An umbrella solution

It is widely understood in the insurance industry that a business, once it has reached asset values of between $5 to $10 million, should consider changing from a business pack wording to an Industrial Special Risks (ISR) policy.

A well-tailored ISR option generally offers broader protection than a business pack and is certainly more easily tailored to the insured’s specific needs.

While it is not a one-size-fits-all offering, it is an excellent option for a growing business that wishes to tailor its coverage to its specific risk exposures.

Professor Allan Manning, Managing Director of LMI Group, literally wrote the book on ISR policies.

In fact, he wrote several volumes on the topic, all available on the LMI website.

“It was 1987 when ISR Mark IV first came out,” Manning says.

“So it is now 25 years old, which means the product has proven itself in the test of time and countless claims.

“Risk managers at the big end of town are comfortable with the policy, good underwriters and brokers know the coverage back to front while loss adjusters understand its complexities.

Tailoring of the policy is arguably the greatest strength of an ISR.

“The great benefit of ISR Mark IV is that you bespoke the policy. The base Mark IV wording is the foundation. It in itself provides the client with a broad cover as it was written by a committee of underwriters and brokers who clearly demonstrated a great deal of social responsibility.

“A broker and underwriter can typically tailor the policy to their client’s individual needs.”

Not getting caught out

Danny Gumm, Managing Director of Parmia Insurance and NIBA Broker of the Year in 2013, says ISR policies are excellent for minimising the impact of grey areas within a claim.

“With a business package policy usually you’d be covered for specified perils – fire, burglary, money, glass etc,” Gumm says.

“With an ISR policy it generally states it will cover all risk, subject to the conditions of the policy, unless there is a specific exclusion.

“So if there is a claim against a business package and it was a grey area as to whether it is covered or not, the insured has to work hard to convince the insurer that one of the specified perils within the policy applies to the event.

“Under an ISR the onus moves to the insurer to say why that grey area fits in with one of the exclusions. If it doesn’t then it’s covered.”

Some of the most common ISR exclusions are vermin, flood, registered vehicles, workers’ compensation, war and terrorism, machinery breakdown, electrical breakdown insurance and fidelity guarantees.

“Brokers must be sure to cover off the events that are not automatically covered by extending the ISR policy to cover those risks or otherwise find a separate business package or policy wording to cover those additional exposures,” Gumm says.

One valuable process during the ISR conversation is a risk survey.

Not only does it help the client develop a better understanding of their own risk exposures, enabling them to properly implement loss prevention strategies, but it is also useful in enticing insurers to provide competitive quotations.

Gumm, for example, has worked on risk surveys with several difficult-to-insure groups and found positive results.

“In the past there has been an association between outlaw motorcycle gangs and tattoo parlours,” he says.

“It got to the stage where tattoo parlours couldn’t get insurance. We work with those industries and apply risk management, looking at where the real exposures are.

“We get to know how we can minimise that exposure. If clients can provide evidence that states there’s no way they could possibly be allied with an outlaw motorcycle gang then we present this to Lloyd’s. Then we’re able to come back to the client with an arrangement that allows them to have an insurance facility.”

Bespoke broking

This tailoring of the policy is arguably the greatest strength of an ISR, LMI Group’s Professor Allan Manning says.

Not only does it immediately offer cover that is comparable with a modern business pack, but it has the ability to be customised to the needs of a business.

There is an incredible range of different endorsements available, offering perfectly tailored cover but necessitating a thorough approach from the broker.

“Clearly the broker needs to understand the endorsements available and their client business needs and exposures in order to understand what should go where,” Manning says.

“That’s quite a complex job.”

Growing pains and how to beat them

Every broker wants to see the businesses of their clients thrive but growth presents its own risks. So when should a broker step in and advise changing from a business package to an ISR policy?

I would always at least recommend an ISR policy, just because it offers broader cover

Different insurers set different minimum asset values for ISR but $2–$3 million is the lowest usually offered.

While the key selling factor for an ISR policy is the broader protection it offers but the good news is they can sometimes offer a saving on premiums as well.

