(s), subject to the terms, Conditions, Exclusions, Memoranda, Warranties, limitations and other provisions contained herein or endorsed hereon, to indemnify the Insured as specified herein, against loss arising from any insured events which occur during the Period of Insurance stated in the Schedule or any renewal thereof.”

The very next clause of the Policy sets out the extent to which the Insurer will meet claims. This reads”

Provided that the total liability of the Insurer(s) at any one Situation shall not exceed the appropriate Limit or Sub-Limit(s) of Liability as stated in the Schedule or such amount(s) as may be substituted therefore by endorsement or memorandum hereon or attached hereto and that each Insurer specified below shall only be liable to contribute to any loss covered by this Policy that proportion of the loss as is specified beside its name.” [emphasis mine].

No where in this clause does it refer to Declared Values only to the Limits and Sub-Limits of Liability.

For reasons that I have stress in my ISR Master Class, the Limit of Liability should always be higher than the value of Declared Assets at the largest location. There are two main reasons for this.

After any property or business interruption claim, once the claim has been calculated in accordance with the relevant basis of settlement the claim is subject to three tests.

First a test for under insurance. Under a standard Mark IV or Mark V ISR property claims are tested with  85% co-insurance. whereas business interruption is tested with 100% average or co-insurance.

The second test is against any Sub-Limits. A good example is flood. If the loss after the application of co-insurance is greater than the Sub-Limit then the claim payment is limited to that Sub-Limit.

The third test is the Limit of Liability. Here the total liability of the Insurer is capped to the Limit of Liability. Additional benefits provided by the policy such as Removal of Debris or Extra Cost of Reinstatement are not paid in addition to the Limit of Liability but out of it.

On the subject of additional benefits, not all items claimed are subject to average and removal of debris, extra cost of reinstatement, and employees clothing and tools of trade are but a few. This is one of the two main reasons that the Limit of Liability should always be higher than the total of the Declared Value at the ‘target’ or largest location.

The second major reason the limit should be higher than the Declared Value is that there may be some escalation of costs between the start date of the policy, the time period against which the adequacy of the Declared Values will be tested by the Co-Insurance test and the date of the final repair. With a loss perhaps occurring 364 days after the start date of the policy and you then add a reasonable period to reinstate the asset it may be several years later. Having a separate an higher Limit of Liability is a great benefit introduced by the drafters of the ISR wording. These underwriters and brokers clearly had protection for the Insured top of mind.

Having the Declared Values listed as Limits of Liability under the ISR does away with one of the major benefits of this great policy, the Australian ISR.

I am often torn between explaining an issue in sufficient detail to make it clear but at the same time, I am mindful that readers do not like long articles. If you would like to learn more please read chapter 2 of my book, Understanding the ISR Policy volume 1 – the Mark IV.

As with any policy, the schedule needs to confirm with the structure of the policy wording and certainly not unintentionally limit what is standard coverage. To do so makes for a very uncomfortable time in the witness box.

In my next post I will discuss the difference between Accidental Damage, Specified Damage and Unspecified Damage.

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Disappointing News Following NSW Bushfires

bigstock-Two-children-looking-at-big-fi-35770451 (1)The recent article in the Sydney Morning Herald about the delays in home owners having their debris removed,  is yet another example of why home owners should not rely on either charity or government to bail them out in the event of a loss.

I understand that over 200 homes were destroyed and $3 million was kindly raised by charities. That equates to $15,000 per home. That is  not going to furnish a home, let alone rebuild it.

Governments want to appear to be doing the right thing,  like the Victorian Government offering to organise the clean up, but government is simply not set up for this type of event. Insurers are.

If people were encouraged to be fully insured it would take a burden off the government, reduce the consequential bad press and it would not erode the good work that charities are doing to raise money for so many worth while causes, such as cancer research, helping the poor etc.

I agree with the Federal Government’s decision to stop handing out welfare after an event that is easily insured for. This may sound harsh but there is only so much disposable income that the community has and to me, it should not be wasted on those that took the gamble and did not insure. The same could be said for our taxes. I would rather see the money be used for education and health and not used on a few that elected not to protect themselves.

