Are fines imposed on SME’s for data breaches fair?

As from 23rd February 2018 legislation now requires that Australian businesses report data breaches.

I have heard that there have already been an average of 10 notifications a week but this figure was on social media and I have not been able to verify the number.

I appreciate that we all have a duty to protect the personal data of our customers and employees but I question whether fines  imposed on any company that is breached is fair and reasonable.

Today the news is all abuzz about how Facebook was hacked. There have been reports of countless hacks of major international businesses and even sensitive government departments.

The issue is what is reasonable has been mulling around in my head for a while. It started last year, when LMI’s head of cyber security presented a board paper seeking an upgrade of our company’s security and seeking additional funding to cover the introduction of new software solutions. As we take cyber security very seriously all the recommendations were adopted and the capital expenditure approved.

A few weeks later I was meeting with a new client and in passing they advised that they had upgraded their security system and had spent exactly 50 times more than we had. Admittedly the client was an insurer with a much greater turnover, much larger customer data base and one would therefore think greater exposure. Having said this, the amount they had spent was greater than the gross profit of our organisation. As such it simply was not feasible for us to mirror their efforts.

Having said that, the same hacker could be targeting LMI as them and despite what to us was a significant expenditure I have to think we will be more vulnerable than the insurer.

I am also concerned about the number  of SME’s that are using the services of cloud based services such as Zero and MYOB’s new accounting systems. Employee data can be held here and the question is who would be fined if there was a breach of the cloud provider?

The other point that I would make is that after attending a number of conferences and hearing a number of computer security experts who carry out penetration testing, I am of the firm opinion everyone has been hacked but they have so much data already collected they have not used it as yet. The infographic at the end of the post shows the number of reported breaches during the first half of 2016, If you compare this to 2017 first half figures of 1,901,866,611 reported data breaches, you can see the massive increase (343%) in just one year.

The point to keep in mind is that in some countries, including Australia, during this period did not have to report breaches and so the figures are not complete.

With this background, I question is levying a fine on an organisation that has taken reasonable steps within their budgetary constraints fair and reasonable. Or is it just another form of hidden taxation on SME’s?

The reality is that reporting of breaches is now mandatory and the penalties for not notifying a breach are correctly more serious. Therefore businesses that do suffer a breach need to report it immediately.

If fines will ensure then every business needs to rethink their attitude to cyber insurance and if they do not have the cover consider obtaining the protection and of course making sure that it provides cover for any fines or penalties.

While does provide a detailed summary of the features and benefits of the majority of cyber policies available in Australia, it is my recommendation to any organisation looking for cyber insurance to obtain the advice of an insurance broker to obtain the right insurance protection for them.

This is a class of insurance that is changing rapidly and as with the cyber security itself it is not a set and forget issue. Both cyber security and the protection afforded by cyber insurance protection needs to be reviewed constantly, the later at least each renewal.


Read Me View comments

Alarming Trends – Part 1: Indemnity Periods

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

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

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

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

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

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

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

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

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

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

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

Read Me View comments

Another broker angry at the NSW Government

I received this email last night and it mirrors many phone calls and emails I have received.

“The NSW ESL Insurance Monitor has now gazetted a new Section 30 Notice which requires premium comparisons to be provided with renewal invitations and renewal schedules for residential property insurance in NSW from 1 July 2017.”

At what point does the State Government pull their head in & stop meddling in our Industry; specifically in areas that really have nothing to do with them?

Sorry to sound aggressive Allan. It’s just that, if consumers don’t like their renewal premium, they already have ample facilities at their disposal to shop around.

Further, this outrageous new “requirement” is totally disingenuous and simply propagates comparisons on price alone. It just isn’t a good look.

Where is the Government’s warning to review the quality & extent of cover, at the same time as comparing cost?

Thanks Allan – Gary. [surname and email provided]

I could not agree more. I seem to be constantly writing to politicians, most recently Nick Xenophon explaining that insurance is not about price. It is about protection and that is what the New South Wales government completely forgets. No one remembers the price of insurance when they have a claim occur.

