INSURANCE
MANAGEMENT
1.0
Introduction
1.1
Purpose
The
purpose of this article is to assist Members to understand the
essential elements of managing insurance programs in relation to
existing buildings by broadly outlining issues relating to the
insurance environment and risk management.
This
guidance note applies to Members who are called upon to advise
clients in matters pertaining to the insurance of their properties
and, in some cases, arrange the relevant insurances on their behalf.
It deals with the management of risk and protection from risk using
Insurance as an important element in achieving these objectives.
Specifically, the
guidance
note deals with:
• a
general background to insurance;
•
aspects of risk
management;
•
relevant classes of
insurance; and
•
other relevant
matters.
1.4
Not Technical Advice
This
guidance note does not seek to provide technical advice on specific
valuation issues.
1.5
Beyond the Scope
Similarly,
issues associated with insurances for new construction or major
refurbishment projects are beyond the scope of this guidance note.
Members will need to be aware of these types of insurance from other
sources.
1.6
Consultation
Whilst
a guidance note of this nature can address the broad issues, it
cannot be definitive and you are, therefore, urged to consult with
the insurer, an insurance broker or your legal adviser to discuss any
aspects requiring clarification or expansion.
1.7
Disclaimer
This
paper was produced by the Australian Property Institute to provide
general information, in summary form to its Members. The contents do
not constitute legal advice and should not be relied on as such.
Formal legal/insurance advice should be sought in particular matters.
2.0
Preamble
2.1 Protect From
Risk of Loss Since the beginning of commerce and trade, humankind has
sought to protect itself from the risk of loss, be that loss associated
with property (real or personal), life or the ability to provide food
and shelter for the individual, family or community.
2.2
Convey Risk to Another
The
need to convey the risk of loss to another party has seen the
development of a number of risk transfer mechanisms, the most notable
probably being the concept of insurance.
2.3
Insurance is a Contract
Insurance
is a contract between two parties where, for a consideration
(premium), one party agrees to pay for a stipulated loss suffered by
the other party. The payment of the claim simply fulfils the
contract.
2.4
Risk Transfer and Risk Combination
Thus,
at the heart of insurance is the principle of both risk transfer and
risk combination. Risk combination allows the risk to be spread,
usually via an insurance fund, over a very large number of
individuals or corporate entities.
2.5
Common Pool
The
combination of many potential risks into a common pool or fund allows
the law of averages of large numbers to operate to the benefit of the
unfortunate few who suffer loss.
2.6
Statistical Data to Predict
With
a large number of homogenous items (be they motor vehicles, lives,
units or real property, etc) grouped together, it is possible from
statistical data to predict within reasonable limits the number and
cost of losses that will occur within the group. With this knowledge
premiums
can be calculated that are needed to pay the losses and the expenses
of operating the fund and to provide an acceptable profit.
2.7
Offer Long Term Security
So
that the insurance fund is able to offer long term security to its
policy holders, premiums must be sufficient to enable it to meet both
immediate claims and those that arise well into the future. The
fund’s long term viability is also dependent upon the level of
investment
income
generated, operating expense levels and the sum of returns paid to
investors (be those investors shareholders or owners in a mutual
organisation).
2.8
Premium Rates
Whilst
premium rates are determined by many complex factors, most of which
are outside the direct control of the purchasers of the insurance
protection, property owners can, however, take some actions that will
affect the premium they are required to pay.
2.9
Modern Risk Management Practices
Modern
risk management practices, careful analysis of the risks to be
covered, and the level of the risk that the property owner will
retain, are but a few of the factors that will determine the amount
of money that will be spent on loss prevention and insurance
protection.
2.10
Insurance Issues
This
paper deals with some of the insurance issues that face Members in
their management and development of real property.
3.0
General Insurance Environment
3.1
Premium Rates Fluctuate
Premium
rates available to companies and individuals seeking the protection
of insurance fluctuate in accordance with both local and
international insurance market conditions, the level of natural and
man made disasters (ie. claims), the economic climate and business
cycles.
3.2
Management of Insurance Programs
The
management of insurance programs has thus taken on an increased
importance for professionals involved in producing satisfactory
returns from property investments.