I do not agree with the New South Wales government’s decision to impose high taxes on insurance, which is a huge disincentive for people to insure and to insure fully.

I attach a copy of the article which at the time of writing was available at

http://www.smh.com.au/nsw/fed-up-bushfire-victims-clear-their-own-homes-20131124-2y3ol.html

Bush fire article

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Is $10,000 combined limit for debris removal and architect’s fees providing genuine protection to home owners?

Picture: Rohan Kelly Source: The Australian

Picture: Rohan Kelly Source: The Australian

Back in July I wrote an article expressing concern that some of the supermarket badged wordings around the coverage for flood. http://www.allanmanning.com/when-is-flood-insurance-not-flood-insurance/

With the bushfires in New South Wales and elsewhere I revisited the wordings to look at some of the key benefits provided by home and contents policies in Australia. Having only a few days ago written an article on removal of debris (refer http://www.allanmanning.com/removal-of-debris/) that was one of the first things I looked at.

I was horrified to see that one of the supermarket badged policies, in fact two through the same supermarket, one a defined events policy and another the optional upmarket ‘accidental damage’ cover has a combined limit for removal of debris and architects fees of only $10,000.

I doubt this would be enough for the average home at the best of times to cover removal of debris by itself but if any home has asbestos building materials and or the home is situated a significant distance from a tip that will take the debris then this level of coverage is going to be completely inadequate. It of course leaves nothing for architect’s fees.

I am not sure what the premium is on these policies and will actually go and get a quote on my own home and compare it to a policy that affords reasonable protection and see what the difference is.

Don

Don Quixote de la Mancha and Sancho Panza, 1863, by Gustave Doré

This is another case where I feel I am Don Quixote but how do we get the insuring public to understand that insurance is not all the same and that it about protecting your greatest assets and your life’s work NOT price.

I suppose I joined the industry at another time. One where the insurers had a social responsibility and looked after their customers. Thas was taught to me at the General Accident and at MBS Pumfrey’s Loss Adjusters. I see more and more sectors of the industry moving away from this.

What causes me the most stress is that in my discussons all around Australia when I raised the issue of the Clayton’s flood cover with insurance brokers I did not know one that realised the limitation in their competitor’s product.

I know of one broker that knows about this limitation on removal of debris and good on him. How can a broker compete on advice if they do not know the facts.

Capture 7

Screen shot from LMI PolicyComparison

The most frustrating part to all of this is that it is not that hard. I found this in less than 30 seconds using LMI PolicyComparison.

I see two major problems with all of this. One Australian home owners are not getting the protection they need or deserve. This is in my opinion after doing claims for over 40 years a disgraceful sub-limit.

Secondly when it comes out in a disaster like this, the whole insurance industry will be once again tarnished with the same brush as we are only as good as our weakest link.

I look at what the Australian supermarkets have done to their supply chain and to the customer so that they can achieve their record profit levels. I see the same thing happening to my industry led by these guys. I wish they would stick to groceries and leave the important job of protecting Mum’s and Dad’s to those that really care!

PS after this rant due to pent up frustration, I can fully understand why PI insurers are so worried about providing cover to those that write blogs! Having said this, I really feel that I must say what I feel for if I get just one person to think about genuinely protecting their home it is worth it.

 

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Removal of Debris

bigstock-Industrial-Waste-Skip-2782696For my milestone 400th post in this blog, I thought I would  choose one of the most popular Google searches that brings people to the LMI Group website. That search tag is “Removal of Debris”.

This is not surprising for it is an important issue in many Property claims. With any reinstatement or repair of a building, it is necessary first to remove and/or dismantle the damaged section. This entails removing the damaged materials to a designated part of the worksite where it is typically thrown into a pile or, more likely to avoid double handling, placed into a waste skip. Although this is all part of the reinstatement/repair process, cover afforded by the normal policy wording would, in the absence of a Removal Of Debris clause, cease at this point, even though the Insured would still incur costs to remove the debris (or skip) from the property or a point adjacent to it.

