The Importance of Pragmatism

By Andrew Buchanan

It is generally accepted within the Insurance Industry that, all else being equal, claims grow more expensive with age.  Technical arguments always have their place but the bottom-line is that such arguments must always be justified by saving more than they cost to run. The pragmatic approach can often result in less overall expenditure, as illustrated by the following two cases recently adjusted by me.

In the first case, my Principals Insured were Scrap Metal Merchants who had a permanent presence on a Steelworks site owned and operated by a third party.  The Insured controlled a large stock-pile of scrap steel, when they would deposit into vehicles operated by various third-party hauliers using a crane-grab.  An accident occurred when a piece of steel fell from the stockpile and struck a third-party driver, resulting in him sustaining a fractured spine.

The accident was caused by a combination of the stock-pile being too high and a failure to ensure that drivers stayed away from the “danger zone” during the loading operation.  The Insured, as the party in ultimate control of the stockpile, had a clear liability.  The Site Owners also had a liability due to their failure to instruct and direct third-party drivers entering the site.  The Haulier also had a liability given they had not adequately trained/instructed their drivers .

Prior to litigation commencing, I wrote to the Opposing Insurers recommending that liability be shared between the three Insureds/Defendants, but neither Opposing Insurer was willing to compromise and admit even partial responsibility.

In the absence of agreement, the case litigated and I immediately instructed a firm of Solicitors.  By co-incidence the two Opposing Adjusters (without realising) also sent instructions to the same law firm.  The Solicitors quickly identified the conflict of interest and sought my instructions.

Having been the first to instruct, I had the opportunity to tell the Solicitors to cease acting for the other two Defendants, whose Insurers would then have to appoint alternative Solicitors.  Instead I proposed that I would permit the Solicitors to continue to act for all three Insurers provided that agreement could be reached on liability apportionment between the three Defendants within a fortnight.

As a result, a one-third/one-third/one-third share was agreed between the three Defendants/their Insurers within one-month of litigation commencing.  This  prompt agreement, which in turn enabled swift settlement of the claim, resulted in a significant saving in Solicitors’ Costs (both Defendants’ and Claimant’s).

It is strange (and unfortunate) that such a pragmatic solution could not have been reached prior to litigation, and it is highly unlikely that it would have happened for some time had three different firms of Solicitors been appointed.  Had the case gone to Court, it is probable that at least one of the parties would have been held to contribute less than one-third, but that would clearly have been a pyrrhic victory.

The second example involved a Products Liability claim relating to the supply of game-bird feed.  The feed (which was produced on a bespoke basis for the Claimant) was allegedly defective, resulting in the birds rejecting it, which caused them to become under-nourished, allowing disease to set in and thousands of birds to die.

Aside from numerous issues regarding whether the feed was indeed defective and whether it was causative of the birds’ deaths, a significant problem arose due to the Insured having changed Insurer at the worst possible time: the preceding Insurer had been on cover when the Product was supplied to the Claimant and he had first started to feed such to his birds, but their cover terminated (and my Principal’s began) prior to the birds starting to die in significant numbers.

The Operative Clause of both Policies was written on a “Damage Occurring” basis, but when did the damage occur: when the birds started to reject the feed (and started to become malnourished)? At the point when they actually became medically “malnourished” and required veterinary treatment?   When death occurred?  

Clearly no loss or damage occurred straight-away: it would take some time for the lack of food to have a negative impact on the birds’ health/development.  Conversely, it is clear that the birds had sustained “damage” (even if their malnourishment was treatable, their development would have been set back) prior to their deaths.   The situation was further complicated by the fact that the affected birds numbered in the tens of thousands and the “occurrence” date would differ between birds.

So what should the percentage split be between the two Insurers?  There was, quite simply, no precise answer on the available evidence.  Both Insurers could bring to bear justifiable arguments that the other should contribute the lion’s share.

However, it was recognised that the increased legal costs resulting from delay would likely exceed the savings available and both Insurers were persuaded to agree a 50:50% proportionate share of all outlays. 

This spirit of pragmatic compromise extended to both the Insured and Claimant.  Through open discussion it was recognised that the Insured, who had raised debt-recovery proceedings against the Claimant, would be happy to have their outstanding debt (owed by the Claimant for unpaid feed) cleared and that the Claimant would be willing to walk away from his claim in the event the debt was written off: this being a fraction of the sum claimed (as supported by Veterinary Reports).

Ultimately, both the Insured and Claimant seemingly walked away happy with the outcome and each Insurer’s total outlays measured just into five-figure sums (when the potential combined claim value, inclusive of litigation costs had been approaching six-figures).

At Technical Assessing, we often say that our aim is to settle claims for the “right amount”, but the right amount must always take into account cost implications.   Our aim to settle claims quickly and pro-actively with the aim of avoiding unnecessary legal dispute and associated cost.

