Real or Not? - You Be the Judge

By Richard Kranz

We were recently appointed by a national insurer to check on a premises in the western suburbs of Sydney, where the Claimant alleged that the activities of New Years Eve, in particular fire works, caused irreparable damage to the building air conditioning system located on their roof. A total new air conditioning system was being claimed at a total cost, labour and materials of around $50K plus GST.

By way of background we were provided with various photographs showing extensive used fireworks on the roof, however no photographs were provided showing any damages to the air conditioning equipment. The Insured and broker were very forceful in their allegations and required immediate settlement of the claim.

The allegation by the Insured was that the perpetrators placed fireworks on top of air conditioning units located on the roof with the result that the heat and smoke from the fireworks, after they had been let off caused extensive damage to the air conditioning equipment.

When we arrived on site on our first visit we were not able to gain access to the air conditioning equipment located on the roof. We were advised that no access was possible and no ladders on site were available, this being contrary to advices initially provided to us when the matter was discussed with the Insured.

We were required to re-attend the site, this time bringing a ladder to gain access to the roof, which is located around four metres above ground. We also brought on site a specialist air conditioning technician, who proceeded to check the air conditioning equipment for electrical integrity. When on the roof we could not see any damage whatsoever to the air conditioning equipment that is consistent with fire, heat, burning, flames or smoke.

The air conditioning technician on site conducted various checks of the air conditioning equipment and determined that only one out of the four air conditioning units was working correctly and that the other three had various breakdowns in place including fusion of sealed compressor motors, fusion of condenser fan  motors, problems with control systems and the like.

In summary the damages in place to the air conditioning equipment were due to general breakdowns and wear and tear and had nothing to do with the activities of New Years Eve.

The moral to the story is when a claim is received it is always important to conduct a site inspection and also view the equipment that is being claimed. When any doubt exists as to the cause of damages it is always advisable to have a specialist attend the site to do various checks of the equipment.

By the way, the Insured always maintained that the air conditioning was working fine prior to New Years Eve and that after New Years Eve the air conditioning equipment was not working. What do you think?

I hasten to add that this was an unusual circumstance as the writer’s experience is that information provided with the majority of claims is quite legitimate, though often knowledgeable interpretation is required.

PS: This claim was denied by the Insurer and no further representations were received from the Insured!

Defects Liability

By Steve Nance

There are usually two types of cover available under the material damage section of the Contract Works policy. The first covers any material damage during the construction period. However, once the construction period ceases, many construction contracts enter into the “Defects Liability” phase. This is a period of time after practical completion of the works where the contractor is responsible for the making good associated with any defects in the works. This forms the second portion of the material damage section of the contract works policy. 

Many policies describe this as being the “Maintenance Period”. It is unclear as to how this term came about, but it is quite clear that the responsibility of the contractor is not one of maintenance, but rather of rectification of defects.  It is for this reason why the majority of contracts refer to this section of the contract as being the “Defects Liability” period.

It is the cover under this period that will be discussed in this item. Specifically, the types of cover which are available.

The wording of the Defects Liability Period/cover varies significantly from policy to policy. Generally speaking the policy provides cover for physical loss or damage to the contract works which occurs or “manifests itself” during the Defects Liability Period of the contract, but which originates from the contract works. It also provides cover for any physical loss or damage to the contract works which may occur when any of the insured parties attend the site to rectify any defects, or indeed any other works which the contractor is responsible for carrying out as a result of the contract.

For example, let’s take a building which has reached Practical Completion two months prior to a significant rainstorm. There is a 12 months Defects Liability Period under the construction contract. As a result of the rainfall, leaking occurs as a result of a defective membrane, causing damage to ceiling tiles, the electrical installations, and carpet (all of which formed part of the contract works) and other contents items which were owned by the tenant.

In this instance the loss occurred as a result of defective work which occurred during the construction period and as such would usually fall within the defects liability provisions of the contract. It is also arisen out of the contract works during the construction period. As a result, the policy will respond to the loss, but subject to the terms and conditions of the policy.  Depending on the wording, this would usually exclude the cost of making good the membrane, however would provide cover for physical loss or damage to other sections of the contract works. Given that the policy only provides cover for the contract works, it would not provide cover for the contents owned by the tenant, such as the desks, chairs, PABX installation, computer installation and the like. This would be more appropriate for a liability cover.

To continue the example further, the contractor re-attends the site to undertake the rectification of the membrane, as well as rectification of the other damage to the building, as well as some other defects. In doing this, he causes a fire which causes yet further damage to the building. As a second proximate cause, this is a separate event, however would also be covered as it is works being carried out by the contractor in complying with the requirements of the defects liability clauses of the construction contract.

The above is fairly straightforward, and is addressed in most of the construction policies, which the writer has seen.

There are, however, some circumstances which are not as straightforward.

Let’s take for example the situation where the Defects Liability Period under the construction contract either does not exist or is of a short period (say three months) under the construction contract. The policy, however, provides a 12 months “maintenance period” cover. Given that the contractor under various states legislation is responsible for repairing the defect, and as such also responsible for the resultant damage, would the policy respond? This of course depends on the wording of the policy.