The Removal of Debris clause is likely to cover considerably more than just waste transportation and disposal costs. Under the Mark IV ISR policy for example, cover is for “the removal, storage and/or disposal of debris or the demolition, dismantling, shoring up, propping, underpinning or other temporary repairs consequent upon damage to property”.

At times there will be also be requests to extend this section by the addition of the words “or the decontamination” after the words “disposal of debris”. The underwriter would need to carefully consider whether there was any asbestos used in the construction of the premises, since, due to the precautions that need to be taken, the costs involved in the removal of asbestos, necessary for the decontamination, are considerable.

The wording of the base cover under a Mark IV Advisory or Modified ISR wording reads:

“Subject to the liability of the Insurer(s) not being increased beyond the Limit(s) of Liability already stated herein, the Insurer(s) will also indemnify the Insured for:…

 (f)        Costs and expenses necessarily and reasonably incurred in respect of:…

 (i)        the removal, storage and/or disposal of debris or the demolition, dismantling, shoring up, propping, underpinning or other temporary repairs consequent upon damage to property insured by this Policy and occasioned by a peril hereby insured against.”

The word ‘debris’ is not defined in the Mark IV policy wording. Its ordinary meaning as recorded in The Macquarie Dictionary[1] is: “the remains of anything broken down, or destroyed; ruins; fragments; rubbish…”.

This Additional Benefit provides protection not only for the removal of debris but also the demolition, dismantling, shoring or propping up, and any other temporary repairs required. I will return to these benefits later in this section.

Following a major fire, the police, fire brigade investigators or the state forensic scientists and the Insurers’ own investigators for that matter, may require a section of the building to be propped up or some of the debris removed to allow for a thorough investigation into the cause. The practice has been that even though the costs may increase due to this work, Insurers will meet the cost subject to liability for the claim being ultimately granted. The reason for this is obvious; the Insurer will benefit from knowing the actual cause of the loss, if it can be determined. A close working relationship with the statutory authorities, who do not generally have the resources to do the work themselves, is gained, which often assists in prompt access to their findings. This is mentioned to remind those who are selecting a Sub-Limit, to ensure it is adequate to include this eventuality.

In fact, an inadequate Removal of Debris Sub-Limit occurs far too often. There are several other reasons for this besides an increase due to the investigation into cause, yet many brokers and Insureds appear to choose 10% of the Declared Value for replacement as an adequate Sub-Limit. This ‘rule of thumb’ is not always a good guide.

Let me take a recent fire as an example. In this example, let us assume that the Insured decided deliberately to underinsure. Notwithstanding this, the adviser elected 10% of the replacement value as the Sub-Limit for Removal of Debris. As the Declared Value to rebuild the building was inadequate, the starting point for the rule of thumb estimate for the Removal of Debris would be too low to start with. This is despite the fact that the Removal of Debris Sub-Limit may be a six figure sum.

While the Insured made have made a conscious decision to underinsure their building, many Insureds are nonetheless surprised by just how much the Declared Value on their building is too low when the loss occurs. Building costs have increased by more than 30% in some areas over the past few years and, if an Insured has not increased cover in line with these costs, they may well find that they will be underinsured. Even where an Insured has increased the Declared Value on buildings, the Sub-Limit on Removal of Debris was not been reviewed and has been found to be inadequate at the time of the loss.

The second point that appears to have been overlooked in the claim involving a similar building seen in Photograph 1, is the fact that this building had an asbestos roof. The cost to hire a 6-metre bin in 2005 for the removal of the debris, increased from $300 to $1,800 once asbestos became involved. This is a six-fold increase in just a portion of the Removal of Debris cost. In addition, the fact that much of the removal has to be done by hand and not machine, also increases the cost considerably. Further, those doing the removal had to wear special respirators and protective clothing. The result of these added costs means that this Insured finds that his Sub-Limit on Removal of Debris is around a third of what is required. It is nearly 20% of the full replacement value of the building in my example case.

Having an asbestos roof is not the only cause for concern. The contents of the building also need to be considered. On two recent occasions, the cost of removing the debris was much higher than anticipated due to the cost of removing the damaged stock. One situation involved a specialist paint manufacturer, while the other involved a supplier of agricultural chemicals. In both these cases, the Environmental Protection Authority (“EPA”) insisted on very stringent procedures to remove the debris, including the burying of the contaminated material in large concrete canisters. This resulted in the cost of removing the debris exceeding the cost of rebuilding the damaged building.

