Australia: Insurance tips for flooded businesses

Last Updated: 8 February 2011
Article by Fred Hawke

David Bushby:  We're speaking with Fred Hawke.  He heads up the National Insurance and Risk Practice Group at Clayton Utz and he's based in Melbourne.  A warm welcome to Boardroom Radio Fred. 

Fred Hawke: Thank you.

David Bushby: Fred, thousands of Queensland businesses mopping up from the recent flooding are now looking to their insurance policies to cover damaged premises and lost revenue.  What are the main issues for businesses when looking to make a claim?

Fred Hawke: The main issues are going to be where did the water come from - primarily, what sort of inundation was it. 

There will be exclusions for flood on a lot of the National Insurance Brokers' Association Mark 4 and Mark 5 ISR wordings, and a number of the other wordings that are being used by businesses in Australia. Some of them will exclude flood entirely, and some of them will define it only as being water escaping from a natural water course.

So that if you have, for example, backup of stormwater drains or overflow from culverts and things which are not normally carrying water, that would be covered.  You'll often need complex hydrological evidence to determine just where the water came from and which set of water, if you like, in some cases caused the damage first. 

David Bushby: Is that flash flooding? 

Fred Hawke:  That's correct, flash flooding is often intended to be covered by the insurers.  What they don't like is the flooding which is going to happen sooner or later in any case because you're essentially on a flood plain where a natural water course, a creek or a river can be expected, whether it be 1 in 10 years or 1 in a 100 years, to overflow. 

David Bushby: What other sorts of exclusions or areas would clients and brokers be looking at? 

Fred Hawke: Well some of the property exclusions will apply. For example, there will sometimes be exclusions for property damage to mining infrastructure, things like tunnels, shafts, haulage roads and other mine works, even when the policy as a whole does cover flood.

There are going to be a lot of issues around whether there's been actual material damage to insured property.  It's a basic principle of all business interruption insurance, for example, that the business interruption has to result from an insured damage to property and that, in most cases, will be the insured's own property These policies will often have extensions so that if damage happens to property of a supplier like an electricity utility or a gas utility or whatever, or even in some cases a customer, and if that damage would have been covered if it had happened to the insured's property, then the business interruption loss is covered. 

But not all insurers give those extensions in relation to flood, and in many cases there won't have been any actual material damage to the business or even to businesses on which that business depends such as customers and suppliers. 

There will have been a general infrastructure shutdown or there will have been damage to state wide facilities, there will have been perhaps depopulation just from people leaving the areas in the future.  Those are not insured losses but those could be very real business interruption losses which fall outside the scope of normal business interruption cover 

David Bushby:  We've spoken a bit about what is not covered.  Are there any entitlements which businesses can pursue that they may not know about? 

Fred Hawke:  Well yeah, some of them will probably have cover that they may not realise they have for a large part of their losses.  You can have a flood exclusion on the policy but there are two things to bear in mind. One is that even if the policy's got a complete flood exclusion it normally applies only to damage which is directly caused by the flood.  If the existence of flood conditions leads to other perils happening, other causes of damage which is covered by the policy, and if that insured peril actually damages the business before the flood does, then that damage and the business interruption that results from it are covered. 

David Bushby: Can you give us an example of that sort of scenario? 

Fred Hawke: Well look the easiest example would be the flood waters are coming down toward the insured's premises but on the way they take out the local electrical substation.  Now there's loss of power to the plant then results in an uncontrolled shutdown which could cause fire or machinery breakdown or serious physical damage, before the flood waters even get there.  That is a fully insured loss, notwithstanding that the flood might go through afterwards and wash the whole thing away 

David Bushby: What are the major areas of dispute that are likely to arise over the calculation of losses and claim entitlements?  Where's the coverage? 

Fred Hawke:  Well there'll be issues, for example, for professional firms like law firms.  For example, we have what we call work in progress in our Brisbane office.  Our Brisbane office is in Riparian Plaza, shut down due to the floods that came right through the building.

Now a lot of that work will have to be done, the clients' work is still waiting to be done, it'll have to be done along with other work that'll come in and people will just have to work harder and it'll be caught up. 

So there's a fundamental issue with businesses in relation to business interruption losses whether sales or turnover have been actually lost or merely deferred, a distinction between cash flow and revenue if you like.  There'll be complex accounting issues around the actual business interruption loss, the actual effect of the material damage, and whether it's covered or not, on the business. 

There are also going to be issues I would imagine be some cases of under-insurance, because there nearly always are and with this many claims there's bound to be.  There'll be questions of what they call average or co-insurance which is an insurance principle whereby if the insured has under-insured the risk, in other words they haven't declared sufficient values for business interruption or material damage, then they have to share proportionately in the loss, even if it's not a total loss.  The insurer may even be entitled to hit them with an additional premium under a premium adjustment clause. 

David Bushby: Well just finally Fred before we wrap up, is there any basic tip that you can give to flood affected businesses? 

Fred Hawke: I'll give them the same tip that I'm giving all our pro bono consumer Mums and Dads clients - read your policy and the related documents closely, think about the circumstances under which you've bought the insurance and what's on the insurer's website, what the insurer told you about it, and if you have any doubts or any concerns at all regarding your entitlement under the policy or the way your claim's been dealt with, talk to your friendly neighbourhood insurance lawyer before you accept a knock back or before you sign a settlement release. 

David Bushby: Absolutely.  Some great insights Fred Hawke.  Thanks again for your time today. 

Fred Hawke: No worries.

David Bushby: That was Fred Hawke heading up the National Insurance and Risk Practice Group at Clayton Utz based in Melbourne

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