The importance in fire claims of involving companies for the recovery and decontamination of machinery and plant

In fire claims, some assets are destroyed and, inevitably, must be replaced.  Others, on the other hand, only sustain partial damage and can be recovered.  Indeed, what tends to happen in serious incidents is that the fire directly affects some areas of the risk whilst other parts of the plant only undergo damage due to smoke, heat, the water sprayed by the Fire Brigade or by the risk’s own automatic extinguishing systems, or the corrosive gases that are formed such as HCI (Hydrochloric Acid), etc.

In these cases where the damage is only partial, it is both expedient and cost-effective to involve companies specialising in cleaning, drying, decontamination and recovery of the equipment, whether mechanical, electrical or electronic.  These companies, some of which fortunately we have in Spain, for example BMS Technologies, Debeer- Belfor, Recover, etc., must intervene as soon as possible since the corrosion and oxidation processes worsen day by day. Therefore, the chances of success are far higher with an early intervention in the loss event.

Apart from minimising the Material Damage in the case of partial damage, the Consequential Losses can also often be reduced by the intervention of these firms.  In fact on some occasions damaged machinery can be temporarily repaired and can then continue to operate for a few months until new replacements are obtained, thereby minimising the Loss of Profits.

In most cases both the Insurance Company as well as the Insured are very satisfied with the involvement of these companies since they can resolve what could have posed a major problem for them, such as being unable to produce over several months until the replacement machinery arrives, which in the case of complex machinery could take some 12 or 18 months.

Moreover, at VANTEVO CLAIMS ADVISORS, besides using these companies in certain loss events, we also involve companies that are specialists in salvaging partially damaged stocks, since they perform a task based upon the classifying and cleaning of the partly affected stocks that can be highly cost-effective for Insurers.

Why it is important to learn the cause of a loss event

Learning the source or root cause of a loss event is, along with the appraisal of the loss and damage, the most important task of a loss adjuster in the event of a claim.

There are 3 reasons why it is essential to learn the exact origin of the loss event:

  1. So as to ascertain the cover for the same. For example, in the case of a Machinery Breakdown brought about by slow and gradual corrosion, the claim would not be covered.
  2. So as to recover the indemnity from a third party, if we can demonstrate their liability in the cause of the same.
  3. Because if we know exactly what has occurred, we can take steps so as to prevent the same thing from happening again and bringing about a similar loss event in the future.

In complicated claims, such as a major fire, it is advisable to involve investigators and experts in the examination of its root cause. Fortunately, there are an ever increasing number of firms and teams specialising in this work for ascertaining the exact source of a fire.  It is important to confirm that it has had an accidental origin and that we are not dealing with a loss event that was caused deliberately.

Likewise in the case of Machinery Breakdown, it is vital to involve metallurgical laboratories so that, based on the analysis of the part that initially broke, it can be determined whether it was a sudden and accidental breakage or was the consequence of a slow and gradual process.  As we have stated earlier, in this second case the claim would not be covered.

Although, ideally, official laboratories or ones belonging to Schools of Engineering should be used, these bodies have the problem that they tend to take several months to provide the results of the analyses and often this is not acceptable, since the Insured and the Insurers want to know as soon as possible whether or not the claim is covered by the policy.  That is why we at VANTEVO CLAIMS ADVISORS usually use private laboratories and investigators of recognised professional competence since they are able to be more agile in furnishing the outcome of their investigations.

 

“Industrial Loss and Damage Claims” book by Roberto Revenga

In his Book “Industrial Loss and Damage Claims, published by AGERS, the author Roberto Revenga analyses real claims and the main covers that industrial firms require.  He stresses the need for the policies to be “made to measure”, that is to say, that they should be tailored to the risk that they want to cover.  Also, that they should be drawn up with major loss events in mind, which is when they will have to function properly, in order for which it is essential that the Sums Insured are updated.

 

Likewise, the book highlights that with the “lessons learned” that arise out of each claim, the safety conditions of the risk and the policy covers can be improved upon, in such a way that after a lengthy process of years of analysis of the causes and constant improvements, the risk situation and the policy covers might be optimised.

