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.

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.