The importance of Risk Management

Risk Management can be defined as being the set of measures an entity undertakes in order to deal with possible future contingencies, an entity being understood to be an individual or a corporation.

Some organisations tend not to consider the need to handle the risks that their activity implies, often generating negative consequences for business continuity.  This presumed saving brings in its wake serious damage that in some cases can generate major losses or even the shutdown of the business.

All human activities involve risks.  From the simplest actions through to the complex business operations, there is always an inherent component of uncertainty that must be understood and correctly managed.

Despite their best efforts, most organisations fail to correctly assess and quantify the risks and the impact that they might have upon their activities, bringing about a scenario in which they face risks for which they have lack the procedures and resources to weigh up and handle the same and mitigate their consequences.

Whilst there are no established rules that these processes or mechanisms must follow, it should be considered that a good risk management entails the following points:

  • That the risks are identified in such a way that it is clear how to deal with them.
  • Make it possible to see the whole picture of the risks involved.
  • Know which are the most critical risks and prioritise their treatment in order of importance.
  • This leads to the drawing up of a Crisis Management Plan so as to ensure business continuity in the event of the occurrence of the most likely risks.

For an efficient Risk Management process, consideration must be given to these principles to be followed throughout the organisation, regardless of its size:

  • Internalise at the decision taking level the treatment of risks and their impact.
  • A Risk Management culture that includes all personnel.
  • Procedures that ensure that the information concerning risks and their treatment is correctly distributed.
  • Continuous improvement and frequent redesign of the procedures.

At VANTEVO CLAIMS ADVISORS we are in a position to assist the Insureds to identify, control and mitigate their risks and we are certain that following COVID and its consequences, the importance to companies of Risk Management has become even more evident.

 

 

 

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.

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.

The study of the cause of Machinery Breakdowns.

We are all well aware that ascertaining the cause of a loss event is essential in order to clarify the cover for the claim, determine liability for the same and to take measures to prevent it from happening again.

In the case of serious fire losses, sometimes given the degree of destruction caused by the fire, it is not easy to pinpoint the origin of the same, despite contracting experts in root cause investigations.

In cases of Machinery Breakdown claims, the study of their cause is less complicated, but nonetheless often requires the intervention of metallurgical or electrical laboratories, depending upon the presumed origin of the loss event.

It is only by means of a metallurgical analysis that you can verify whether the fracture process of a blade or metal part has been a slow and gradual one or sudden and unforeseeable,  besides being accidental.  In the first case, the loss would not be covered whilst in the second, it would be.  Again we would need the assistance of a metallurgical laboratory to ascertain whether any corrosion or erosion was slow and gradual or accidental and fast, and therefore possibly covered in this latter case.

At VANTEVO CLAIMS ADVISORS, we tend to use the laboratories of Engineering Schools, since in the event of any dispute, the courts usually positively weigh the reports signed by professors, since they assume they have the knowledge and independence to issue their opinion.

There are not normally any problems with the conclusions reached in the laboratory reports, since these are usually clear and conclusive, and their conclusions are objective and well documented, and accordingly can be accepted by all the parties involved in the claim.

At VANTEVO CLAIMS ADVISORS, we usually ask that, in addition to ascertaining the “root cause” of the loss event, they suggest measures to avoid similar claims in the future and their recommendations normally are very interesting.