3.3
Amount Spent
With
the development during the 1980s of very large property assets which
in themselves require insurance cover of many hundreds of millions of
dollars, the amount spent on property insurance has become very
significant, both in aggregate terms and as a cost of operating
property
portfolios.
3.4
Insurance Necessary
Insurance
is necessary because it offers:
•
security to lenders
and other stakeholders;
•
comfort to customers;
•
continuing of
business operations; and
•
safeguards to
employees’ jobs (ie. financial protection following a loss).
3.5
Insurance Costs Controlled
To
ensure that insurance costs are controlled, it is important that
owners and their asset managers are able to demonstrate to
underwriters the qualities of their buildings and management controls
they maintain.
3.6
Risk Management
This
is best done by risk management and ‘anticipation of risk, rather
than by reaction to loss.’
3.7
Control Premiums
If
this is observed, it will not only assist all property owners to
control their risk but also their premiums.
4.0
Risk Management Responsibility of Officers and Directors to Owners
4.1
Some Have a Legal Obligation
Practising
effective risk management procedures is not simply a matter of good
management, some people have a legal obligation to their employer.
4.2
Legal Responsibility
The
officers and directors of a business have a legal responsibility for
the proper management of pure risks.
Pure
risk is the loss of, or damage to, property or injury or death of
persons using the property. It can be accidental or fortuitous,
foreseen or unforeseen. They have an overall legal duty and a
specific obligation to use care and be diligent in the administration
of the affairs of the corporation and in the use and preservation of
its assets.
Courts have
recognised
that the failure to effect proper insurance coverage, to pay premiums
when due, or to keep coverage in force, may well be the basis for
personal liability suits against the officers or directors of a
business. The legal standard of performance is that officers and
directors must exercise the care that an ordinary prudent person
would exercise under similar circumstances.
5.0
Risk Management
5.1
Process to Identify and Quantify Exposures
Risk
Management of Real Property is the process through which an
organisation can identify and quantify its exposures to loss, access
priorities and develop strategies to avoid losses or, if they do
occur, deal with them effectively.
5.2
Benefits
The
benefits of the Risk Management approach are:
•
prior recognition of
real risks to an organisation;
•
optimal
insurance/self insurance;
•
increased management
awareness;
•
effective Reporting
Mechanism;
•
helps Avoid or
Minimise Losses;
•
reduced Cost of Risk;
•
satisfies Due
Diligence Requirements;
•
conforms with Best
Practice;
•
facilitates Corporate
Governance;
•
increased profits;
•
better Management of
resources;
•
improved
Productivity.
5.3
One Objective
Risk
Management has one objective; i.e. to ensure the economic continuity
of the goods and services of an organisation whilst minimising the
costs of both expected and unexpected losses. The activities of the
Risk Manager are influenced by the Owner’s general insurance
philosophy which can be summarised:
• Eliminate
or reduce as far as practicable the conditions and practices may
cause insured or uninsured losses’.
Note:
- outsource
non-core functions or inappropriate activities;
- transfer
contractual liability of consequences, eg. tenants take public
liability risk; insurance and/or indemnity is required of contractors
working on site or supplying services or goods;
- imposition of
insurance, indemnity and hold harmless conditions in agreement with
contractors; and
- when premises
are rented risks may be transferred from owners to tenants or from
tenants to owners, depending on the lease conditions.
- The extent of
elimination or reduction affects insurance costs;
- When risk
cannot be eliminated or reduced to workable levels;
- Purchase
commercial insurance that will provide indemnity for catastrophic
losses;
- Either insure
or assume those risks not considered to be of major importance to the
operating or financial position of the Owner.
5.4
Importance and Complexity
The
risk management function continues to grow in importance and
complexity. Management is becoming more cost conscious and more aware
of how sound risk management helps to minimise expenses.
5.5
Strategy
For
this reason, it is always important to have a risk management
strategy which can protect tenants as well as the owner and also
assist by demonstrating to insurers that the business is aware of
potential exposures and is implementing procedures to ensure such
exposures are controlled. This will benefit all parties and lead to
more
economical
insurance premiums.
5.6
Identifies & Controls Potential Loss
The
risk management process identifies and controls potential loss
situations which can affect an organisation’s financial security,
reputation and viability.
5.7
Identify Risks
In
order to identify the risks, it is important for the owner of the
property to be aware of potential hazards and to implement a control
to enable management to always be conscious of changes in tenants and
likely hazards.
