SLOAN RISK MANAGEMENT SERVICES LIMITED

SLOAN RISK MANAGEMENT SERVICES LIMITED
RISK MANAGEMENT AND INSURANCE CONSULTANTS
Telephone 64 4 472 6896
Facsimile 64 4 471 1240
E-mail [email protected]
Website: www.sloanrisk.co.nz
P.O. BOX 10173
WELLINGTON
NEW ZEALAND
RISK MANAGEMENT NEWSLETTER NO. 210
This newsletter is downloadable from our website
insurance premium is more than the value of his car!"
Circulate to:
• Finance
• Property
• Insurance
• Procurement
• Legal
”He has discovered that his
INSURANCE TRIVIA
Question:
Answer:
Which type of insurance policy can exclude cannibalism?
Aqua-culture policies (i.e. insurance of live fish mortality).
COLLABORATIVE INSURANCE PROCUREMENT
This approach is recognised overseas especially in Australia with their ComCover and State Self Insured
Funds reinforced by reinsurance.
Our own Government is now proceeding with the initial stages of an All of Government insurance. The
potential benefits are obvious as are the complications.
PROPERTY INSURANCE INDEMNITY VALUE COVER OPTION REMAINS VALID
A recent audit revealed that the client had been forced to acquire and insure a large building which was
unwanted but continued to be insured for its full replacement value.
On reviewing the matter it was confirmed the building was totally superfluous and, if a total loss, would not
be rebuilt at all. So indemnity value cover was costed and the annual premium cut in half.
The “dangers” of indemnity value insurance were recognised especially:
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For a partial loss, insurers could deduct an amount for repairing or replacing “new for old” which is
usually termed “betterment”.
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PRINCIPAL – JOHN SLOAN, A.N.Z.I.F. (FELLOW) A.R.M.
OFFICE –2nd Floor, Aviation House, 12 Johnston Street, Wellington, N.Z.
TELEPHONE – (Mobile) 027 4461 728 / (Private 64 4) 232 4241
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In event of a total loss the indemnity value is all they would get.
The indemnity value needed to be correctly established (in this case it was).
The insurers had to agree first as some will not grant full business interruption cover on buildings
insured for indemnity value alone.
Financiers had to agree as any loan/mortgage may require full replacement value insurance
irrespective of the client’s view.
READ THE POLICY
In another case, one policy excluded earthquake cover. This really surprised the broker, who had just taken
over the programme, but obviously, hadn’t read the policy exclusions.
BUSINESS INTERRUPTION INSURANCE ... SAME OLD PROBLEMS EXIST
Yet again:
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Claims preparation costs seriously under insured. Standard limits in Package/Scheme Policies can be
far too low for some businesses.
Check all sources of income to ascertain which would continue unabated after an insured interruption
(such as share investment income) and not need insurance and those which would definitely reduce.
Rental income can create complications.
Reliance on just one nationwide distribution centre which obtains all its products from China but that
dependency is not included in the business interruption policy ... which is not unusual.
Remote “hot site” getting established for the computer facility but no advance thought for the
insurance changes required or the provider’s insurance or liability restrictions.
Wages/salaries over insured when more cost effective and appropriate options were available.
CONTRACT WORKS INSURANCE LIMITS
As virtually all Property policies exclude separate Contract Works/Alterations to insured buildings separate
cover is required. This is because the risk is increased.
Most businesses have their Property policies extended to automatically cover Contract Works up to an agreed
limit to ensure multiple small contracts are insured but contracts over the pre agreed limit are not covered at
all. In such cases the contractor can insure them or the client.
The real danger is, and this has emerged with devastating consequences for some entities, is that a
building/alteration/refurbishment/new building on site contract in excess of the policy limit is completed, and
commenced, with no insurance cover at all in place by the client or contractor.
Another problem is that when a building is insured by a contractor and is completed the client’s Property
policy is meant to take over. Again incidents occur when this does not happen and the building/property is
not insured at all. If a policy is on specific declared assets and not blanket on a basis a costly uninsured
claim can occur. This happened once or twice in the Canterbury earthquakes.
JEWELLERY VALUATIONS OVERSTATED
We were recently asked to comment on a claim where a woman lost her engagement ring. It had been
specially made by a friend who was a jeweller for $12,000. She was told it would retail at $21,000 and was
specifically insured for that amount.
However when she claimed, the insurers said that “their” jeweller would replicate it for $12,000 and that is all
they would pay to meet their obligation to “replace” it. Her friend said he would do the same, so she took
the cash settlement but complained about paying a premium on $21,000.
The insurers did not see the irony of them telling her that their proposed new ring, costing $12,000 would
have an insurable value of $20,000!
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People should not readily believe the inflated “shop valuations” given to them after purchasing jewellery
which are a ploy to imply they got a bargain when buying it for much less.
Independent, professional valuations are preferable.