Turning back to asbestos, an old building can contain asbestos other than as roof and/or wall cladding. In another recent fire, it was found that the material used to insulate a cool room, built during World War II, was all asbestos. Even with some very hard negotiations taking place with the EPA, the cost was over 20 times the policy Sub-Limit for Removal of Debris. Historically, asbestos was also used as lagging around pipes to reduce the loss of heat and as a fire retardant material around otherwise exposed steel framework.

When considering the adequacy of the Sub-Limit for Removal of Debris, it is also important to take into consideration whether the insured building is on a main road. In such cases, the local authority may require special permits and/or recompense for lost parking meter fees.

Many contractors who specialise in debris removal have an Enterprise Bargaining Agreement in place with their workforce, which may escalate costs by up to 30%. If the site is on a main road, is in an inner city suburb and/or has a high profile, Unions may become involved, which again can increase the cost of the contract[2].

Yet another point to bear in mind is that under the Mark IV ISR policy wordings, Removal of Debris is not subject to co-insurance. However, the Sub Limit and overall Limit of Liability need to be adequate to ensure the policy fully indemnifies the Insured. Another way of looking at the Sub-Limit for Removal of Debris under a Mark IV wording, is to consider it as a ‘first loss’ limit only.

As an aside, I would explain that traditionally, to strip out fire damaged and sound material to gain access to fire damaged sections of the building or contents, was always considered part of the repair cost and not demolition. Demolition is the cost of knocking down (demolishing) a building or machinery that is destroyed to the point that it has to be replaced. The same applies to flood damage or damage from any other insured circumstance. I would also point out that different contractors do the two types of work. Demolition contractors are different tradespeople from builders and it is the builders who carry out the stripping out work as they determine just where and when to stop as part of the repair. The only reason Removal of Debris extensions were introduced, was to pay for the cost of removing and disposing of the debris from the Situation.

In summary, it is not good practice to simply set the Sub-Limit for Removal of Debris at 10% of the estimated cost of rebuilding on every risk. The adequacy of the building value, its construction, the presence of asbestos, location, and the type of stock and contents must be taken into consideration to ensure that the Insured is fully protected.

I have spent a great deal of time on this three-line Additional Benefit for Removal of Debris. As I pointed out at the start of this section, Sub-Clause (f) within The Indemnity also provides cover for: “the demolition, dismantling, shoring up, propping, underpinning or other temporary repairs consequent upon damage to property insured by this Policy and occasioned by a peril insured against”. I now analyse this issue. These words may appear straightforward, but a great deal of debate has occurred over what actually the words “other temporary repairs” mean. To me, these words are quite wide-reaching and any temporary repairs carried out by the Insured are covered. The only limitations are set by the preceding paragraphs to the one providing the cover, and I reproduce the preceding words hereunder:

“Subject to the liability of the Insurer(s) not being increased beyond the Limit(s) of Liability already stated herein, the Insurer(s) will also indemnify the Insured for:…

 (f) Costs and expenses necessarily and reasonably incurred in respect of:…”

The limitations in the preamble of the actual cover are that if the Limit of Liability is exhausted, the Insurer’s liability is at an end, and that the “costs and expenses must be necessarily and reasonably incurred”. Therefore, if the costs incurred are reasonable in amount, and if the logic behind the decision to carry out the temporary repair(s) in the first place is reasonable and the repairs were necessary, then the Insured would be entitled to recover those costs.

Where some adjusters and claims officers feel the cover goes against the spirit of Section 1 – Material Loss or Damage of the policy, is that some temporary repairs are not reasonable purely from the material damage standpoint, but are from an interruption insurance perspective. Such cover should be provided by Increase in Cost of Working (see Section 2, Item No. 1(b), ie. Sub-clause 8.1.1(b)) or Additional Increased Cost of Working (Section 2, Item No. 4, ie. Sub-Cause 8.4). The major concern is that the Insured is able to mitigate a potential interruption loss without purchasing Section 2 cover, or that they are able to avoid a time deductible or separate monetary deductible under Section 2.