5.8
Procedure
The
procedure should include risk identification, risk management and
risk control.
5.9
Specific Risks – Risk Identification Process Systematically and
Continuously Identifies
This
is the process by which a business systematically and continuously
identifies property, liability and personnel exposures as soon as
they emerge. Unless these risks are identified, all potential losses
will unconsciously be retained by the company.
Most
Risks Easily Recognised
Most
risks are easily recognised, and would be known within an
organisation.These should be identified by either the insurance
broker or the ownership entity, after discussions with staff and
staff should be given on-going support from Management in the
identification of risk.
The
risks shown below are normal within the property industry, and it is
in order to insure against perils such as these that an insurance
policy is purchased:
•
Fire
•
Lightning
•
Storm and Tempest
•
Water Damage
•
Flood (not readily
available in flood prone areas)
•
Sprinkler Leakage
•
Explosion
•
Business Interruption
(including loss of rent)
•
Loss of
Machinery/Boilers
•
Demolition and
removal of debris
•
Earthquake
•
Impact by Vehicles or
aircraft
•
Malicious Damage
•
Theft
•
Accidental Damage
•
Legal liability to
third parties
•
Workers’
Compensation (compulsory) called
‘WorkCover’
in some States
•
Motor Vehicle (Third
Party injury insurance is compulsory).
•
Breach of
professional duty
•
Liability of
directors and offices arising out of a
wrongful
act
•
Consultants fees
•
Contract works
(principal controlled contractor’s
liability
policy)
•
Environmental damage
•
Pollution
Check
List
However,
to identify all the potential losses, a check list of all assets of
the company should be drafted, and a systematic approach used to
discover which of the potential losses provide the most exposure to
the company. This is best done internally by the person whose
responsibility it is to control insurance, or can be carried out by
an
independent
firm, such as a broker/risk management company. Any independent firm
should work in liaison with the firm’s internal risk Manager when
conducting a risk identification survey.
Risk
Profile
As
each property is unique, both as to its operation, usage, location,
construction and cash flow pattern, it is important that a risk
profile be developed for each property, ie. Pro-forma profiles may
overlook some feature unique to a particular property.
Exercise
Will Correctly Inform
Although
this is a time consuming exercise, it is the only means which will
correctly inform the company of the risks/exposures it carries, and
will:
•
identify exposures
which can be insured, therefore the exposure is transferred from the
company to an insurer;
•
where the exposure
cannot be insured, management controls can be implemented which will
diminish the risk to the company.
Risks
Prioritised
Risks
should be prioritised by analysing both the probable frequency of an
occurrence and the impact (ie. severity) on the company. Risks that
are assessed as having a high likelihood (ie. frequency), together
with a high impact, should be fully insured.
Excess
The
starting point is the excess under the policy. This indicates the
level of risk the company can absorb.
5.10
Risk Management
Potential
Losses Measured
After
the risk has been identified, the potential losses must be measured
in order to determine their relative importance.
NB.
Replacement/reinstatement costs do not necessarily equal market
value.
Calculated
Periodically
Asset
values should be calculated periodically by consulting professionals
who will assess the dollar value at risk to ensure,
at
the time of a major loss, the value of both property (ie. physical
structures excluding land value) and business interruption is
adequately insured. This will ensure that the business does not need
to fund part of the loss, which could impact on the viability of the
organisation. Extra costs
may be incurred if regulatory changes are triggered.
Quantity
Surveyor and Valuer
A
quantity surveyor can be used to establish replacement cost
estimates for commercial buildings and a valuer for domestic buildings.
It is generally believed studies reveal that a significant
number of buildings are underinsured. The impact of averaging
insurance [GN 22: 9.5] means that exposure previously thought to be
insured is now only partially so.
Engineering
Survey
Specialist
risk management engineering surveys can be engaged to identify
specific, or peculiar exposures at each location.
Physical
Survey
A
physical survey, implemented by both management or a risk management
consultant, should include a review of:
•
management controls
•
fire protection
systems
•
inspection programs
for fire hazards and other exposures
•
general housekeeping
•
staff training
•
environmental risks
•
security
•
emergency evacuation
•
bomb threats.
Note:
extra costs are referred to later in this guidance note.