 

As regards the cover for Consequential Losses, emphasis is placed on the need to examine the Sum Insured, the Maximum Indemnity Period and the appropriate Deductible, stressing that this will only work in those claims where there is an impact upon the financial results, which does not usually happen in loss events with a short duration.

 

This book will be particularly of interest for those persons embarking upon the complex world of insurance, and can be acquired from AGERS (Libro físico – Siniestros de daños y pérdidas en la industria – AGERS) who publish it in Spain.

 

When must a faulty machine be replaced?

Often we have had cases where apparently a machine has been left so damaged following a Fire or Machinery Breakdown event that it has to be replaced.  However, before taking that decision, the situation must be thoroughly examined since, although the Insured may be interested in having the damaged machine replaced with a new one, as you are well aware, if the repair is both technically and financially feasible, then the insurance policies will settle the cost of the repair not that of the replacement.

The Insured can easily get a report from the machinery manufacturer explaining that the repair is not feasible and that the damaged machine must be replaced. Obviously, the manufacturer is interested in selling machines and therefore normally has no problem with issuing this type of report, which generally is pretty brief and not very technical.   But if the machine is replaced, then we will be faced with a total loss, and the cost of the damage will be more than the actual value of the machine.  In such a case, most policies prescribe that the actual or real value of the machine ought to be indemnified, that is to say, taking into account depreciation for age, use and obsolescence.

On the other hand, if we are facing a partial loss, or in other words, the cost of the damage is less than the actual value of the machine, then in this case the policy will indemnify the cost of the repair without applying any depreciation whereby the Insured will not have to make any disbursement whatsoever.

Another scenario that might happen in this type of loss affecting machinery is that it can be repaired temporarily, with no guarantee, so that it might withstand a few months whilst awaiting the arrival of the new machine, which often has delivery times of several months.  This is expedient when the shutdown of the damaged machine will give rise to some significant Consequential Losses.

What can also be useful is to ask for a second opinion or a second report regarding the chances that the machine may be repaired when the manufacturer and the Insured propose its replacement. Likewise, companies specialising in the recovery of facilities and machinery should be contracted, as they can minimise the damage and get the machine working again, even if only temporarily until the new machine can be supplied.

This solution is highly valued by Insureds and Insurers alike, since it allows the Consequential Losses to be minimised by reducing the potential losses of sales and clients.

To summarise all the above, with Machinery Breakdown not only is it important to learn the cause of the loss event, in order for which a metallurgical analysis is often required, but also it is essential to ascertain the exact extent of the damage and confirm whether the machine can be repaired or if it needs to be replaced.

At VANTEVO CLAIMS ADVISORS we work with reputable laboratories and reliable workshops, which allows us to resolve these two questions:  the origin and cause of the breakdown and the extent of the damage, clearly and precisely, thus enabling us to reach agreement with all the parties involved in the claim.

Conditions in order for the Business Interruption or Consequential Loss cover to be triggered

In our opinion, there are three conditions and moreover, it is necessary that all three are met for there to be any indemnity payable under this cover.

The first condition is that the Material Damage that gave rise to the Consequential Loss being claimed, is covered by an Insurance Policy.  This has its logic and rationale since otherwise, if the Insured does not have the resources to repair the damage, the maximum indemnity period prescribed in the Consequential Loss Policy would always be exhausted.

The second is that production activities are resumed after the loss event.  This condition is likewise well founded because otherwise, it could be the case of a businessman whose company is not doing well, who burns it down so as to collect the indemnity for both the Material Damage as well as the Consequential Loss.  If fraud cannot be proven, at least with this second condition you avoid the Consequential Loss having to be indemnified under the Policy.

Lastly, the most important condition and something that is not usually explained to the Insured when contracting the Policy, is that the loss event must affect the company’s financial results.  Thus it is necessary that the loss event has an impact upon the company’s income, or in other words, that there is a loss of sales or that there is an affect upon the costs, i.e. that it causes extra costs.  Both are things that usually occur with major claims.

