Fire and Liability Insurances
| Published date | 01 March 1982 |
| DOI | https://doi.org/10.1108/eb057236 |
| Date | 01 March 1982 |
| Pages | 9-10 |
| Author | Michael Auld |
| Subject Matter | Economics,Information & knowledge management,Management science & operations |
Fire and Liability Insurances
by Michael Auld
Chief Information Officer
Guardian Royal Exchange Assurance
It is disturbing for industry that, in a time of recession,
with relatively low levels of production, the cost of fire
wastage should continue to rise. For 1980, the estimated
cost of fire damage in England, Scotland and Wales was
over £469 million, representing a 32 per cent increase over
the figure for 1979.
While there are those who feel that, when industry is not
working to full production, more attention can be paid to
"good housekeeping", and aspects of fire protection, it
looks very much as though management have been trying
to cut corners, so as to save costs wherever possible. It is
particularly important, at this time, that insurance ar-
rangements should be fully adequate, since, in the event of
a loss, many companies are not in a financial position to
make good any "shortfall" because, for whatever reason,
they have not arranged the insurance on an adequate basis.
Incidentally, insurers, in common with industry, have been
affected by the recession and keen competition—with the
result that, in many cases, premiums being quoted are
lower than those really needed in the light of experience.
While an active and positive interest in fire prevention
and "good housekeeping" are essential, a disturbingly
high proportion of fires (particularly among the really
large fires) are known or thought to have been started
deliberately. They can gain a head start, as the fire raisers
have an advantage over genuine accidental fires, since they
can start fires in a number of places in a building, make
sure that fire doors are open, etc. It is, therefore, most im-
portant to guard against illegal entry to premises, even if it
is considered that the contents do not present a serious risk
from the theft point of view.
A significant proportion of industry's building and
machinery insurances are arranged on a "reinstatement"
basis,
with a claim being settled for the cost of re-building
or replacement in a condition similar to that existing when
new—although the damaged property need not be replaced
in the same manner. Should increased production capacity
result, the insured company would be expected to make a
contribution to the cost. With insurance on this basis, the
sum insured is compared with the value at the time of
reinstatement. In the event of any under-insurance,
average is applied. Its practical effect is to scale down the
amount of any claim, however small it may be, in the same
proportion as the under-insurance.
It is in the interests of all parties for sums insured to be
maintained at adequate levels. An escalator clause in a
policy allows a selected percentage increase for inflation to
be applied on a day-to-day basis; but this automatic in-
crease ceases as soon as the property is destroyed. As a
concession, while inflation is running at relatively high
levels,
the condition of average applying to buildings,
plant and machinery insured on a reinstatement basis has
been amended, so that it operates only if the sum insured
by the relevant item of the policy is less than 85 per cent of
the full reinstatement value of the insured property. In
other words, since it may be difficult to keep the sum in-
sured constantly at the right level, provided the sum in-
sured is not less than 85 per cent of the reinstatement
value, any claim up to the insured value will be paid in full,
without average being applied. In the event of a total loss,
however, there will still be a 15 per cent uninsured short-
fall.
If, however, the insured value is less than 85 per cent
of the current cost of reinstatement, average applies in the
normal way, and any claim will be scaled down.
Given that it is the cost of reinstatement that is covered it
is vital that the sum insured is projected to provide for
future inflation—bearing in mind that reinstatement may
not be complete until some years after a loss. As an alter-
native to the 85 per cent mentioned previously there are
various alternative schemes available.
Any insurance programme should provide adequate
consequential loss insurance (otherwise known as business
interruption insurance). In the difficult trading conditions
of the past few months, there have been plenty of examples
of companies suffering a serious fire and being unable to
start up again, due primarily to lack of or inadequate con-
sequential loss insurance. This meets expenses which will
continue, despite a reduction in turn-over; loss of net
trading profit; additional expenditure incurred to return to
normal trading and to reduce losses; wages and salaries
paid, but not earned.
Two important points to establish with this type of in-
surance are the level of indemnity required, and the period
for which a claim can be made. Clearly, it is very difficult
to project into the future, and thus it is best to err on the
side of caution. Insurers appreciate the problem, and
generally allow for the premium to be adjusted when the
figures are known. In deciding on the idemnity period, it is
easy to be over-optimistic when considering how long it
may take to put a business on its feet again after an insured
disaster. Leaving aside deals in obtaining planning ap-
proval, etc, interruption to a business will not end when
reinstatement has been effected. Time must also be allow-
ed to bring trading back to its normal level. Since most
manufacturing businesses are dependent on each other, it
is prudent for cover under a consequential loss policy to be
extended to the premises of suppliers (in case of, say, a
serious fire at those premises)—if alternative supplies
could not be obtained from elsewhere at a reasonable
price, and within an acceptable period.
Liability insurance normally is divided into three distinct
sectors, employer's liability, public liability, and products
liability. Nevertheless, for convenience, the three types of
liability insurance often are placed with the same insurer.
This can avoid any difficulty about which policy covers a
particular loss.
In much the same way that strict attention to fire preven-
tion can help to cut losses, so attention to safety can reduce
accidents, and claims under liability policies. This reduces
premiums in the long term but there is a more immediate
MARCH/APRIL 1982 9
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