Loss
recording is a vital step in the risk management process.
If
an organisation does not record all losses, it is unable to take an
informed decision to carry a risk, ie. higher deductibles, which can
minimise premiums.
5.11
Risk Control Elimination or Minimisation
The
aim of risk control is elimination or minimisation.
After
risks are identified, practical and cost effective recommendations
can be made regarding the physical protection of assets.
Monitored
and Investigated
If
all losses are monitored and investigated, the organisation is in a
position to take effective measures to either eliminate or reduce
recurring losses.
Familiarity
Contributes
The
organisation is well placed to effectively contribute
to
risk control due to their familiarity with the property.
Tenancy
Supervision
Tenancy
supervision is also an aspect of risk control and a procedure should
be implemented whereby there is regular liaison with tenants to
ensure that their standards, or physical protection and housekeeping,
are in line with that provided in common areas.
Controls
Influence Premiums
If
these controls are achieved, the risk of losses is minimised, which
significantly influences premiums.
6.0
Risk Financing, Risk Transfer and Insurance
6.1
Total Cost of Risk
The
Total Cost of Risk includes such items as:
•
capital expenditure
on fire protection and security equipment;
•
upgrades to
electrical and mechanical plant;
•
repairs and
maintenance;
•
insurance policy
excesses or deductibles;
•
risk management
consultancy fees;
•
insurance premiums;
and
•
associated
administration costs.
The
way in which the Total Cost of Risk is absorbed or otherwise paid for
can be referred to as Risk Financing.
Risk
Transfer
Risk
Transfer of the operational or financial consequences of an event can
be effected in several ways, eg:
Lease
Agreements
Requirement
in Lease Agreements that tenants effect Glass and Public Liability
insurance.
Note:
• The
amount of the policy excess can be greater than the value of the
glass;
•
Public Liability
insurance will generally be restricted to the tenant’s operations
unless that tenant is the sole occupant;
•
Policies should be in
the joint names of the Lessor and Lessee;
•
Lessor may effect
insurance if Lessee fails to insure;
•
Lease documents
should reflect Lessor’s requirements.
Service
Providers
Contacts
with service providers to include insurance, indemnity and hold
harmless provisions in favour of the owner.
Purchase
of Insurance
Purchase
of insurance, ie. transferring the ultimate risk to an insurance
company per medium of effecting an insurance policy or policies.
7.0
Types of Insurance
7.1
Type of Policy Depends on Value
The
types of policy or policies of insurance to be effected will to some
extent depend on the value of the property.
The
criteria as to which insurances are appropriate for a given property
vary from insurer to insurer but as a general rule:
•
properties with
values less than, say, $1-2,000,000 and perhaps up to $5,000,000 will
be insured under Business Insurance or similarly titled package
policies; and
•
properties with
values greater than these amounts will generally be insured under
individual policies for each category of risk to be covered.
7.2
Business Insurance
Business
Insurance policies generally offer a range of cover choices and those
most relevant to the insurance of property are likely to be as
follows:
•
fire, lightning,
explosion and other specified perils to cover physical loss or damage
to the property caused by those nominated perils;
•
consequential Loss,
i.e. loss of gross rentals and increased costs of work arising as a
result of a peril insured by the preceding section;
•
breakdown of
electrical and mechanical plant and machinery and consequential
losses arising there from; and
•
public Liability,
i.e. legal liability in respect of claims by third parties for
personal injury or death or damage to property arising out of an
occurrence in connection with the ownership or occupancy of the
property.
7.3 Separate Policies for Higher Value Property
The
kind of separate insurance policies likely to be effected in the case
of a higher value property are as follows:
•
Industrial Special
Risks (ISR) which insures ‘Physical loss or damage (and
consequential losses arising there from) not otherwise excluded’ -
the ISR policy therefore combines and expands upon the first two
elements of the Business Insurance policy as above;
•
breakdown of
electrical and mechanical plant and machinery and consequential
losses arising there from (which are exclusions under the standard
ISR policy); and
•
public Liability,
i.e. legal liability in respect of claims by third parties for
personal injury or death or damage to property arising out of an
occurrence in connection with the ownership or occupancy of the
property.
