20 June 2008
20 June 2008: The Varanus Island gas plant explosion in Western Australia earlier this month should serve as a timely reminder to businesses to check what risks they are insured against - or risk being out of pocket unnecessarily, national law firm Clayton Utz warns.
Clayton Utz Insurance and Risk partner Fred Hawke says the explosion is a reminder that unforeseen events in the business supply chain can have a domino effect. He says all businesses, particularly manufacturers, should review their Industrial Special Risks (ISR) or Business Property insurance policies for possible business interruption cover - which may extend to circumstances where a supplier to the business sustains damage.
The explosion at Apache Energy's gas plant on Varanus Island off Karratha in Western Australia on 3 June is reported to have cut the state's energy supplies by 30 per cent, affecting businesses across a wide range of industries including building and tourism.
Mr Hawke, who worked in the insurance industry for more than 20 years and has been responsible for negotiating and settling insurance and reinsurance disputes involving some of Australia’s largest liability losses, says the incident has parallels with the Longford Gas Plant explosion in Victoria in September 2007 which resulted in interruption of gas supplies to much of southern Victoria.
"One of the features of the Longford gas plant explosion was extensive litigation against the owners and operators of the plant brought by or on behalf of businesses which had not themselves sustained any or any significant material damage to their premises or equipment due to the outage, but had suffered either partial or total interruption to their production processes due to the absence or restriction of gas supply," says Mr Hawke.
Mr Hawke's colleague Mark Waller, who heads Clayton Utz' Brisbane Insurance and Risk Practice, agrees and notes that most forms of Fire and Perils and Industrial Special Risks insurance policies in Australia provide cover for business interruption losses where they result in material damage as the result of an "Insured Peril". Such losses can include increased production costs, loss of turnover/output and increased cost of sales.
However Mr Waller says companies are often not aware that such policies can also contain optional or automatic extensions of cover, known as the 'Utility Supply Interruption endorsement' and 'Specified and Unspecified Suppliers/Customers endorsement'.
These 'endorsements" can provide cover for business interruption losses where an event has caused material damage to a supplier of the business - rather than the business itself.
"Many of the claims for consequential losses arising out of the Longford Gas outage were, in fact, brought by subrogating insurers who had paid substantial claims under these extensions to their policies," Mr Waller says.
Mr Hawke says it is important that businesses review the extent of cover provided by these endorsements however, as they may be subject to different sub-limits of cover. "There may also be other relevant exclusions and limitations which require analysis depending on the specific terms of the policy," he says.