CHECK OUT NEED FOR DIRECTORS AND OFFICERS LIABILITY COVERAGE
We were involved in a review which revealed that, possibly, an unnecessary D & O policy was affected.
The matter arose out of reviewing insurances for a subsidiary organisation. The parent company had a
separate D & O policy which also applied to all of the subsidiaries. However, independently, the subsidiary
had also taken out a D & O policy including protection for the self same directors who were covered under
the parent’s D & O policy.
Note also that D & O Policies traditionally exclude:
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Intentional Acts.
Professional Liabilities (separately insurable if an exposure).
Inadequate insurance arrangements; eg. a D & O Policy does not pick up major underinsurance or
non-insurance of valuable property due to the negligence or oversight of either management or even
the directors.
BROKER SELECTION PROCESS
In 1996 the Pittsburgh Chapter of the Risk Management Society produced a Best Practice publication that
included a section on Ethics which continues to make valid points.
Ethics
Of major importance to this treatise is the issue of ethics. There has been no code of ethics accepted by the
risk management profession as yet. The literature and anecdotes are rife with stories of unethical tactics
used by both brokers and buyers in the selection process. We believe the following guidelines need to be
considered as part of the selection process:
1. Friendship may provide access, but should not have any impact on the actual selection.
2. Gifts of a material nature must be declined if there is any possibility (real or perceived) of their having
impact on the selection process.
3. Quotes or information from one broker must not be shared with another prior to the selection. After
the selection process is concluded, you many share the proposal as a method of contrasting their
quality and/or content with the other broker’s.
4. A broker selection process should not be used to replace an incumbent, hoping that the incumbent
will not be successful. If the incumbent is not performing satisfactorily, the proper action is to correct
the situation. If correction is not achieved or there is no improvement, the incumbent should not be
included in the selection process.
5. The broker selection process should not be used to ratify a decision already made (i.e. the desire that
one broker, perhaps the incumbent, be the winner and the selection process is “rigged” so the
decision is validated). Competition for accounts in expensive for the participants and it is not ethical
to use brokers in this way.
6. The servicing team at the brokerage firm must participate in preparation of the response to the RFP
and be involved in the oral presentation. This will assure the prospective buyer the broker is
prepared to service the account.
7. Further, “blue skying” or presenting unattainable program structures in conceptual presentation,
when the broker knows the programs are not achievable, is not acceptable.
8. Low balling first-year brokerage fees with the clear intent of buying the business can be countered by
requiring multi-year caps on fees and multi-year policies where available.
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HOUSES/FLATS/APARTMENTS RENTED OUT AT RISK IF NOT REGULARLY INSPECTED
Some landlords may not be fully aware of major insurers’ requirements for the rented out properties to be
regularly inspected.
One major insurer’s House policy contains the following Condition which goes beyond just inspections. Any
breach could void an insurance claim where the specific requirements become material and can apply to both
the owner and any property manager.
LANDLORD’S OBLIGATIONS
You, or the person who manages the tenancy on your behalf, must:
1. Exercise reasonable care in the selection of tenant(s) by at least obtaining satisfactory written or
verbal references, and
2. Collect:
a. At least 1 week’s rent in advance, and
b. At least 2 week’s rent in the form of a bond that will be registered with Tenancy Services, or
c. Any combinations of (a) and (b) to a total of 3 weeks’ rent, and
3. Complete an internal and external inspection of the property at a minimum of 4 monthly intervals and
upon every change of tenant(s), and
4. Keep a written record of the outcome of each inspection, and provide us a copy of the record if we
request it, and
5. Monitor rents on a daily basis with written notification being sent to the tenant(s) when the rent is 10
days in arrears. If rent is not received then a second letter must be personally delivered to the
tenant(s), at which point in time it must be ascertained whether or not the tenant(s) is/are currently
in residence and
6. Make application to the Tenancy Tribunal for vacant possession in accordance with the provisions of
the Residential Tenancies Act 1986 once the rent is 21 days in arrears.
EXTRACTS FROM OVERSEAS INSURANCE/RISK ARTICLES
INTERNATIONAL
United States: Financial Cost of Ebola Crisis Sparks Insurance Coverage Questions
REINSURANCE
Reinsurers must adapt to ‘new world of risk’
The reinsurance industry has been slow to respond to new risks because of its tendency to look to the past to
predict the future, according to Brian Duperreault.
The Hamilton Insurance Group chief executive officer, speaking yesterday at the opening of the Baden-Baden
Reinsurance Symposium in Germany, added that reinsurers had new roles to play in a “new world of risk” –
and opportunities existed for those prepared to take bold steps.
LLOYD’S/U.K./EUROPE
Risk responsibility lies with the board: Airmic welcomes Financial Reporting Council guidance
Non-Life Insurers’ Profits Under Pressure
Another significant trend revealed by the FERMA report is that insurance behaviours in Europe tend to
depend on budget restraints and rules of thumb. “While tried and tested by many risk managers, this way of
thinking could pose significant problems for the management of emerging risks such as cyber and
environmental liabilities”.