7.4
Specific Policies
In
addition to industrial special risks (ISR) policies on a full
reinstatement basis, other specific policies in relation to property
can be adopted to suit specific requirements or specific loss
categories. The requirement for these will vary according to
individual circumstances. These polices include:
•
insurance of
contents;
•
loss of master key
insurance;
•
capital works
insurance as an addition to conventional contract to cover such works
as tenancy fit outs or refurbishments.
•
fidelity Guarantee,
i.e. misappropriation of money or goods by employees;
•
credit Insurance,
i.e. bad debts following tenant insolvency;
• key
person Insurance;
•
professional
Indemnity;
•
directors and
Officers Liability;
• any
other appropriate insurance.
7.5
Workers Compensation
The
requirement for Workers Compensation insurance differs from State to
State and Territory to Territory.
Care
must be exercised to ensure that, if there are any employees, the
appropriate insurance or statutory arrangement is put into place.
8.0
Issues to Consider in Choosing Insurance Cover
8.1
Assessing a Building’s Risk
The
main criteria for an insurer when assessing a building’s risk is:
• the
materials used in the construction of the building;
•
compliance with
ordinances. For obvious reasons insurers will not provide competitive
quotations where a site does not comply with ordinances as the
insurer would postulate that the lack of compliance would increase
the risk;
•
fire Protection, eg.
sprinklers, are always an advantage, as it assists with minimising
the risk for insurers and, hence, results in lower premiums;
•
tenancy of buildings.
Insurers will always assess the exposure of tenants and quote
accordingly, eg. a mechanic is a higher exposure than a bank – this
will be reflected in the premium;
•
building security;
•
neighbouring
environment - eg. explosives/chemical plant, bushland, etc;
•
limitation of road
access;
•
location of premises
(eg. on an existing flood plain);
•
compliance with
ordinances eg. asbestos contamination (authorised removal is required
following an asbestos audit).
8.2
Comments at the Planning Stage
Most
major insurance brokers and insurance companies are able to provide
comments on building design, fire protection and security. Ideally
this should be provided at the planning stages, but later if need be.
They will also be able to advise on risk management techniques
tailored to the individual property.
8.3
Three Basic Functions
A
core insurance program as discussed fulfils three basic functions for
a property owner/manager:
•
conservation of all
assets (Property insurance);
•
preservation of
income/profits (Consequential loss);
•
protection against
liabilities (Public liability);
Note:The
extent to which insurance fulfils these functions is subject to the
terms, conditions and exclusions of the policy, e.g.
•
generally a liability
policy will only cover sudden and accidental pollution;
•
asbestos is generally
an exclusion unless it is in static form.
8.4
Extensions to Policies
Taking
the above into consideration, there are some extensions to Business
Insurance and ISR policies which should be compulsory to any prudent
property owner. These are:
Indemnity
Period
The
indemnity period should be long enough to provide for the following
in the event of destruction (e.g. by fire):
•
planning;
•
tendering;
•
approvals;
•
construction;
•
letting.
8.5
Removal of Debris
Removal
of debris. At times, the local council tip will not be able to handle
all the debris from a building due to either the content (asbestos)
or due to the bulk. This may incur very large charges/costs where the
debris may need to be removed by specialists and sent to a processing
plant
which will accept the waste. Always ensure that the insurance limit
will adequately reflect the cost of disposal.
As
a rule 10% of the value of the asset would be a minimum but this
varies dramatically depending on factors such as the height and
construction of the building. (Note: Removal of asbestos has
extraordinary cost implications and may involve 50-100% of the value
of a building).
8.6
Reinstatement and Replacement
Always
ensure that the policy provides for reinstatement and replacement
conditions - including the ability to rebuild on the site where
development controls may have changed.
8.7
Extra Costs
The
policy should include the extra costs of reinstatement, which is the
extra costs incurred to comply with any requirement of any Act of
Parliament or Regulation, By-Law or Regulation of any Municipal or
other Statutory Authority.
8.8
Increases in Cost of Working
Increases
in the costs of working, which covers any reasonable expenses
incurred in order to minimise any long-term effect of a loss on
profit/revenue, eg. Overtime wages, the costs of leasing other
premises, including fees, advertising and promotional expenses.
8.9
Flood Insurance
Flood
insurance - to cover damage to property caused by flooding. This may
be provided subject to strict underwriting guidelines.