Some policies specifically provide the necessary period of cover up to a maximum of the Defects Liability Period which is required under the contract. If therefore a contract has only a three months Defects Liability Period, then the policy would respond to losses up to three months after Practical Completion, but then would not provide cover for the events manifesting themselves during the nine months after this, being the maximum amount provided by the policy. Other more generous policies specifically state that they provide cover up to the end of the maintenance period allowed for in the policy. This suggests that even though the three months Defects Liability Period under the contract may have expired, cover would be provided up to 12 months, where this is the maximum allowable under the policy. This effectively provides cover where it may not be required.

Another issue is where some construction contracts actually allow for an extension of the Defects Liability Period. Typically this would be where a defect has originally been determined, and then repaired. Some contracts then require a new Defects Liability Period to commence at the completion of that rectification. Indeed, the writer has been involved in claims 27 months after Practical Completion where a Defects Liability Period of 12 months only had been provided. Whether cover is provided for this or not will again depend on the detailed words of the policy. Where a policy simply mentions that the cover provided will follow that of the construction contract, then where the construction contract does allow for this accumulated defects liability provisions, cover would probably be provided.

A further issue associated with the maintenance period under the contract can relate to the (usual) requirement that the cause has to arise out of the contract works which is carried out by the Insured and occur during the construction period. If we take the example of a defective generator which has been installed in our building and becomes badly damaged during the Defects Liability Period. What cover would be provided to the generator if the cause was a manufacturing defect within the generator itself, and the generator was manufactured some time prior to the contract commencing? The extent to which cover would be provided for both the generator and any resultant damage which may occur will again depend on the policy wording.

Further, most policies require the defect to occur at the construction site. Given the same generator, which was constructed off site, possibly overseas, even if the manufacture was during the construction period, cover may not be afforded to this. Again, this will depend on the policy wording, which is often tailored to suit the needs of the Insured.

Golfing in the UK!

A few blokes from the Australian insurance industry, a couple of doctors, an accountant, a bed manufacturer and a few ring-ins got together in the UK to play some of the best golf courses in the world. Birkdale, Turnberry, St Andrews, and Carnoustie amongst them. And didn’t they have a great time!

Efficient Use of Service Providers in Liability Claims

By Filip Damjanovski

The general insurance industry has been under increasing pressure to deliver positive returns to company shareholders. In an environment where revenue growth is nominal and investment yield limited, insurers are making concerted efforts by insurers to reduce costs.

However reducing costs does not have to entail a slash and burn policy of eliminating external expenditure such as service suppliers (i.e. lawyers, adjusters, investigators). Indeed the claims management process benefits from the skills that everybody in that chain brings.

It is not uncommon for a claims handler to delegate claims based on the “monetary value” of a claim and many times this can be justified, however often this is not the most efficient way of dealing with a claim.

Having a good understanding of the role of service providers such as loss adjusters, lawyers and investigators will ensure that the quality of the insurer’s claims service is kept at a high level and at the same time minimising wasted costs that are incurred by engaging service providers on a traditional “monetary value” basis.

For example, the natural response to receiving a claim for a large quantum sum may be to send it to lawyers. Understandably this is because of the perception that a large exposure requires a “safe pair of hands” to deal with it. In fact, the complexity of a claim is rarely determined by the quantum of the claim and often “small” claims are far more complex in terms of the issues they raise than “large” claims.

Alternatively it may be perceived that if the claimant is represented by lawyers it means legal proceedings are imminent and warrants lawyers being appointed to act for the insurer. In actual fact, often the reason that a claimant has decided to retain lawyers is because the claimant feels that he/she was not engaged with (in discussion) in good faith at an earlier stage of the claim process.

Decisions to be made in the claims process

1. Notification of claim – The insured or broker approaches the insurer and lodges a claim or notification of an incident. They will provide basic facts about the incident and any relevant correspondence to provide a basic outline of the incident. This information allows a claims handler to get a “gut-feel” for the claim. A claims handler can request any other information that they feel is necessary for them to be able to determine what further steps ought to be taken at that stage.

2. If the claims handler has much of the relevant information required or is able to obtain any further missing details from the insured and/or claimant by a simple email or phone call, then there is very little that an adjuster, lawyer or investigator can add to the claims process but cost and delay. If not, the claims handler may decide that an external service provider is best placed to provide what is required within a reasonable timeframe and cost.

3. If the claims handler has previously engaged with the claimant and/or their legal representative and it is clear that the parties have exhausted attempts to resolve their differences and the issues remain in dispute, then the natural progression is for the claimant to commence legal proceedings. At that point the insurer ought to engage lawyers in order to protect both the insurer’s and the insured’s interests.

4. However, if a claim is notified and much of the information required to make a decision is missing, irrespective of the size of the claim or whether the claimant is dealing with the matter personally or through lawyers, it is prudent to first engage a loss adjuster.

5. A loss adjuster is best placed to gather the information from all parties (insured, claimant, third parties, witnesses), collate documentation and evidence, take statements, attend to the loss location, take photographs, and then provide the claims handler with a factual report weighing up the strengths and weaknesses of the claim and make recommendations with respect to the further conduct of the claim, as well as comment on the potential impact on policy response and address quantum issues.