I did not design the policy, nor have I been able to determine exactly the reasoning behind the introduction of the cover. All I can do, like anyone else reading the words, is to interpret the written clauses and sub-clauses. To me, the wording is quite clear and there appears to be no restriction in what constitutes “reasonable and necessary” other than to consider the Insured’s actions against that of a prudent businessperson faced with the same decision.

I would also point out that a common extension endorsed onto ISR policies is Expediting Expenses (EXPEDXB4 [3]). This cover is also a limited form of Increase in Cost of Working or Additional Increased Cost of Working and yet no one shows any concern.

I would consider whether Perils Exclusion 9 (refer Sub-Clause 12.9) would limit the cover, but came to the conclusion that if the Expediting Expenses Endorsement was freely accepted as being a legitimate Section 1 cover then, likewise, temporary repairs claimed under this additional benefit of the indemnity under Section 1 property damage, was also in order. For the sake of completeness, I reproduce Perils Exclusion 9 for your convenience below.

The Insurer(s) shall not be liable under Section 1 and/or Section 2 in respect of:…

9. consequential loss of any kind, including consequential loss due to due to delay, lack of performance, loss of contract or depreciation in the value of land/or stock except as herein provided in Section 2.”

Two wrongs do not make a right and my argument may be flawed as to why this exclusion does not limit the Insured in carrying out repairs that are reasonable and necessary from a Section 1 Property Damage perspective. However, it could be argued that if the draftsperson(s) wanted the cover for temporary repairs to be so limited, they could have easily done so within Sub-Clause (f)(i) (refer Sub-Clause 3.2(f)(i)). Secondly, it may be argued that the claim from an Insured is not for a consequential loss, but the cost of carrying out temporary repairs which, having been completed, may or may not have avoided a consequential loss.

I do not wish to labour on this one point, but I feel it is appropriate that I provide both sides of the argument. Interestingly, nobody to my knowledge has raised the issue of Perils Exclusion 9.

It has been suggested to me that the words “demolition, dismantling, shoring up, propping or underpinning of the Property Insured” are activities that are all linked, by their very nature to the protection from further damage of the building. In other words, work carried out for the temporary protection of the property until it can be safely demolished or permanently repaired. For example, you may prop up a wall that is in danger of falling and causing more damage to the Insured Property, adjacent property or injury to persons.

The proponents of this argument suggest that this is a logical explanation of the cover and, as further justification suggests, this is why the activities listed in Sub-Clause (f)(i) are linked to Removal of Debris and not Sub-Clause (d) (see Sub-Clause 3.2(d)) above, which covers:

“(d) Costs and expenses necessarily and reasonably incurred for the temporary protection and safety of property hereby insured pending repair or replacement consequent upon damage recoverable hereunder;”

The reason for the above interpretation is not so much to restrict the words demolition, dismantling, shoring up, propping, underpinning” but, as discussed above, to limit the words that follow, namely: other temporary repairs consequent upon damage to property insured by this Policy and occasioned by a peril insured against”. These words do, if standing alone, mean more than temporary works to protect the building while it is made ready for repair. For example, if a conveyor belt were to be cut by an event not excluded by the Policy, it is often possible to carry out temporary repairs by stapling a join in it. This is not repairing the belt “to a condition substantially the same as, but not better or more extensive than, its condition when new” and, as such, the Insured is entitled to a replacement under the terms of the Reinstatement & Replacement Memorandum.

By limiting the earlier words to activities that, in their argument are all linked to the protection of the building, the argument goes that the Policy, under Additional Benefit 3.2(f)(i) only provides cover for temporary repairs that are linked to the protection of the building, and not to other temporary repairs such as the temporary repair of the conveyor belt mentioned above.

Let us consider the position using the rules of document interpretation.

Many rules of document drafting may apply here. In the reasoning that was put to me on this Clause, the first rule of document interpretation used was the ejusden generis rule, which may limit the meaning of “temporary repairs” to those involved in temporary protection. Simply put, the rule states that when general matters are referred to in conjunction with a number of specific matters of a particular kind, the general item is limited to the class of the specific matters (Davidson, 1897)[4].

