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.

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.

 

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.