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Super distribution centres store up accumulation risk at one site trouble?
CANADA
Cyber-Risk – The Electronic Ebola of the 21st Century
USA
Insurer Warns About Ebola and Coverage
A major insurer is warning customers it may impose restrictions on Ebola related liability claims for
businesses and organisations with employees travelling to West Africa, in what is believed to be the first such
move by the insurance industry as economic ripple effects of the deadly disease spread. Zurich based ACE
Ltd., a leading global property and casualty insurer, has begun selectively excluding Ebola from its coverage
“on a case by case basis” for U.S. customers.
BP Hopes Missing Comma in a Contract Triggers $750 Million Transocean Spill Insurance
INSURANCE FACTORS IN MERGER AND ACQUISITION RISKS
Some mergers and acquisitions go smoothly, whilst others create problems – the main insurance coverage
issues can arise under the following:
 Accident Compensation – ACC claims experience of the company acquired can be incorporated into
the experience of the parent with, possibly, a major impact on future levies.
 Residual Liabilities – These may be insured or self-insured by the company being taken over and need
to be identified in advance because the new parent company will not be able to get insurance for
existing known liabilities.
 Directors & Officers Liabilities – These create an equal minefield, if only because some D & O policies
exclude coverage for the acts of a subsidiary company’s directors and officers that occurred prior to
an acquisition date. Other problems arise in arranging run-off insurance and extended reporting
period endorsement.
 Representations & Warranties – Where these are embedded in a company’s contracts it is not always
possible for the new parent to avoid them.
 Personal Accident/Employee Benefits Insurances – In some cases, a company may have these types
of policies included in their employment contracts, meaning they have to be continued by the parent
company who may not even have the same types of coverage themselves.
 Unpaid insurance claims.
REMINDERS
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Property Policies normally contain an exclusion for “contamination” which can be applied to P Lab
contamination of any property whether a home or a business. However some policies may include
extremely limited cover but that is rare.
Insurance agents (not brokers) invariably act for one insurer but some may have dual arrangements.
The dangers of getting insurance premium quotations “on-line”, e.g. for travel:
o Policy coverage may vary.
o Some policies may contain major exclusions.
o You don’t know the claims payment services or overseas resources.
o The cheapest premium is not always the best – the premium may be cheaper because cover
is limited compared to others.
“Having a nice looking risk register is no guarantee a risk is being well managed” (Mathew Leitch).
If you have to trim your insurance budget, do not cut back on essential protection by reducing cover
at the higher levels, but consider self-insuring more at the bottom end, by accepting larger
deductibles. This could have a bigger impact on premium savings, without exposing you to
catastrophic losses.
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ELABORATION OF OUR SERVICES
EXISTING INSURANCE PROTECTION REVIEW AND SELF INSURANCE
Organisations can be adequately insured, underinsured or over insured. A thorough review of the loss
exposures and existing insurance protection will be made. More innovative solutions may be worth
considering. Amalgamation or revision of policies can broaden cover, save costs or both.
PREMIUM COST REVIEW – PREMIUM SAVINGS
Insurance is a major expense for most organisations. A review of all insurance costs will be made to ensure
premium rates are fair, competitive and allow all available discounts.
In today’s economic climate, all organisations are reviewing costs, including insurance premiums and brokers’
remuneration.
COMPETITIVE INSURANCE QUOTATION TENDERS – REVIEW BROKERS’ SERVICES
Proper presentation of risks to the insurance market place has become increasingly important to the
purchaser. We can analyse your risks, prepare comprehensive specifications for brokers to present to the
insurance market and assist you in evaluating the resulting quotations. Our independence protects all parties
involved and ensures a due diligence process.
We have saved clients significant amounts of money with this service.
SPECIALISED SERVICES:
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Claims audits or reviews
Expert witness support
Evaluation of third-party claim administrators
Self-funding analysis or captive options
Broker/agent review
OUR ADDED VALUE
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We are well established and experienced in the insurance industry
We have an enviable track record and client listing
We concentrate on risk analysis and/or insurance consultancy assignments with no vested interests in
any ultimate insurances which may be placed
Fees are competitive, cost effective and agreed in advance. We do not operate on fees being a
percentage of savings achieved, all of which go to the client.
TERMS
We can work on a fixed fee basis, by the project, or an hourly rate or on a retainer, depending upon the
services you need, your objectives and your budget. We can provide a proposal for any service you may
require at no cost or obligation, along with references.
INDEPENDENT RISK MANAGEMENT AND INSURANCE CONSULTANTS
Sloan Risk Management Services
PO Box 10173, WELLINGTON
Phone: (04) 472-6896 Fax: (04) 471-1240 Cell phone: (0274) 461 728
Email: [email protected] Website: www.sloanrisk.co.nz
NOVEMBER 2014
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NL #210