In many claims where the Company’s inventory or stocks of finished goods is enough for several weeks and their sales capacity is less than their production capacity, which tends to happen in times of crisis, it is pretty unlikely that a loss event with a short duration, of less than a week, will have an impact upon the financial results of the Company.  Therefore, it is absurd to impose Deductibles of just a few days for businesses with high levels of stocks and whose production capacity is greater than their sales capacity.

To avoid the Insureds from subsequently feeling cheated, this third condition must be clearly explained at the time of negotiating the Policy and make them see how important it is that it should be designed for major claims since the smaller ones will hardly affect their financial results.  Furthermore, imposing higher Deductibles in these cases, extending to weeks rather than days, significantly reduces the cost of the Policy.  Unfortunately, this is not normally done and mistakenly they attempt to lower the cost of the Policy by reducing the Maximum Indemnity Period, instead of raising the Deductibles.

At VANTEVO CLAIMS ADVISORS, given our extensive experience with this type of claim, we can help the Insureds and Brokers to set a correct Sum Insured, an adequate Maximum Indemnity Period, and a Deductible that lowers the cost of the Policy but without reducing the cover for the Insured.  To sum up, Business Interruption or Consequential Loss Policies must be drafted with large claims in mind, not the smaller ones.

Are loss events “Black Swans” for companies?

As defined in 2007 by the inventor of the theory, the renowned Lebanese researcher Nassim Taleb, a “Black Swan” is an unlikely occurrence that takes us by surprise and has a major impact for society.

By way of examples of “Black Swans” we have, amongst many others, the outbreak of the 1st World War, Hitler’s rise to power in Germany, or more recently the attack on the Twin Towers in New York City on September 11 2001.

According to Mr. Taleb, all “Black Swans” must have these three attributes:

  • Be highly improbable
  • Have a severe impact upon Society
  • Be predictable, retrospectively

Clearly, on the above bases, a loss event is not a “Black Swan” for companies.  The occurrence of a pandemic, an explosion or a fire in an oil rig or refinery… is not an unlikely and unpredictable event.  They have happened before and they will happen again in the future.

Hence the importance, and particularly in a hard market situation such as the current one, of investing in and improving upon the safety and risk prevention of companies since this is the best way of avoiding – or at the very least – of reducing the likelihood of any accidents occurring.  It has been proven that most of the claims that occur in industries are caused by a “human factor”; or in other words, they are due to negligence on the part of their own or subcontracted employees.  Consequently, it is essential that the training of workers be improved upon and that the officers of the companies take on board the importance of complying with the safety regulations they have established.

There is no point whatsoever in organising training courses and seminars and implementing rules and regulations if afterwards these are not obeyed and the offenders are not penalised for their negligence and carelessness.  But it is still strange how the Works Councils of the industries that ought to be the most concerned about the safety of their workers, protest whenever the companies try to penalise those culprits who caused the accidents.

For those of us who know how companies in Latin American and English-speaking countries operate, it does not go unnoticed how these latter are the strictest in enforcing compliance with the safety rules on the part of their personnel, which results in those countries having a lower claims ratio.

When a loss event occurs, the moment of truth

The fact is, insurance policies are contracted by companies in view of the chance that a loss event might occur causing them substantial loss and damage.

If there were never any claims, then no policies would ever be contracted, and so it is clearly evident that Insurance plays a very relevant and necessary social function, mutualising the losses in the sense that many of us pay for the damage caused to a few.

That is why it is vitally important that the policy should be well designed and operate correctly so that, following a loss event, the Insured recovers the major part of their loss and damage.  It is when a loss occurs, that everything is put to the test:  whether the policy is adjusted to the risk that it was intended to cover, whether Insurers attend to their client with due diligence and professionalism, whether the Brokers advise them adequately and finally, whether the Loss Adjusters appointed by the Insurance Company are expert and independent professionals.