T&C, smoke grenades and the bathtub curve

By David Outred

Many many years ago, when I was a young tradesman, I found myself working with a team designing smoke alarms for long distance passenger trains. You see, traditional smoke alarms can’t be used because the fumes from the train engine, even if too faint to be sensed by people, would set the alarms off. Finally, a solution was found, a sensor designed and manufactured and then installed in four carriages, each representing a different type in common use. It remained only to test them. A young engineer was given the task, and a smoke grenade, and sent off to the station yard where the newly modified carriages were parked alongside platform 4. Unfortunately, there was also another set of very similar carriages parked at platform 3, being readied for passengers, and indeed, some passengers had arrived early and already embarked. Obviously, this story does not have a happy ending, the grenade was placed in a carriage entrance and set off, and when the hapless passengers and staff ran screaming from the train, the engineer’s stomach turned to water.

It may be an extreme example, but the story is a demonstration of the pitfalls of Testing and Commissioning, and the potential for a simple T&C process to impact on a much wider scale than just the item being commissioned. Not all T&C losses are due to a gormless graduate equipped with explosive ordinance though; most arise when there is the initial application of energy to complex and expensive machinery, sometimes with unexpected and catastrophic results.

In a standard Contract Works policy, Machinery Breakdown, or Derangement is generally an exclusion. Testing and Commissioning is usually available as an endorsement, which effectively removes the policy Machinery Breakdown exclusions during the commissioning period. Underwriters will often want the T&C period well-defined, perhaps to the extent of nominating specific dates and specific commissioning processes, and it will generally carry a large deductible, to reflect the increased risk to plant during the commissioning period. And quite an increased risk it is too. The installation of complex plant and equipment is fraught with dangers. For starters, the machine may very well have left the factory with an inherent defect, which doesn’t manifest until some load is introduced, or the installation process may include a careless moment, or a fitting that is not quite right. The fact is that most machines are never more at risk than those moments when they are first switched on, or first experience load conditions, except as they near the end of their working life, when wear and tear starts to contribute to breakdowns.

This increased rate of breakdown at infancy and again at the end of the working life of a machine can be expressed graphically in what engineers commonly refer to as The Bathtub Curve, and I have included just such a graph below for you. The horizontal axis represents the age of the machine, the vertical, the failure rate for like machines. In terms of the infancy of the machine, it can be seen that the potential failure rate is extremely high at very early stages, then falls as the machine overcomes what may be referred to as teething problems and settles into a steady and efficient working life. If the curve was applied to, say, a refrigeration sealed unit compressor, the yellow section would span about 5 months, the green about 15 years. For a large electric motor running a relatively constant load, it would more likely be 1 month and 30 years. 

As I mentioned before, there are a number of factors which contribute to the increased failure rate of an infant machine and below are a few examples, from my own personal experiences, that might highlight those factors.

The Factory Fitted Fault: Commissioning of an air compressor in a medium sized workshop, installed, and power supplied. On start up, the compressor ran for a few seconds and then the cylinder head, about the size of a small suitcase, fragmented and exploded across the workshop. The largest piece slammed into an overhead crane cab and, unfortunately, a smaller piece travelled about 40 metres and sliced through tendons in the elbow of a workshop employee. Subsequent investigations revealed that an internal valve plate had been fitted back to front, although how it escaped quality control has never been adequately explained.

The Careless apprentice:  A very large Diesel powered generator set was being installed in a remote town. During erection, an apprentice was given the task of fitting lagging to the exhaust manifold, to quieten the engine a little. To make it easier to get access, he removed the governor linkages, attached the lagging, and then reattached the linkages – upside down. When the engine was started for the first time, because of the wrong linkage position, it immediately ran to full speed. By the time the kill switch was activated, the engine had almost self destructed, and had to be replaced. 

Who Needs Instructions: A large freezer installation was finally finished, and although it was late on a Friday, it was decided to give it a quick test. The control panel was energized and the compressors operated and everything cooled down nicely. It was knockoff time so the plant was then shut down and everybody left the site, for the weekend, overlooking the fact that the control panel still had power to it. In that control panel was a timer, in that timer was a small plastic pin, attached to that small plastic pin was a tag, which read for factory testing only, remove before commissioning. As nobody had read the instructions, the pin remained in place, allowing the defrost heaters to run all weekend, melting the insulated sandwich panel forming the walls of the freezer rooms.

You Forgot WHAT?:  A ball mill was erected at a gold mine and had been tested without load. It was then loaded with dead weight and the bearing deflection calculated, and the bearings set up accordingly. The Mill had a capacity of 50 Tonne and so 50 Tonne of deadweight was used. The test engineers overlooked however, that the mill still hadn’t had its liner installed, which weighs another 10 Tonne, so their calculations were out by that amount. When it was commissioned with a full load, the bearings failed and the repairs took 4 months, triggering a major Advanced Loss of Profits claim.

Is it any wonder then, that Insurers and reinsurers exercise great caution when endorsing a policy for T&C? Brokers and their clients are well advised to ensure a T&C endorsement is given consideration for every Contract Works policy written where the works include anything where mechanical, hydraulic or electrical forces are applied. They should also have a thorough understanding of the T&C process and how timelines will impact on policy response and premium. In some cases, an independent pre-construction survey may be invaluable in getting the right cover.