PROPERTY ASSESS “NEWS UPDATE” ISSUE NO 5 – 07 May 2007
Web based Traders – Suppliers extention of a Business Interruption Policy
The most recent edition of Claims Professional (CILA) contained a very interesting article on a case involving damage to the premises of an Internet Provider who provided a web based facility for the Policyholder. The Policyholder was a high street Retailer whose business was driven by internet activity. The IT Suite managed the Policyholders stock and re-ordering systems in addition to pricing and all internal accounting and communication functions. The loss at the provider’s premises occurred prior to Christmas and the back up system was also damaged.
The Policyholder sales strategy revolved around having stock available at the best price in the market. Following the incident, they could not manage stocks effectively or maintain their pricing model.
The Policyholder sought recourse under their own BI Policy and in particular the Suppliers Extension which had a traditional wording protecting loss of Gross Profit due to interruption etc., to the business consequent upon damage at the Insureds’ Supplier’s premises but “excluding the premises of any supply undertaking from which the Insured obtained electricity, gas or telecommunications services”. The main difficulty here was the reference to the exclusion of “telecommunications services”. The question was whether this wording included Internet Providers and the general consensus (after much deliberation) was that if the Insurers want to exclude cyber related suppliers then the Policy should have contained a specific wording to this effect.
If the Supplier Extension did not apply, then there was an expectation that the utilities extension would. This extension referred to damage to cables only and as there was no damage to cables in this instance, this section would not have applied.
The author suggests there are issues here for Insurers and in the past Insurers have obviously considered the risk posed by Utility Service Providers and have excluded it from the Suppliers Extension but that the area of cyber related risks presents obvious difficulties, such as should the Policyholder ask the IT Provider for copies of their continuity or disaster plans or what happens if the Provider sub-contracts to another etc The sub-contract could be to an overseas supplier which presents obvious difficulties. Another issue is where a virus affects the Internet Provider’s systems – would this constitute damage as defined by the Policy?
With the preponderance of web based activity and the reliance on web based traders on third party providers, the issue is raised whether the Suppliers Extension on the BI Policy is robust enough to deal with this type of risk.
If you want a copy of this article, please do not hesitate to contact me.
Professional Indemnity (Consequential Loss) cover for technology companies
If the Policyholder is a technology provider, issues arise in relation to what is referred to as “financial losses” arising due to breach of the contract. The intention is normally to exclude indirect losses and to understand what constitutes a direct loss and an indirect loss, the case of Hadley –v- Baxendale is usually relied on and that case confirms that a Claimant can recover
1) Losses arising naturally according to the usual course of things from the breach of contract itself or
2) Such loss as may reasonably be supposed to have been in contemplation of the parties at the time they made the contract as the probable result of its breach.
For the sake of simplicity and in terms of the way the law has developed in the intervening years, the matter can be simplified as follows:
1) Direct losses are those arising directly from the breach and which are recoverable under point (1) above.
2) Other types of losses are consequential losses arising under point (2) above.
3) Any other losses that are neither direct or consequential can probably be regarded as indirect and not recoverable.
Clearly the definition of direct loss under Hadley –v- Baxendale has far reaching consequences for the technology supplier. For example, an exclusion of “consequential loss” does not necessarily exclude a claim for loss of profit if those profits flow naturally from the breach. It is also possible for loss of profits to be indirect or consequential but it all depends on the circumstances and wording of the particular contract.
A recent issue of “Brokers Monthly” dealt with this scenario, suggesting the technology industry encompasses a broad and diverse range of companies and that most claims against technology companies will arise from alleged breach of contract. These claims will include provision for direct, indirect and consequential loss however it arises. The author suggests that many IT specific PI wordings exclude consequential loses even if they do not mention it in their list of excluded perils. For example a Policy term may place an obligation on the Policyholder to limit any liability for indirect, consequential or special loss where it was reasonable to do so. If the Policyholder/technology company failed to limit their liability, they may find that their insurance Policy will not respond in the event of a claim.
The author suggests that too much insurance is purchased on price alone and that it is essential that cover is clearly outlined and that the exclusions are looked at carefully, particularly any reference to claims for consequential loss (source “Brokers Monthly”).
Value at Risk:
We dealt with “Value at Risk” in previous issues and examples of reinstatement figures were quoted and here are some more unusual examples:
Retail fit out unit €130 to €210 per sq.ft.
Nursing Homes €210 to €310 per sq.ft.
Cinema €150 to €250 per sq.ft.
Swimming Pool €250 to €370 per sq.ft.
You will note these are average costs and each case should be considered on its merits. The rates exclude VAT and fees and do not allow for inflation between the time of the loss and reinstatement.
Financial Regulator:
The European Communities ( Insurance Mediation) Regulations 2005 (IMR)
The Financial Regulator has recently clarified the position in relation to Engineers or Surveyors involved in the “performance of insurance contracts”. In this respect, negotiating settlement would fall under “dealing with claims”. Similar considerations would apply to Accountants dealing with business interruption claims. These professionals have to register as an insurance intermediary on the basis that “activities such as the provision of specific advice in how to make a claim under particular Policy and negotiating a settlement with an insurance undertaking far exceed the provision of information and therefore fall to require registration under the IMR”. In other words settling claims etc. falls outside the Engineers or Accountants normal business activities so that they need to be registered under the Regulations.
I am not sure how far insurance companies are taking this or indeed whether there is a directive to their appointed Adjusters to establish whether these professionals are registered. As of January 07, every insurance company is compelled (where they appoint a Loss Adjuster) to advise their Policyholder that they have the right to engage their own Loss Assessor at their own expense etc. but again there appears to be inconsistency among Insurers. The position is quite different in the U.K. where the Financial Regulators equivalent, the FSA, is implementing the provisions of the “IMR” strictly.
Remarks:
I hope you have found the foregoing to be of interest. Whilst clearly this and indeed previous “News Updates” are essentially informative and educational, clearly I want to promote this firm’s ability to handle the more complex and indeed larger losses. By engaging this firm your Clients will have a Chartered Loss Adjuster representing their interests. We are Irish representatives of Claim Experts Ltd. and Richard Hanson-James, Chief Executive, said in an interview with Brokers Monthly recently that when we are acting as the Policyholder’s Adjuster (as opposed to Insurers) the Broker is pivotal to the settlement of the claim and is an essential part of the process. The involvement of an adjusting team and a Broker dedicated to the Client, will make the process easier and more bearable with a faster and better settlement. The Chartered Institute of Loss Adjusters are in the process of removing the reference to “impartiality” from their Charter and whilst it has long been accepted that the Adjuster acting for the insurance company is not impartial, clearly the roles i.e., Policyholder’s Adjuster as against Insurance Company’s Adjuster will be even more clear.
If you require any further information on any of the foregoing, please do not hesitate to contact me.
Alan FitzGerald, FCII. FCILA, FUEDI, ELAE.
FITZGERALDS CHARTERED LOSS ADJUSTERS & ASSESSORS T/A PROPERTY ASSESS
16, South Mall,
Cork.
T: 021 4276933 F: 021 4276445 M: 086 8074553
alan@propassess.com
www.propassess.com
“Property Assess is registered to undertake insurance mediation under the European Communities Regulations 2005 and is registered with the Financial Regulator accordingly”.