Preparing and proving a claim after a major loss event is very specialised work, and can be extremely demanding, especially during the first few weeks following the incident.  Being able to rely upon a company such as VANTEVO CLAIMS ADVISORS, composed of expert and independent Loss Assessors who can assist the Policyholder to compile their claim and undertake measures with a view to mitigating their Consequential Losses, can be extremely expedient and result in a substantial economic impact to the benefit of the Insured.

Indeed, a good Loss Assessor can not only suggest valid measures for minimising the Consequential Losses, but can also get the Insurers to make “payments on account” in order to defray any costs that such measures might bring for the Insured.

It is in Europe and North America where this service of assistance for the Policyholder has been most developed, and it has been proven that it expedites the settlement of the claims, since it is easier that an understanding and agreement can be reached between professionals and thus the claim can be “resolved” speedily, professionally and ethically.

The major Insurance Brokers, who have their own loss adjusting teams, include in the policies, particularly those covering All Risks of Material Damage, cover for “fees of the Insured’s expert”, so that the Policyholder will not have to pay any additional cost for this service. VANTEVO CLAIMS ADVISORS, through our international structure and with a solid experience in the adjustment of claims, allows medium sized Brokers, who also have important clients who require comprehensive advice, to offer this type of service on the same terms as the major Brokers, given that VANTEVO CLAIMS ADVISORS is a firm independent of any other interest in the Insurance sector.  In order to be competitive with the major Brokers, we strongly urge that the “fees of the Insured’s expert” clause should be contracted so that these services can be covered by the policy itself.

It would be very useful for those medium sized Brokers that have industrial clients to contract this type of service for complex losses, since a large part of the claims can be resolved without any outside help.  VANTEVO CLAIMS ADVISORS have an international and independent team of expert specialists, some with more than 20 years of experience, for the compiling of claims and the assessing of losses defending the interests of the Policyholder.

The problem with the lack of clarity regarding the time Deductible in Loss of Profits or Consequential Loss Policies

Whenever the Loss of Profits or Consequential Loss policies issued by the London Market establish a Deductible or Excess  of, say 10 days, this is construed as being the first 10 days, and so there is no need to define just how those 10 days must be interpreted.

However, in Spain and other countries this is not the case, and the policies ought to specify just how the Deductible is to be considered:  Do we take the first 10 days?  Do we apply them pro-rata to the indemnity period?  Are they 10 calendar days or 10 working days?  Depending upon how it is interpreted, we will get a different indemnity figure.

It is quite shocking that the vast majority of Spanish Loss of Profits or Consequential Loss policies do not define the Deductible or Excess.  That is to say, they do not specify just how it must be applied and this prejudices the Insurers issuing them.

In effect the Spanish Law 50/80 on Insurance Contract, and consequently the courts, construe that such a lack of definition cannot prejudice the Insureds and therefore it must be applied in the way that is most beneficial for the latter.

Our experience as Loss Adjusters leads us to recommend that Insurers and Brokers should define how the time Deductible or Excess is to be applied.  Very often we have proven that such vagueness has led to the breakdown or deterioration in the relationships between Insureds and Insurers, and due to the lack of clarity concerning the time Deductible, it has taken longer to settle the claim and many have even ended up in the Courts.

It is the opinion of VANTEVO CLAIMS ADVISORS that, since the Insurance Policy is a standard form contract, entered into voluntarily and in good faith between the parties, such lack of precision ought to be avoided as it is a source of problems and conflicts when it comes to adjusting claims under Loss of Profits / Consequential Loss policies in Spain.

It is strange how after so many bad experiences, most of the Spanish Policies still continue to fail to specify just how the time Deductible or Excess must be considered.  It is VANTEVO’s suggestion that instead of stating “10 days” they should state “10 working days and applied pro rata”.  We are sure that this would avoid many problems when adjusting this type of loss in our country.

Why is Machinery Breakdown cover important for Industrial Risks?

In the insurance sector you often hear it said that if a piece of machinery has a Maintenance Contract, then it no longer needs any Machinery Breakdown Policy because the two cover the same thing.

The above is totally incorrect, since maintenance contracts do not cover any accidents due to employee negligence, nor do they cover any Consequential Losses arising out of a breakdown, both being things that can be insured under the covers for Machinery Breakdown and Consequential Losses arising out of a machinery failure.