What they want (and need) is coverage that indemnifies them for their loss or damage and has a sufficient sum insured, limit or sub-limit high enough to meet the cost. On top of this they look for a fair and reasonable claim service that is proactive and does not take a delay, deny, defend approach.

If anyone can get all of this in one policy and assure me that insurer will not have gone to God when I need them sign me up!

Let us see this for what it really is. The New South Wales government completely messed up the transition of Emergency Services Levy from the insurance industry where it has not been in Queensland since 1985 (nor in UK since the mid 1880’s) on to property rates where it ought to be so that all the community pay it. How they messed it up when they were the last state, is beyond my comprehension and one of the best examples of incompetence in government I have ever seen. How can anyone trust them after this.

One of the oldest political tricks in the book is to move the focus off your own failings and divert it elsewhere. We are constantly being demonised by the press and government and an industry who is incapable or unwilling to fight back, so we become the fall guy and the whole nonsense with the appointment of an insurance monitor who of all people should know better is showing examples of price differences between policies that are chalk and cheese.

I think every broker and insurer should comply with the request but also show just how much the New South Wales is taking of the total cost of insurance and in particular the completely unconscionable tax on tax on tax where the New South Wales Stamp Duty on insurance is a 10% on the premium, the Emergency Services Tax, and the Goods and Services Tax (“GST”), with the GST being applied to both the premium and the Emergency Services Tax. So it becomes triple tax.

If the New South Wales Government were genuine about making insurance more affordable, which only helps protect their citizens and economy by the way, then remove the taxes which is adding over 20% to the cost of home, home contents, and business property and business interruption premiums.

PS: I would also add a how to vote for one of the opposition parties in the same envelope if they gave a commitment to remove the Emergency Services Levy from insurance.

Read Me View comments

Happy to see some relief for Insurance Taxes in NSW (unless there is yet another back flip)

The NSW Government is in line to win the Olympic Gold Medal in Back Flip Gymnastics

New South Wales Treasurer Dominic Perrottet says the state’s 2017 budget will relieve cost pressures for 600,000 small businesses in the region through the reduction of red tape, including by axing insurance duty on a range of policies for businesses with annual turnover of $2 million or less. As an aside, I am convinced governments want businesses to stay small for as soon as you grow and of course employ more people you end up paying a lot more government charges with Insurance Taxes being added to the insidious Payroll Tax.

The 2017 budget, which claims to deliver a $4.5 billion surplus, pledges to relieve cost of living pressures for families and business owners, and includes a $318 million plan to improve the viability of small businesses by removing insurance duty for commercial vehicle, professional indemnity, product and public liability, and crop and livestock insurance from January 1, 2018.

This will mean businesses with an aggregate turnover of up to $2 million will be encouraged to “take up more appropriate levels of insurance by removing the disincentive caused by higher insurance premiums”, according to the budget papers.

Insurance duty is paid to the state government by insurance providers and is calculated as a percentage of the policy premium. According to the Office of State Revenue, in NSW this can mean additional fees, which are often passed on to policy holders, range from 2.5% to 9% depending on the policy type.

Of course this is all dependent on the NSW Government honouring their word and not doing a back flip as they so cruelly did just one month out with the Emergency Services Levy.


Read Me View comments

Recap of week one.

LMI activated its Emergency Response plan on Thursday 30 March starting first in Mackay, Proserpine, Bowen and surrounds and as we were able to gain access, extended this into the Whitsundays. Other teams looked after claims in South East Queensland, Murwillumbah and Lismore.

Within this first 10 days, we have arranged for progress payments for close to $40 millions to be made to assist business recovery. This of course, makes a huge difference to those businesses allowing them to engage trades, replace stock and recover that much quicker. But more it helps the suppliers, tradespeople etc asked to step in and do the rebuild etc. It helps the whole community.

I make this point in an effort to show the public that with the right correct adviser/broker arranging the correct coverage with a quality insurer, followed up when it really matters with good claims service, insurance is an invaluable service protecting you from financial loss.

We do not hear about the huge effort, insurers, their claims teams, loss adjusters, and claims preparers put in after every such event to help our customers and communities.

Of course, we see the horror stories in all the regions we are responding to, where at the time it was considered too high a premium and now having taken the risk of “it will never happen to me”, business owners are now faced with significant uninsured losses both in property damage and business interruption.

