The importance of maintaining industrial plant and machinery and having maintenance contracts

Company directors are becoming increasingly aware of just how important it is to carry out adequate, predictive, preventive and corrective maintenance of their plant and machinery.

Firstly, it is the best way to guarantee the efficiency and reliability of the machinery and equipment, since correct maintenance will minimise the numbers of breakdowns and consequently the loss of production time.

On the other hand, because it is required by the Insurance Policies contracted, since these exclude any claims where the instructions issued by the manufacturer of the machinery regarding inspections and maintenance have not been complied with.

It is important to highlight how it is vital that the personnel handling the machines are qualified and expert and thoroughly familiar with both the maintenance manuals as well as the manuals for their operation, shutdown and start up.

Moreover, whenever the maintenance work is carried out by third parties, that is to say by personnel from outside the company, it is essential that they respect the safety rules established by the company, since it has been proven that many losses occur during the course of the maintenance operations carried out by third parties.

Likewise, we would like to stress how it is important for the most sophisticated and critical machinery of the company (the generators, transformers, turbines….) that maintenance agreements are entered into with the manufacturers of the same.  This will guarantee that you will be treated with priority in the case of a loss event and will have replacement parts available in the short term, thereby allowing you to reduce the Consequential Losses.

Thinking that if you have a maintenance contract for an important piece of machinery means that you no longer need to insure it is a serious mistake, since the Policy and the contract are complementary, and one is not a substitute for the other.

In fact, a maintenance contract is never going to cover any loss events caused by negligence on the part of the personnel, which is one of the common causes of claims, nor is it going to cover the Consequential Losses brought about by an interruption in the production as a consequence of a breakdown.

These two very important scenarios can be covered by a Machinery Breakdown Policy and its corresponding cover for Consequential Losses caused by Machinery Breakdown.

The advice of VANTEVO CLAIMS ADVISORS is that for important machines that are manufactured to order, maintenance contracts are entered into in addition to contacting a Policy, which in the event of a breakdown will guarantee a rapid repair undertaken with all the warranties.

What does a Risk Manager have to do when faced with a major loss event?

The fundamental objective of a Risk Manager is to protect the safety of the workers, the assets and the Profit and Loss Account of their company and therefore, one of the things they must do, is to contract a suitable Policy to cover all of the company’s risks.

Risk Managers should be supported by a Broker who will help and advise them in the complicated task of designing the very best Policy for their company and who are the best Insurers and Reinsurers for their purposes.

In addition the Risk Manger must be involved in drawing up and updating the company’s emergency and contingency plans.  These latter, also called “business continuity plans” are essential to minimise the Consequential Losses in the case of the occurrence of a loss event.

What should Risk Managers do in the case of a major loss event?  In our opinion, with the help of their Broker, they should appoint a Loss Assessor who can help, on the one hand, to minimise the Consequential Losses and normalise the production of the company after the loss event and, on the other, to help them prepare and defend the claim that must be presented to the Insurers and their Loss Adjusters following the same.

Most claims are satisfactorily resolved with the help of the Brokers, but there are others that, given their size and complexity, require the support of Loss Assessors. They are experts in claims and have experience of dealing with emergency situations such as those that arise after a major loss event, especially when their cost can be assumed – either partially or entirely – by the Insurance Company under the “Fees of the Insured’s expert” clause that is ever more frequently being found in Policies, especially in those that cover large risks.

It is even more important to have the support of a Loss Assessor in the case of the loss event occurring in a facility far from the company’s headquarters, and moreover if it occurs in a plant situated overseas.

Am expert Loss Assessor will not only help the Insured to try to avoid any loss of sales, which might bring about the loss of clients, but also to get the Insurer to agree to “payments on account” to pay the costs of repairing the damage.

 

It has been demonstrated that presenting a well-documented and verifiable claim assists in the speedy and amicable closing of a claim and that is why the Loss Assessor appointed by the Risk Manager to act for the Insured has such an important role to play.