8.10
Policy Excess
Most
policies will be subject to an excess or deductible, i.e. the amount
of each loss which must be met by the insured following a claim.
8.11
Excess will Vary
The
amount of the excess or deductible will vary from insurer to insurer
and the nature of the property being insured.
8.12
Can Elect Higher Excess
Property
owners can elect to assume higher excess or deductible than that
being imposed by the insurer although it is recommended that this
only be entertained where the insurer is prepared to offer a
substantial premium discount in return.
8.13
Policy Exclusion
Policy
Exclusions: All insurance policies contain exclusions and it is
important that owners/managers familiarise themselves with those
exclusions applicable to their own policies.
9.0
The Importance of Valuations and Insurance
Average
Clauses
9.1
Definitions
In
the context of insuring property it is important to be cognisant of
the definitions which apply to the various types of policy.
9.2
Business Insurance
Business
Insurance policies generally require separate sums insured to be
specified for:
•
buildings, including
architects and professional fees (the term ‘Buildings’ is
understood to include the structure itself together with fixed
electrical and mechanical plant, sprinkler and fire alarm systems and
landlord’s fixtures and fittings);
•
contents - in this
regard the insurer should be asked to advise if carpeting and floor
coverings, for example, would be considered as part of the building
or would require a separate sum insured;
•
Computer and
electrical equipment;
•
Costs of demolition
and removal of debris.
9.3
ISR Policy Covers
An
ISR policy covers 'all real and personal property of every
description’ under a single declared value for each property. Care
should however be taken to ensure that the value declared takes all
the above items into account.
Land
Not Included
The
value of land is not to be included in either case.
Under-insurance
Business
Insurance and ISR Insurance are quite different in the way they deal
with under-insurance and, irrespective of which policies operate for
a particular property or portfolio, care will need to be taken in
assessing the sums insured or limit of liability as applicable.
Generally properties are insured for their replacement cost and the
following aspects should be taken into account.
Sum
Insured
The
sum insured under Business Insurance is the insurer’s limit of
liability in the event of loss or damage. It is therefore necessary
to project the sum insured nominated at the commencement of the
policy period to cater for inflation and other cost variables during
the policy period.
ISR
Policy
An
ISR policy does not contain a sum insured per se but has:
Declared
Value
Declared
Value, ie. the estimated value of the property
insured
at the commencement of the period of insurance - as well as being
relevant to the test of coinsurance or average, this amount is
utilised for the purpose of premium calculation; and
Limit
of Liability
Limit
of Liability, ie. the maximum liability of the insurer in the event
of loss or damage - this need not and should not be the same as the
declared value but should represent what the replacement value of the
property would be if, for example, it was totally destroyed on the
last day of the period of insurance. (Sub-limits are also generally
applied to contingencies such as accidental damage, burglary and
demolition/removal of debris costs).
Coinsurance
or Average
However,
both Business Insurance and ISR Insurance contain Coinsurance or
Average clauses which permit the insurer to reduce the amount of loss
if the:
• Sum
Insured at the time of loss or damage in the case of Business
Insurance; or
•
Declared Value at the
commencement of the period of insurance in the case of ISR Insurance.
is
less than 100%, 90%, 85% or some other specified percentage depending
on the insurer’s policy wording and/or the value of property
concerned.
Example
Assuming
that there was a 100% Coinsurance or Average Clause in the policy,
the following example demonstrates how under-insurance can reduce the
amount of a claim.
S
x A = Claimable Amount P
Where
S
= the sum insured or declared value in the policy
A
= the amount of the loss
P
= the correct value of all property
In
this example
S
= $ 50,000
A
= $100,000
P
= $200,000
$50,000
x $100,000 = $ 25,000 (Claim settlement) = $200,000
This
has occurred because, in this example, only 25% of the values were
selected as either the sum insured or declared value as applicable.
Note that the equation would vary in the case of, for example, a 90%
or 85% Coinsurance or Average Clause although the underlying
principles are the same.
Ensuring
Fully Insured
The
best way of ensuring that a property is fully insured is to have the
property valued and the policy figure updated on a regular basis. The
valuer should be instructed to prepare the valuation so that the
valuation accords precisely with the basis of insurance eg.