The reality is no matter how skilled and willing to help the LMI team are, we cannot put the toothpaste back in the tube. If the cover is not there, or is not adequate then we cannot wave a magic wand and fix it.

Even if your business was not affected by the event, please remember this at your next renewal. Make sure that your assets, business income and liabilities are insured adequately just in case it is your turn next time.

I end on a positive note. One of our clients we visited had felt overwhelmed by the whole event and was upset that no money was offered by the loss adjuster during his first visit. The Insured sent a text to her broker who in turn rang the Insured straight away. She rang me and Rian Jenkinson our State Manager in Queensland acting as a Claims Preparer got straight onto it and with the help of the claims team and the loss adjuster who certainly did not mean to cause any stress arranged a progress payment. The insurer sent out their senior property claims manager who assisted by arranging a second payment at the end of the week.

It does make such a difference to have a good insurer on board.

Insurance is not just about $, it is about people.

Despite his very hectic workload, Rian dropped in and picked up some flowers and a bottle of wine for the Insured and her husband from their broker, he and I to put a smile back on their face and let them know they were not alone at this time.

This small gesture had a really marked effect as we now focus and getting this business back up and running “double quick time”.

Thanks to all the insurers that helped us help your clients, to the brokers who have entrusted your client’s claims with us,  and a special well done to Rian for going the extra mile.



Read Me View comments

46 years on: a lot has changed, some good, some not so good.

46 years ago, today, I started as a claims officer at the General Accident Fire and Life Assurance Corporation in Brisbane straight from high school.

In that first year I assisted in handing claims from Cyclone Ada which hit the Whitsundays in 1970 and later in 1971, it was Cyclone Althea that hit Townsville.

Fast forward 46 years and we are back handling claims not only in the Whitsundays but throughout Queensland, New South Wales and in New Zealand.

Thinking back to those cyclones from the early 1970’s the thing that I recall most was the really high level of under insurance. We were getting quotes in for the replacement of roofs which exceeded the sum insured on the entire house or commercial building, claim after claim after claim. It was heartbreaking to me as a teenager to think of the financial burden this placed on home and business owners.

Free “under insurance penalty calculator” App from LMI Group

While under and non insurance are not quite that bad it is still a major issue facing the insurance industry and our communities. I think products like the BIcalculator program and the Under Insurance Calculator app that I thought up at different times while in the shower have been of assistance to reduce it but we still have a long way to go.

It was great to see the response to the RiskCoach On The Go app this week that Steve Manning who like me is concerned on the over emphasis on price in insurance, developed and launched last Thursday which highlights the exposures for 7,000 industries across 12 classes of insurance.

As an industry we generally provide much broader cover today than in 1971 with flood insurance being much more widely available today.

A couple of things I think have changed perhaps not for the better. One is the willingness in some adjusting houses and claims departments to make immediate progress payments to assist with emergency repairs. This causes clients great distress and distrust of our industry. One client was in tears when they received the infamous document request list when they did not even have power to turn on their computer. The lack of funds and the requirement by the insured to comply with this will only blow out the business interruption claim but I suppose it got the claim off the adjuster’s desk.

I know something, that as a claims officer if any loss adjuster left my company’s insured in tears they would not work for us again.

As I type this I just received advice that the Broker, Insurer and LMI worked together to obtain a $100,000 progress payment for the client who is now over the moon and is already getting on and mitigating their loss and disruption.

The second thing is that most insurers always tried to use local builders and contractors as we knew they would do the right thing as they lived in the community. Now we have to deal with panel builders and I am personally convinced that in most cases the perceived savings are illusionary at the expense of the premium paying customer experience. Sometimes there was a demand surge but we would remind them not to cook the goose that laid the golden egg and be reasonable. Most followed this advice and if they did not we soon worked them out and black balled them.

The third thing is that I do not recall the industry criticism in the media that we have now often even before we get a chance to make a mistake.

While we are certainly doing some things better and have better technology to help us such as drones, digital photography, geopolitical technology and satellite phones (even mobile phones for that matter) customer empathy, the time to do the job properly and common sense are still very much required.