The question, therefore, is are the words or other temporary repairs consequent upon damage” limited by the words before them and if so, in what way? The preceding words are: the demolition, dismantling, shoring up, propping, underpinning”. Without the words ‘to buildings’ or ‘to buildings or other structures’, I do not accept that the words limit the temporary repairs to exclude machinery such as a conveyor. You can dismantle a machine, just as you can prop or shore a machine up if it were in danger of toppling over. Further, the words do not limit the work to safeguarding the building or equipment. You may simply be dismantling the equipment to determine the extent of the damage, or to allow the continued use of the building or equipment until final repair work is completed. The conclusion I reach on my reading of the phrase, is that there is no genus in the preceding words. That is, that the specific words are not of one particular kind and certainly do not create the limitation of only referring to buildings and/or are for safeguarding damaged property only.

The second rule applies where there is an ambiguity. The rule here is known as contra proferentem[5]. Put simply, the rule means that if a word or words have more than one meaning, ie. they are ambiguous, then they will be construed against the party to the contract that drafted the wording[6]. The Courts will only apply this rule if they feel that there is an ambiguity. I do not accept that there is any ambiguity.

The third rule is that the intention of the parties must prevail. In the Mark V wording, the draftsperson(s) split “temporary repairs” away from the other activities, so that it stands alone.

3.1.5.3 the demolition, dismantling, shoring up, propping or underpinning of the Property Insured or the carrying out of other temporary repairs to the Property Insured as a result of the Damage;”

In this format, many believe that there is absolutely no doubt that temporary repairs” in the context of the Mark V policy would be read by the Courts in its widest meaning. That is, they would allow an Insured to claim any type of temporary repairs as long as they were necessarily and reasonably incurred”.

What we do not know is whether the draftsperson(s) of the Mark V policy wished to broaden the original cover or, as I suspect, simply make clearer what the cover was originally designed to provide. The reason for the change in wording is not explained by either Marks and Morgan (1991)[7] or Goodlad (1993)[8], both of whom had input into the changes. Without such advice, it is not possible to draw any link on intention between the Mark IV and Mark V wordings.

In any event, it is only in cases where the Courts find the wording ambiguous that they will they look behind the words to the intention of the parties. I do not believe that any Court would need to resort to this step.

I have purposely gone a long way round to discuss this 4-line sub-clause.[9] It must be remembered that:

The human mind is like a magnifying glass: It exaggerates. A simple rule of thumb: Whatever you’re looking at is not as big a deal as you think it is.”

Daniel Meacham (1985)[10]

The reason for my circuitous route is to demonstrate that it is easy to read what you want to into some wordings. The Courts, however, take a far simpler approach.

The first rule that should be applied in the interpretation of a contract of insurance, is the Literal Rule.[11]. While it specifically addresses statute interpretation, one of the clearest statements of the literal rule was provided by Higgins J. in Amalgamated Society of Engineers v Adelaide Steamship Co. Ltd (1920) [12] where he said:

“The fundamental rule of interpretation, to which all others are subordinate, in that a statute is to be expounded according to the intent of the Parliament that made it; and that the intention has to be found by an examination of the language used in the statute as a whole. The question is, what does the language mean; and when we find what the language means in its ordinary and natural sense, it is our duty to obey the meaning, even if we think the result to be inconvenient, impolitic or improbable”.[13]

It is only if this rule cannot be applied to provide a single meaning due to some ambiguity or confusion, that the other rules discussed earlier are applied.

It is the application of the Literal Rule that leads me to the conclusion that the words “temporary repairs” would be construed in their normal meaning and not be narrowed by the perceived context in which they have been used in this sub-clause, ie. Sub-Clause (3.2)(f)(i). That is, that in the case of the conveyor belt, the Insured would be entitled to claim the cost of temporary repairs to allow the continued use of the conveyor until a replacement belt was procured.