Reinstatement, replacement and extra costs insurance or indemnity
value as applicable and include costs of demolition and removal of
debris and professional fees. At the very least, if a professional
valuer
is
not to be utilised, it is recommended that reference publications
such as Rawlinsons Australian Construction Handbook or Cordells be
consulted.
Sum
Insured or Declared Value for Consequential Loss It is similarly
important to direct considerable attention towards assessment of the
sum insured or declared value for Consequential Loss insurance -
generally thought of as Loss of Rents insurance in the context of the
insurance of property. This insurance is also subject to coinsurance
or
average
provisions.
Indemnity
Basis
It
is also possible to seek insurance cover on an indemnity basis being
either the market value of the building less the land value or the
depreciated value of the property. This can, under certain
circumstances, provide greater flexibility in the event of a
catastrophic loss but may lead to complications in regard to a
partial loss.
Different
Levels of Insurance Within One Complex
It
should also be noted that different levels of insurance cover can be
taken for structures within one property complex but at different
levels of risk, eg. a factory and its outbuildings on the same site
where the factory might be under reinstatement conditions, and the
outbuildings
insured
for their indemnity values.
Public
Liability
Public
Liability insurance is subject to a limit of liability for any one
occurrence ie. the maximum amount the insurer will pay for all claims
arising out of the one event. This means that the limit of liability
selected must:
• be
sufficient to cover all claims from all claimants arising out of the
one occurrence;
•
recognise that
injuries can take several years to stabilise to the point where some
claims can be taken to Court - there can be both inflation and
escalation in the amounts of damages awarded in the intervening
period;
and
•
take account of the
possibility that at least some of the potential claimants will be
juveniles and that claims in respect of such persons cannot be
finalised until a juvenile reaches the age of 18.
The
most appropriate limit of liability will be to some extent,
influenced by both location and occupancy of the property concerned.
Contract
Waivers Recover Loss Against a Third Party
Contract
Waivers:When an insurer has agreed to indemnify a company for a loss,
it retains the right to recover its loss against a third party if
they caused the loss. If the insured party has contractually waived
the insurer’s right of recovery against another party, the
insurance policy can become null and void. The insured party should
ensure that he
has
neither accepted nor waived liability.
Hold
Harmless
At
present there are many contracts that are regularly utilised in the
commercial environment that contain ‘hold harmless’,‘waiver of
subrogation’ or warranty clauses. These can be found predominantly
in maintenance agreements and some lease agreements.
Negotiate
a Wording
Prior
to signing or recommending any of these agreements, always refer to
either the insurance broker or insurer who will either negotiate a
wording which is acceptable to all parties or, if this is not
possible, will endorse the contract on either the property or
liability policy.
10.0
Conclusion
Not
All Exposures Are Insurable
Not
all exposures are insurable events, eg. wear and tear, damage by
vermin.
Read
Insurance Contract
It
is surprising the number of persons who do not read their insurance
contract and/or obtain either legal advice or advice from a
professional insurance adviser as this is perhaps the only contract
that will ensure the ongoing viability of the business if a major
catastrophe occurs.
Although
an insurance policy can be complex to read, it is important to
understand, at the very minimum, the policy exclusions and
conditions. If any part of the insurance contract causes concerns to
the purchaser, they may be able to negotiate changes to policy
conditions and
wording.
However, this can only be accomplished where the insurance purchaser
understands the contract.
Very
Large Programs
For
very large insurance programs, it may be advisable to recommend that
the insurance adviser/broker to meet with the owner, the owner’s
solicitor and the insurer to design (draft) policy wordings and
conditions. It is also reasonably common for a nominated loss
assessor
acceptable
to both the owner and insurer to be agreed, as this can facilitate
claims settlement when losses occur.
New
Products and Changes to Taxation Provisions
Finally,
Members should be aware that as with all market sectors, the
insurance industry is subject to continual review and there is the
potential for significant change in the future. New insurance
products regularly become available, and changes to taxation
provisions or other
Government
regulation can effect the utilisation of insurance.
Ensure
Insurance Covers are Specifically Tailored
As
indicated, this Guidance Note addresses broad issues, relating to the
property insurance environment and risk management. However, just as
the property market is not homogeneous and each property has
different characteristics, so it is with the insurance market and
individual
policies of insurance. Thus the professional adviser needs to ensure
that the insurance covers are specifically tailored to individual
properties and their risk profile.
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