This is not lost on everyone in the insurance industry and many insurers, insurance brokers, claims personnel, loss adjusters, claims repairers, builders and suppliers are working tirelessly and doing a first rate job. It would be nice to get a few of those stories out there.

The things I love the most about the profession are that we are providing genuine assistance to people when they are in need. That is enormously satisfying and gives you a great sense of purpose. Secondly you never stop learning. I am still a student of insurance and always will be.

Already I have updated LMI’s Emergency Response plan so that we can deliver better and faster service on future claims we are entrusted with on this catastrophe event and for the next ones.

In the last 46 years we have moved from community rating to risk rating. If you are in a high hazard area, a flood zone, a cyclone or bush fire zone insurance premiums will reflect this. What the damage and disruption following Cyclone Debbie has clearly shown as is, if you think insurance is expensive, look at what it costs if you do not have the right full cover.

Perhaps the biggest disappointment to me is the lack of flood mitigation work that has been done to safeguard our communities. A relatively small investment here will pay dividends for generations and yet our governments pay the issue lip service.

Finally, and most importantly is that besides being introduced to the profession I am so proud to be a part of, today also marks the anniversary of the day I first met my wonderful and loving wife of nearly 43 years who I met on my first day at General Accident. No wonder, 5th April is such a red letter day for me.

Read Me 2 Comments

Blog Question on Landlords seeking the tenant to arrange the building insurance

Risk Management.Over the past week I have had two similar questions on how to name the landlord on a policy of insurance where the tenant is required under the lease to arrange the insurance.

Before I answer this particular question, I would like to share my views on the approach by landlords to not just have the tenant pay for the building insurance but arrange it.

To say I really do not like this approach is an understatement.

The idea came about under the guise of risk management. The typically larger organisation, often on the advice of their legal department or external legal advisers, seeking to transfer risk from their organisation onto someone else.

Having been involved in many claims where this arrangement has been in place, I have grave concerns for both the tenant and the landlord with it.


The major concern for the tenant is if the lease requires that the building be insured for full value. This pushes the risk of under-insurance onto the tenant which can create a genuine personal risk.

I would always have the landlord confirm the sum insured is adequate to try and avoid this issue.

Still on the adequacy of the insurance, if the building, typically a big value item, is under insured under an Industrial Special Risks Policy (“ISR”) it could adversely affect a claim for contents or stock for the tenant due to the application of the co-insurance clause which under an ISR Policy or some quality business pack policies is tested against all assets at the “situation and/or premises”.

Another question is, who is responsible for the policy excess/deductible in the event of a claim under the policy? This is rarely spelt out anywhere and often leads to disputes particularly if there is damage to both building and contents. Is this just another hidden risk the tenant is taking on?

In one claim I am involved in all the proceeds of the claim went to the landlord and the landlord is “slow” to pay over the amount owing to the tenant. This was due to a mistake but the insurer has walked away from the problem forcing the tenant to take legal action against the landlord, insurer, loss adjuster and broker involved. How long this will take to sort out I am not sure but it has of course left the tenant in a terrible financial position without funds to reinstate their business and now forced to fund the litigation.

Landlord/Property Owner

Turning now to the landlord/property owner.

The whole idea of the landlord abrogating the insurance protection to the tenant is quite frankly stupid. When it is not their property, most tenants seek out the cheapest possible cover without thought of the quality of the coverage or claims service. Where does this leave the landlord who typically has no relationship with either the insurer or the broker who arranged the insurance?

Flood is just one area where consideration needs to be given as to the extent of coverage required for the particular building.

Who ensures that the insurance is paid each year and that that sum insured/limit of liability, sub-limits for things like removal of debris, extra costs of reinstatement etc are reviewed regularly and are correct?

If there is a dispute between the landlord and the tenant who is there to look after the interests of the landlord?

I have seen far too many landlords, including solicitors who were the landlords themselves be left out of pocket after a fire as a result.

You can have all the directors guarantees in the world but if the tenant(s) has no funds they have no funds so the risk goes back to the landlord.

What of the loss of rent. Most landlords forget this. If they do think of it, most leases stipulate 12 months cover. This is often completely inadequate.

