What should businesses affected by the recent floods think about now? In this short Q&A we look at the major questions you should be asking now.
What are the insurance issues for businesses, factories and mines affected by the floods?
There are five main issues for businesses arising from the floods:
was the flood-affected property domestic/residential or commercial/industrial?
was all of the water which caused the damage in fact flood water, as the Policy defines it?
was there actual physical damage to the insured's property or the property of one of its suppliers or customers?
how many excesses should apply? and
how policy entitlements are calculated.
Is there a standard wording for cover involving floods?
The majority of business insureds will probably have Property Damage and Business Interruption insurance using the National Insurance Brokers Association's Mark IV or V Industrial Special Risks wording as a template.
Although the standard NIBA wordings exclude flood, they distinguish between water which escapes from a natural water course and other forms of inundation, for example, storm water drains backing up. It can require complex technical evidence to determine where the water which actually caused the loss came from.
Adding to the uncertainty are the variations of individually negotiated coverage terms that can be written on those wordings; or the use of policies issued by overseas-based insurers using wordings radically different from the common Australian market ones.
What about Industrial Special Risk policies?
Flood exclusions are often deleted from or modified in Industrial Special Risk policies so that floods, or certain forms of them, are covered.
All Industrial Special Risks-type insurance requires that insured damage to property has occurred in order for the Business Interruption loss to be covered. Often they will also have extensions, so if damage occurs to the property of a supplier of services (such as utilities) to the insured, and that damage would have been covered if it happened to the insured's property, then the Business Interruption loss caused by the supplier being out of commission can be claimed.
There is unlikely to be cover for a loss of turnover or sales, however substantial, which occurs merely because the insured, their employees and/or customers are denied access to their business premises or because state-wide infrastructure has been shut down or compromised. Nor are so-called "de-population losses" (the long-term impact on a business of people simply leaving the area) likely to be covered.
Are there any entitlements which people can pursue, but might not be unaware of?
Some business insureds with flood exclusions in their policies may nevertheless have cover for a large part of their losses without realising it.
The flood exclusion only applies to damage directly caused by the flood itself. If it causes the occurrence of another peril which is covered under the Policy, and that insured peril actually damages the business before the flood does, the damage and resulting business interruption are insured.
An example might be where flood waters, on their way to the insured's premises, take out the local electrical sub-station. The loss of power to the plant results in an uncontrolled shutdown and extensive physical damage to the insured's premises, before the flood waters even get there. That damage and the resultant business losses are covered, notwithstanding that the flood may have caused similar damage when it arrived.
It will be an important question of fact, in some cases, whether the water which actually did the damage did, in fact, come from a source, such as the overflowing of a natural watercourse, which brings it within most flood exclusions. It is the insurer's job, not the insured's, to prove where the water came from, before it can reject a claim.
What are the most likely areas of dispute over calculation of losses and claim entitlements?
With many Property Damage and Business Interruption losses, there are bound to be issues arising over the adequacy of declared limits and amounts of cover purchased. If your policy contains a "premium adjustment" clause and "average" or "co-insurance" clauses, and you've under-declared, you not only may not get paid the full amount of an inadequate limit, but be hit with a claim from the insurer for additional premium into the bargain. That is a pretty sure recipe for an insurance dispute.
Another issue, particularly for businesses which charge for their services by the hour on an ongoing basis, is the distinction between cash flow and revenue: have sales or turnover been lost or merely deferred?
Finally, because of the sheer scale and cumulative affect of these floods, there are likely to be issues around the number of excesses which policyholders should bear: how many events, occurrences, or accidents have taken place, and consequently how many excesses should apply?
So what should flood-affected policyholders, consumers or business people do now?
You can learn more about these and related issues in our longer Q&A document.
Read your policy and related documents closely and if you have any doubts or concerns at all regarding your entitlement or the way you have been treated, talk to your friendly neighbourhood insurance lawyer before you accept either a settlement or a knockback.
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