6. At that point the claims handler should have sufficient information to make a decision as to how to resolve or progress the claim. If the loss adjuster has raised issues that require legal advice (or clarification of a legal position), it is at that point that it becomes prudent for a claims handler to engage lawyers to address the specific issues raised (again, all with a view to allowing the claims handler to make a decision as to how to resolve or progress the claim). Likewise, if the investigations reveal that further specialist expertise is required on a specific point, then it would be prudent to engage the relevant consultant to address the specific issues raised.

What benefits can a loss adjuster provide?

When a claim requires investigation, a loss adjuster is generally best placed to obtain the relevant information available from the parties involved in the shortest timeframe.

An adjuster is usually able to secure a visit to the location of the loss and with very few exceptions is able to speak with all parties involved in order to obtain an unfiltered account of events and facts. This enables an adjuster access to places and people that other service providers will not have the benefit of.

The loss adjusting process can be undertaken in a conciliatory fashion (as opposed to the adversarial style of litigation). It follows that with the expectation that the insurance process is in play, all parties involved are generally eager to assist a loss adjuster in furthering the claim. Thus an adjuster is able to move the claim process forward further and quicker than others.

A good liability adjuster should be able to undertake the investigations, obtain as much of the facts as possible, understand and filter through the relevant issues and make meaningful recommendations for the further management of the claim, keeping in mind the commercial aspects of the claims process and where appropriate attempting an early resolution of the matter to avoid unnecessary and expensive litigation, thus saving the insurer both time and money in resolving the claim.

Ultimately the management and resolution of an insurance claim is all about quality and timely information – something that a loss adjuster is often best placed to provide.

At Technical Assessing we have many experienced and knowledgeable liability adjusters with a range of backgrounds and qualifications who are familiar with both the claims and litigation processes.

Film Insurance

By Peter Brown

The Wikipedia definition of Insurance reads as follows:

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment.  It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

In our daily lives we are well used to handling the full range of claims for property damage, in particular Contract Works and general liability including Public and Products and Professional Indemnity.

However, there is one area of specialised insurance in which Peter Brown and Bill Matthews from the Brisbane Office of Technical Assessing have developed a niche and that is Film Insurance.

Film Insurance provides insurance on films, television productions and commercials from short productions to full-length features.  The underwriting of Film Insurance is normally the domain of specialist underwriters in this field both locally, in the UK and USA.  There are a number of types of cover available, the main ones of which are as follows:

Film Producers’ Indemnity

This cover, also known as Cast Insurance, provides for the increased costs incurred due to the death, injury or illness of nominated personnel who are considered essential to the continuation of the Production.  Typical people insured are the Director, Producer, Director of Photography and Principal Actors.  Cover is normally taken out for pre-production and shoot, however, in some instances cover may also be taken out for the post-production period.

Negative Film Risk

Cover is provided for the increased costs incurred due to the loss of, or damage to, negatives and video tape and other forms of content media.  This Policy also normally provides cover for the risks of faulty stock, faulty cameras and faulty processing.

Multi-Risks

This particular cover is normally split into three sections:

• Props, set and wardrobe;
• Office contents;
• Cameras, lighting and electrical equipment.

It should be noted that a lot of the equipment used in a production is hired in from specialist hire companies and it is important that responsibility for insurance is clarified at the commencement of hire.

Extra Expense

This section of the Policy protects the Production Company for increased costs incurred following damage to props, sets, cameras, equipment or facilities –it provides protection to cover the costs of delays caused by material damage to property.

Public Liability

This Policy covers the Production Company for claims made for death, bodily injury or property damage to third parties other than employees of the Production Company.

Errors and Omissions

This Policy protects the Production Company and distributors for claims for libel, slander, defamation, plagiarism, breach of copyright, invasion of privacy and theft of rights and includes the legal fees incurred in the defence of the claim.

This class of business can lead to the handling of some extremely varied and interesting claims as illustrated in a cross section of claims handled by Peter and Bill over the last few years.

(i)             Loss of 5 minute scene during filming of “Scorched”, a made-for-tv movie shot in Sydney;

(ii)            Loss of day’s shooting of 40 second commercial entitled “Bush Tucker Man” for Electrolux due to poor weather conditions in Broken Hill.  Filming extended leading to increased production salaries and extended hire costs for equipment;

(iii)           Hirer failed to return hired camera equipment from renter of broadcast and professional video equipment.  Equipment located in Lebanon and most of it successfully recovered;

(iv)          Disruption to filming of “Farscape 2” production due to illness of leading actress.  Major cost to extend and change film production program;

(v)           Substantial claim for additional expenses incurred due to the delay in commencement of Principal Photography due to health issues suffered by leading cast member;

(vi)          Contamination of electronic event screens by foreign matter generated during filming resulting in claim for reinstatement of damage;

(vii)         Fire in sound stage destroyed building, cameras and equipment owned by third party suppliers.  Sound stage building required reinstatement and a substantial claim eventuated for disruption to rental income during the period of the construction.

The writer will discuss Contingency Insurance in an article later this year.