I spoke early about risk transfer. The best way to transfer risk is not to the tenant but to an insurer. That is their role in the economy and in society. To my mind it is far better for the landlord to manage the insurance on the building themselves, get the cover both in sums insured and extent of coverage right based on the risk and their appetite (not the tenants) and sleep well at night.


There is always an exception to the rule.

If the landlord is relatively small and the tenant is a huge corporation with a world class insurance program with every bell and whistle known to insurance and the landlord trusts the integrity of the tenant and their insurer, risk manager and legal department to do the right thing by them and not just walk away and leave them high and dry to deal with the insurer without the benefit of their own broker working for them, then yes it may be in order to allow the tenant to arrange the insurance.

For me, with any asset. I have had to work damn hard to get it and I am not going to take the risk and abrogate the most important contract protecting my financial future, that is the insurance contract, to anyone else other than my own broker, whom I trust and myself.

Now to answer the specific question

If the insurance is to be arranged this way then the policy needs to show all the legal entities involved as named insureds but for “their respective rights and interests”.


Read Me 1

Lessons learned from a fire in Brisbane – Part 1

Photo Courtesy of ABC News

Photo Courtesy of ABC News

On the 350th anniversary of when the Great Fire of London was finally brought under control and extinguished, a fire in Paddington, a suburb of Brisbane, destroyed two homes and damaged two others.

Two differences between now and then is that we now have permanent fire brigades with excellent equipment and highly trained staff protecting our cities and major towns and we also have fire insurance to protect the financial losses suffered by the owners of property damaged or destroyed. Both were the positive outcomes of the Great Fire of London.

The lessons learned from the Paddington fire are a reminder and 3 warnings.

One reminder is that when buildings whether they be homes or commercial/industrial buildings are built in close proximity the chance of a fire spreading from one to the other is increased. 10 metres between buildings is considered the minimum for good fire separation but even that distance is not sufficient if the fire load within one or both buildings is higher than the norm.

With our quest to have higher density living in our cities this of course leads to the problem the fire officers faced in Paddington and the home and business owners faced in London.

We try and avert this with non combustible building materials but are all the foam paneling used in modern construction then rendered over to give the allusion of masonry fire rated?

My first warning is that I genuinely doubt they are. We have seen a couple of high rise buildings in Docklands in Melbourne where the paneling helped spread the fire.

InsulationThe second warning is regarding disclosure. When you take out insurance on the peril of fire you are asked for the construction of the building. What will happen when a home owner states the building is brick/concrete believing it to be so when in fact the home has pine (softwood) timber sheeted in 75 or 100mm thick foam paneling and then covered in a thin render?

On the one hand the person insuring their home or contents genuinely believes it to be so as it is rendered and they did not witness the construction having purchased or occupying the building after it was built. They may have even been advised it is massive (brick, concrete, stone) construction by the real estate agent who may or may not know the truth.

On the other hand, the Insurer relies on the truth, under the principle of Utmost Good Faith to decide whether to accept the risk and if so at what price and on what conditions. [As an aside it is a milestone anniversary of this principle as well, dating back to 1766]. Many insurers have underwriting guidelines that state they are not to insure extruded polystyrene (“EPS”). They could and would argue that they would not have accepted the risk had the known the true construction material.

I can see a few lawyers making some money out of this and brand insurance coming under the spotlight again.

There are other issues about this paneling and what in fact worries me more than fire, but the post is getting too long and I will keep that for next week.

In the same vein, when I started this post I wanted to talk about the tenants not having insurance. This is a topic in itself so I will hold this off till Monday to discuss this potentially controversial subject.

Read Me View comments

Blog Question: Increased Cost of Working v Additional Increase in Cost of Working

bigstock-Business-Interruption-Sign-39078256The question that I chose to answer as a post today from the myriad I received leading up to the end of the Financial Year renewal period reads:


Is our understanding correct that if a client elects to insure for Additional Increased Cost of Working Only & not cover Loss of Revenue, that a traditional business interruption wording automatically covers both Additional Increase in Cost of Working and Increase in Cost of Working?