Vantevo, which is an international and independent consultancy, with professional engineers and economists who are experts in major claims, can help Risk Managers to “resolve” the claim in a fast and professional manner, after which they will find their   position in the company to be strengthened, since they will have demonstrated the value of their work at a critical moment for the business, as would be the case if it were to be affected by a major loss event.

A claim that is well handled and swiftly resolved works to the benefit of all parties involved in the same:  the Policyholders, the Insurers, the Brokers, the Experts as well as the Risk Managers.

What happens when a loss event occurs in the middle of another claim?

The above does not occur often, but it does sometimes.  Indeed, we have been involved in claims in which whilst the damaged machine was being transported to a workshop to be repaired, the lorry carrying it had an accident and overturned, thereby an increase of the loss being brought about in such cases.

On other occasions, due to an error on the part of a subcontractor who had been engaged in the repair of the damage, when it came to testing the machine, it failed and the repair and recommissioning of the same was delayed by several weeks.

In cases like these we have come across some Insurers who regard these incidents as being part of the same claim, since they understand that they occurred during the process of repairing the damage caused by the first loss event.  Whilst respecting this interpretation, the indemnity is paid by the Insurers and it is they who decide how the loss is to be adjusted.  It is the opinion of VANTEVO CLAIMS ADVISORS, that in both cases these are different loss events, since they occur at different times, on account of different causes and brought about by different persons.

In the case of the accident during the transportation, there will be somebody responsible for the same whose Insurer must be liable for the damage caused to the lorry’s cargo.  Therefore it is essential whenever a machine is to be transported so as to be repaired at an external workshop, that insurance is contracted that covers this carriage, since normally the covers of the carriers is inadequate.

In the other case, we have here an error on the part of an external subcontractor who must have a Professional Liability Policy, which should be liable for the loss and damage caused by the poor performance of the company subcontracted for the repair of the damaged machine or installation.

Unfortunately,  cases such as the above are not usually considered in the General Conditions and Schedules of the Policies, when it stands to reason that the Policies ought to specify whether they should be regarded as being new claims, as we at  VANTEVO CLAIMS ADVISORS believe, or as incidents of one and the same loss event.

Common sense tells us that the experts ought to consult the Insurers as to the what approach to take in these types of cases, since what tends to happen is that all the loss and damage is covered under the Policy whilst at the same time they try to recover the increased loss and damage from the third parties that were responsible for the same.

Vagueness must be avoided when drafting Policies

For the experts, the Insurance Policy is crucial in order to be able to adjust a loss event.  Therefore, when the Policy is “made to measure”, that is to say, when it is tailored to the risk it is intended to cover, the process of the loss adjustment is usually straight forward.

The problems arise when this is not the situation, especially in covers for SMEs, when often the Policy fails to cover the Insured’s basic risks or even the Sums Insured are not updated and results in underinsurance.

However in many cases, both in Policies that are tailored to the risk they were intended to cover as well as those that are not, added complications arise such as vagueness and poorly drafted wordings, not to say ambiguities in many of the Policy clauses, particularly in those to do with the exclusions.

It may exclude corrosion and erosion, but neglects to indicate that this refers to that corrosion and erosion that originates in a slow and gradual manner but not to that which arises accidentally and unexpectedly.

The same thing happens when the loss event is caused by a defective item.  The Policy fails to clarify that the rest of the damage brought about to other parts of the machine or installation by this defective item could be afforded cover thereunder.

Again the same occurs with the Consequential Loss covers.  Normally, regarding the time Deductibles, they do not specify just how the days indicated therein must be considered:  Are they working days? Calendar days? The initial days after the occurrence?  Are they to be allocated pro rata?  This lack of definition causes, at least in Spain, many problems when it comes to adjusting a claim.

Neither do these LoP Policies normally specify what percentage of Gross Margin must be taken into account when calculating the indemnity:  Is it that of the year the loss event occurred? That of the previous year? And if the loss event affects two accounting years, which one should be applied?