It is statistically proven that the majority of industrial claims occur on account of a “human factor”; in other words, caused by employee negligence and in that case, the Maintenance Contract will not be liable for the losses.

Machinery Breakdown cover not only complements the Material Damage All Risks cover, which as we know excludes Machinery Breakdown due to any causes intrinsic to the functioning thereof, but also is complementary to the Maintenance Contracts.

These latter, particularly in the case of sophisticated and high value machinery, are very useful for guaranteeing rapid repairs using original parts in the event of its breakdown.  They also might allow us to reduce the Consequential Losses if we have agreed in the Maintenance Contract that the manufacturer must, within the next 30 -45 days, install a similar second hand machine whilst the repairs are carried out on the damaged one.  This clause should allow us to achieve a cheaper premium for the Consequential Losses cover by limiting the financial consequences of the loss event.

The same as with the MD All Risks Policy, the General Conditions of the Machinery Breakdown cover includes a series of exclusions which in some cases can be revoked by means of additional covers to the basic ones, such as covering the Extra Costs on account of urgent work, air freight, covering the machine foundations, etc.

It is up to the Insured and their Insurance Broker when contracting the additional covers to “adjust” the Policy to the risk that they want to cover, in such a way that the Machinery Breakdown cover is also “made to measure” so that the Policy functions properly in the event of a loss event, which is the moment of truth in the insurance sector.

 

As regards the loss events, it is vital to ascertain their cause.  In order for this very often it is essential to contract a metallurgical laboratory that can determine whether it was the case of a slow and gradual failure, which is not covered by the Policy, or whether it was a sudden, accidental and unforeseeable event, which is covered by the insurance.

At VANTEVO CLAIMS ADVISORS, we have persons who specialise in the adjustment of Machinery Breakdown losses and the Consequential Losses arising from the same.

What is covered under a Materials Damage All Risks Policy?

We at VANTEVO routinely have meetings with leading Brokers, during which some of them tell us – half joking, half serious – that the Material Damage All Risks Policy, in their opinion, “covers what does not happen and does not cover what does happen in companies”.

For VANTEVO, the MD All Risks Policy has represented a major advance in the cover for industrial assets, since it is the Insurer who must prove the absence of any cover for the loss on the basis of the Policy exclusions.

Under the old-style Policies, which were for named perils, it was the Insured who had to demonstrate that their loss was indeed insured under one of its covers.

Where VANTEVO does agree with these Brokers, is that the General Conditions of the MD All Risks Policies have many exclusions and even some that are indefinite and not very clear, which generates confusion and conflicts at the time of a loss.  It is as wrong to say that this Policy covers nearly nothing as it is to state that it covers almost everything.

What this Policy needs, whose greatest advantage for the Insured is that it is the Insurer who must demonstrate that the damage is not recoverable thereunder, is to be adapted to the risk that you wish to insure and in order for this, there are the Special Conditions and Optional Covers.

Amongst other things that can be agreed and reflected in the Special Conditions of the Policy are the form of the insurance for the stocks, the waiver of the Average Clause, the insuring of the assets at their New Replacement Value, the Deductibles, the Automatic Increase Clauses, etc..

It is evident that by contracting Optional Covers such as that for Machinery Breakdown, Consequential Losses, Burglary and Theft, Molten Material Spillage, etc., some of the Exclusions contained in the General Conditions of the Policy can be revoked by means of the express agreement between the Insured and the Insurer, which must be recorded in the Policy Schedule.

In the opinion of VANTEVO CLAIMS ADVISORS, it is essential that the Broker and the Insured, based on the characteristics of the Risk, adapt the Policy in such a way that it is “made to measure” and efficiently protects the risk that is to be covered.

This work of adapting the clauses of the Policy to the needs of the risks is commonly done for Large Risks, but is less frequent in covers for SMEs where there is still a lot of work to be done.

Between us we must ensure that the Policies are drafted better and more clearly so that should a loss occur, they function properly without any conflicts or surprises later.