We have clients from time to time who do not envisage a loss of revenue if their office premises are damaged or destroyed, but acknowledge that they could have increased operating costs.  The particular client in this instance is a large civil contractor with mobile plant at several sites at any one time.  

In their view damage or destruction at their office, is not going to stop the machines working & therefore generating the same revenue for the organisation. 

I just want to be sure that the item we have insured under the policy labelled Additional Increase in Cost of Working, is also going to cover Increased in Cost of Working & we do not have the insurance carrier and or their loss adjuster splitting straws & paying for Additional Increase in Cost of Working but refusing to pay for the reasonable increased costs = Increased Costs of Working.

I look forward to hearing from you.


Paul [surname and email provided]


Hi Paul,

You are not alone in asking me this question and I would like to have had a dollar for each time it has been asked of me.

The answer is quite simple. No your client will not be caught out. The reason is that the Increase in Cost of Working cover has 5 tests of which 1 is key to this discussion.

If I take the Industrial Special Risks (“ISR”) Policy as an example Increase in Cost of Wording reads at Item 1 (b) under Section 2, Consequential Loss of Profits:

Item 1(b) [Loss of Gross Profit in Respect of an 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.”
[emphasis mine]
The test of interest is known as the Economic Limit Test. In simple terms, it means that an Insured cannot claim more as an Increased Cost of Working item than was saved by way of avoiding a claim for loss of insured Gross Profit.
We test this by comparing the expenditure incurred (say $25,000) to the loss of insured Gross Profit avoided. Where insured Gross Profit, Gross Rentals or Gross Revenue is not Insured then the expenditure fails the test and nothing is able to be claimed as an Increase in Cost of Working.
Any amount not paid as an increased cost of working may be considered under the wider cover of Additional Increased Cost of Working, if this is insured up to the Sub-Limit as recorded on the Policy Schedule.
Most Business Pack policies operate the same way with similar words or words with the same meaning but it is always important to check the actual wording involved.
Additional Increased Cost of Working 
The cover provided by Additional Increased Cost of Working is much broader than that provided by Increase in Cost of Working as is clear from the following definition, which again has been taken from the ISR Mark IV wording.
Item 4 [(Additional) Increased Cost of Working]
 “The insurance under this item is limited to increase in cost of working (not otherwise recoverable hereunder) necessarily and reasonably incurred during the Indemnity Period in consequence of the damage for the purpose of avoiding or diminishing reduction in Turnover and/or resuming and/or maintaining normal business operations and/or services.”
This wider cover allows increased costs that maintain the business or service, but which do not necessarily reduce or avoid a Loss of Turnover during the Indemnity Period.
Further, the Additional Increase in Cost of Working cover is not subject to the Economic Limit Test mentioned above.
By definition, any reasonable (reasonable being one of the 5 tests mentioned earlier) increase in cost of working from $1 up is claimable as an Additional Increase in Cost of Working.
From experience, I and the team at LMIG find this to be a very valuable cover. It allows an insured to make quicker decisions as they do not have to justify expenditure before incurring it. If it is prudent and reasonable then it should be covered by the Policy.
One final benefit is that the Additional Increased Cost of Working cover is not subject to any adjustment for under-insurance. In all policies where you can insure for it, the Sub-Limit or sum insured is a first loss limit. However, it is important that the cover is adequate to allow the businessperson to take all reasonable steps to protect their business during the period of the crisis.

Additional Increased Cost of Working Cover only

As you suggest some Insureds believe that they do not require full business interruption insurance as they will not lose any sales but may incur some additional expenses to maintain sales and customer service. This may be true for some service companies. They claim that they can quickly relocate or have their staff work from home. If this is true then this cover, purchased as a stand alone cover may be appropriate.
We would certainly not recommend this for a manufacturer or retailer. In most cases, it is found that the cover does not adequately indemnify a wholesaler.
If the office or service risk involves specialised equipment such as a dentist, again we would recommend the business take out full business interruption cover.
A word of warning. When it came to major events, such as for example the interruption of a public utility, it may not cause any damage to property but could result in a significant loss of insurable Gross Income as we saw with the Longford Gas Crisis in Victoria,  which cost industry $1,300 million, and the Mercury Power Crisis  in Auckland and countless similar events across Australia and the world, that businesses that thought that they only needed Additional Increased Cost of Working found that they did lose significant revenue and therefore insurable Gross Profit that they did not expect that they would.
Before making the decision, the business owner is strongly encouraged to discuss the pros and cons with their insurance broker or adviser.
On this issue, I have found that to purchase full business interruption cover with a reasonable Additional Increase in Cost of Working Sub-Limit is often not much dearer than just purchasing a high Level of Additional Increase in Cost of Working bearing in mind you do not have to purchase as much with full business interruption due to the coverage afforded by Item 1(b) Increase in Cost of Working described above.