Certainly as I have already mentioned, any confusion that may exist could have been avoided by listing the additional benefit separately, if the draftsperson(s) wanted it to be full cover for any temporary repairs, similar to what the draftsperson(s) of the Mark V version did. Conversely, if it was the intention not to provide such wide cover, the drafts draftsperson could have added words that limited the cover such as, temporary repairs to allow safe demolition”. The word ‘demotion’ is often misunderstood. It is different from ‘dismantling’. The meaning of ‘demolition’[14] and ‘demolishing’[15] are set out below:

Demolish: 1. to throw or pull down( a building, etc.) reduce to ruins, 2. to put an end to; destroy; ruin utterly.”

Demolition: 1. the act of demolishing, 2. the state of being demolished, destruction”.

In conclusion, the only limitation contained within the Sub-Clause itself is that the costs must be “necessarily and reasonably incurred“, while to be ‘reasonably incurred’ means that the circumstances for the expenditure will need to be reasonable, as will the amount (quantum) of the costs. If the repairs were to reduce a business interruption loss and the cost of the work itself was reasonable for the work performed, then the costs would appear claimable here. This may assist an Insured who has failed to insure Gross Profit, either adequately or not at all, or where a substantial time or monetary deductible applies to Section 2 – Consequential Loss of Profits. It certainly should not be grounds not to take out Section 2 and/or have reasonable Additional Increased Cost of Working cover.

For further discussion on the rules of document interpretation, please refer to Volume 3, Part A, titled ‘An Overview of Document Interpretation and Drafting’ in my book, Understanding the ISR Policy. http://www.lmigroup.com/content.aspx?artId=63

For those of you with a subscription to LMI RiskCoach please go to the short course on this topic: http://www.lmigroup.com/RiskCoach/ShortCourses/ShortCourse.aspx?scid=8

 

 


[1]     The Macquarie Dictionary, Revised 3rd Edition, edited by Delbridge A., Bernard J.R.L., Blair D., Peters P. and Yallop C., 2001, The Macquarie Library Pty Ltd, Sydney, p.496.

[2]     Nothing untoward is being suggested with this statement.

[3]     Goodlad D., 1996, “Augmented List of Endorsements”, The ISR Book – The 1996 Supplement to the Mark IV Edition, Risk Technologies Pty Ltd, The Patch; and as Endorsement 1A1j in Goodlad D., 1993, The ISR Book: A Working Guide for Insurance Executives and Risk Managers, Mark V Edition, Craftsman Publishing Pty Ltd, Burwood. p.4.2.

[4]     Davidson C., 1871, Precedents and Forms in Conveyancing, 8th Edition, W Maxwell, London. p.43.

[5]     The full maxim is verba chartarum fortius contra proferentem accipuntur, See Part A of Volume 3 of this Guide for a comprehensive list of the rules for document interpretation.

[6]     Osborn’s Concise Law Dictionary, 8th Edition, edited by Rutherford L. and Bone S., 1993, Sweet & Maxwell, London, p.88.

[7]     Marks F. and Morgan T., 1991, Guide to the 1990 ISR Advisory Policy Wording, Dunhill Madden Butler & Robins GAB, Sydney.

[8]     Goodlad D., 1993, The ISR Book: A Working Guide for Insurance Executives and Risk Managers, Mark V Edition, Craftsman Publishing Pty Ltd, Burwood.

[9]     It appeared as four lines in the original policy wording.

[10]   Meacham D., 1985, The Magic of Self Confidence, Simon & Schuster, New York.

[11]   This rule applies equally to other contracts and to the interpretation of Acts of Parliament.

[12]   Amalgamated Society of Engineers v Adelaide Steamship Co. Ltd (1920) 28CLR 129 at 161.

[13]   Impolitic means: inexpedient; injudicious (The Macquarie Dictionary, Revised 3rd Edition, edited by Delbridge A., Bernard J.R.L., Blair D., Peters P. and Yallop C., 2001, The Macquarie Library Pty Ltd, Sydney, p.953).

[14]   The Macquarie Dictionary, Revised 3rd Edition, edited by Delbridge A., Bernard J.R.L., Blair D., Peters P. and Yallop C., 2001, The Macquarie Library Pty Ltd, Sydney, p.509.

[15]   Ibid.

For further details, please refer to the Short Course covering this topic.

 

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