Likewise the Policies do not define who must be responsible for the extra expenses, since they do not indicate that these should be assumed pro rata to the benefits that may accrue to each party from the same.

Lastly, nor do they usually specify how the costs of recommissioning the damaged piece of equipment or installation must be treated once it has been repaired.  Should this be done under the Material Damage cover or under the Consequential Loss cover?

In the opinion of VANTEVO CLAIMS ADVISORS, the drafting of the wording of the Policies is unsatisfactory and Insurers ought to improve the clarity and accuracy of the same, avoiding any vagueness and possible disputes that in many cases harm them.

How should an Expert Report be structured?

It is very important and desirable that the information provided by the expert to the Insurance Company and/or the Insured, depending upon who they were contracted by, is well organised and above all, that the Report is clear, concise and verifiable and accompanied by the most relevant documentation used by the expert.

The structure normally used by the different firms is:

  • The Insured.
  • Description of the Risk.
  • Circumstances and discovery.
  • Spread and extinguishing (in the case of a fire).
  • Cause
  • Nature of the Material Damage.
  • Extent of the Consequential Losses.
  • Measures adopted following the loss event.
  • Cover under the Policy
  • Liability on the part of Third Parties (if applicable).
  • Other Insurance (if applicable).
  • Reserve (in the Preliminary and Interim Reports).
  • Appraisal of the Loss and Damage (in the Final Report).
  • Indemnity (in the Final Report).

We have highlighted in bold those sections of the Expert Report that we consider to be the most important.

In general terms, the Preliminary Report should be concise and issued as soon as possible, since it is important that the Insurers should know promptly the amount of the Reserve.

On the other hand, the Final Report should be as complete and fully documented as is possible, in such a way that it is verifiable by whoever has to read and approve it.

At VANTEVO CLAIMS ADVISORS, besides striving to reach agreement on a figure that is acceptable to both the Insured and the Insurers, something that we manage to achieve in the vast majority of the claims, we also suggest measures for improving the safety conditions of the risk and so as to prevent any similar losses in the future.

We also try to obtain a “payment on account” early on for the Insureds so that they might defray the costs of the repairs and the measures undertaken to minimise the Consequential Losses.

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.

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.

The role of the Policyholder’s Risk, Insurance and Loss Assessor

Increasingly in cases of major claims, the Insureds – invariably at the indication of their Lawyers or Brokers – contract a Loss Assessor to help them to prepare and defend their claim that will be submitted to the Insurance Companies.

This has obvious advantages, since firstly:

  • These experts will furnish the Policyholder with a technical report on the causes and consequences of the loss event that can then be compared against the report compiled by the Loss Adjuster acting for the Insurance Company.
  • They can help the Policyholder to adopt measures, something that they are obliged to do, in order to minimise the Consequential Losses.
  • They will free the Policyholder from the work of preparing and documenting the claim to be presented to their Insurers, so that instead they can dedicate themselves primarily to recovering their normal productivity and contacting their suppliers and clients.

Furthermore, with the “fees of the Insured’s expert/loss assessor” clause that the major Brokers currently are contracting in the policies that they negotiate, VANTEVO’s services  may end up being wholly or partially free of charge for the Policyholders.

Likewise an independent and professional Loss Assessor like VANTEVO, can help the Policyholders reduce their claims record by systematically analysing the causes of any loss events that arise and thus undertake measures so as to prevent any similar loss events recurring in the future.

Additionally, based upon the analysis of the incidents that occur, it is possible to achieve a year on year improvement in the safety measures implemented at the risk and thereby improve the covers afforded by their Policy, all of the above in collaboration with the Policyholder’s Broker.

Lastly, an independent Loss Assessor such as VANTEVO CLAIMS ADVISORS can help the Policyholder to avoid any underinsurance by appraising their assets, and to improve their risks by means of the survey report they compile that reflects the necessary hazard prevention and safety measures, and to draw up an “action protocol in the event of a loss” the advantages of which we have explained in a recent communication.