 This is one of those areas of the business interruption cover that is quite complex. The overview provided above has been given to give you a good grasp of the cover. The points to take away are:
  • Increase in Cost of Working should never be sub-limited.
  • Increase in Cost of Working Cover is subject to 2 main tests, the “Sole Purpose” and “Economic Limit” tests and is also subject to average.
  • Every policy should have some coverage for Additional Increased Cost of Working.
  • While Additional Increased Cost of Working only cover does have it place its use should be carefully discussed with your insurance broker or adviser.
greenTo understand it more, particularly in a claim situation please read Understanding the ISR Policy (Manning, 2006) Volume 1, Section 8.1.1(b) pages 152-157.


Read Me View comments

Blog Question to better understand co-insurance under an Industrial Special Risks Policy

Hi Allan,

Thank you for your very informative article below:

I am regularly asked about the Asset Schedule by my team members

  1. “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.”
  2. If the insurer is immediately looking at the Asset Schedule as a test of co-insurance, does the co-insurance test apply to the total declared value across all situations or is it applied specifically to a line item, for example stock at situation 1?
  3. The client may be correctly declaring situation 1 & 2 at day one but for operational reasons relocate plant, machinery and stock from 1 to 2.
  4. As per your article I have encouraged staff to get the sub-limits and combined limits correct to fully protect the Insure but have seen some very “Business Package” approaches adopted by insurer claims staff to the items in the Asset Schedule


Any clarification you can give would be greatly appreciated.

Kind regards,

Malcolm [surname and email provided]


When it comes to insurance, advice is much more important that price!

When it comes to insurance, advice is much more important that price!

My reply was as follows.

I answer each of your questions using the same numbering system below.

  1. You are correct, the standard Mark IV (and Mark V for that matter) Industrial Special Risks (“ISR”) policy is subject to this level of co-insurance or average. Although, LMI has worked with some brokers to have this changed to 80% on each Section (that is Material Damage, Section 1, and Consequential Loss of Profits, Section 2) of the Policy in line with most companies’ business packs.
  2. The old Mark III version of the ISR had the test across all locations but there was mass under declaration which was so rampant that the Insurance Council of Australia (“ICA”) and the National Insurance Brokers Association (“NIBA”) worked together and moved the test to “at the Situation”. That is, the test for Material Damage, under the Mark IV, is at the situation where the loss or damage occurs but across all locations for BI as there can be interdependence between locations. To compensate Insured’s for this move, the tolerance for being under insured moved from 90% to 85%, where as you said, it remains in the standard ISR Mark IV. All this occurred back in 1987.
  3. This is one of the reasons why the test for co-insurance is what is known as a “Day 1 test”.  That is, the test for average / co-insurance is on the first day of the Policy Period and not the date of the loss. This means that, so long as the changes are picked up at renewal, there should be no problems. If not co-insurance can and will be applied. This is an important point that you are right to remind your team about and for them in turn to discuss with their clients.
  4. This shows a lack of training in that particular insurers claims area. The drafters of the Mark IV and Mark V ISR policies showed great social conscience and thought to protect the client and we often see that the policy is not read by an adjuster or claims officer and but for the diligence of the broker or claims preparer the client would be disadvantaged and under paid.

Emergency2If you or your team ever get stuck on any of this, I or any of the LMI Claims Team are here to help. Although we do prefer to get involved from the start of a claim than when it goes pear shaped.

greenWhen it comes to drafting issues, I am sure you have my ISR book in your office and this will assist with examples and the like on the issues we have discussed.

I hope this all makes sense.



Read Me 1