Natasha Barker, Practice Leader in the Corporate & Specialty division of OAMPS Insurance Brokers, says her team recently ran a comparison for a client with over $5 million of property value.

“The ISR came out with broader cover and actually cost the client less than their current business pack,” she says.

Whether the ISR comes in cheaper or not, there are many more options that must be discussed.

“I would always at least recommend an ISR policy, just because it offers broader cover,” Barker says.

“An ISR policy covers everything unless it’s specifically excluded. A business pack or office pack only covers sections that you have actually chosen and paid for.”

There are standard exclusions within ISR policies, Barker says, and it’s up to the broker to review those in the context of their clients’ exposures, then negotiate endorsements.

Flood, for example, is a standard exclusion but it is common for brokers to have the exclusion deleted.

As the basis of the ISR policy was first written in 1987, it doesn’t fully contemplate modern-day perils such as cyber risk.

Knowing where the ISR policy leaves gaps, and knowing how to plug them, is vital.

“Issues such as machinery breakdown and transit cover can sometimes be negotiated into an ISR policy with small sub-limits,” Barker says.

“But if you want broader cover and more substantial policy limits for those types of risks you should arrange standalone policies.”

“And set the limits of indemnity or liability to ensure those limits are sufficient to allow even for a loss occurring on the last day of the policy period, and the reinstatement costs that could be escalating over the indemnity period.”

Case Study 1 – On good terms

In 2007, wild rains in the Hunter Valley caused the largest Hunter River flood for 36 years. The widespread damage include flooding in Newcastle, prompting an OAMPS client to lodge a storm damage claim.

“It was classified and paid out as storm damage but could have been considered a flood,” says Natasha Barker, Practice Leader within OAMPS’ Corporate and Specialty division.

“The definition under the ISR policy helped us to persuade the insurer to treat the loss as a storm damage claim rather than a flood claim. If the client had taken out a business pack, I’m not confident it would have been considered in the same way. It was a $4 million claim.”

In these and other situations, Barker says, OAMPS has been able to organise forensic accountants to help their client quantify the cost of their business interruption loss. That loss, and the forensic accountants’ fees, were all covered by the ISR policy.

–      OAMPS Insurance Brokers

Case Study 2 – Back on the job quickly

When a fire tore through a facility dedicated to hot-dip galvanising steel products, the damage was extensive.

The building, stock, completed works and the vital hot-dip tanks themselves were all greatly affected.

In addition, given the extent of the damage, the insured also incurred substantial costs relating to the removal of debris, reinstatement to meet local council conditions, drain clearing and the expense of expediting repairs.

Fortunately, their ISR policy had been tailored to their individual needs and exposures, all of which the policy responded to.

In this case, the approach taken by both the insured and the claims team played a key role in helping to reduce the overall cost of the claim.

The insured took specific actions to mitigate their loss by using their own labour and materials from their other businesses to reduce costs while the insurer took a commercial view on certain aspects of the claim in the spirit of cooperation and to expedite finalisation.

In all, the claim totaled several million dollars.

– QBE

Case Study 3 – Covering the bases

An insured suffered a catastrophic collapse of a warehouse roof due to a defective design. Although their ISR policy excluded the defective design – in this case a nominal amount – it responded to the subsequent damage ad business interruption exposure, which was the balance of the claim.

“In another case we worked with a regional council whose properties were in several remote areas and that remoteness made replacement costs considerably more expensive.”

Risk surveys can also provide maximum loss or sum insured figures for business interruption using figures drawn from the company’s accounts. – Cerno

With the inclusion of the Additional Increased Cost of Working Clause

(AICOW) under the policy, the insurer was able to arrange for the repairs to be conducted outside of business hours to minimise interruption to the tenants of the property, and thereby any loss of rent claim. The increased cost of repairing the property was covered under the AICOW clause.

To compare, had the insured only had a Fire and Perils Insurance Policy, which is limited to natural perils, there would have been no cover under this policy for this loss.

– Allianz

Case Study 4 – Survey the land

Underinsurance can be crippling in any circumstance but the large sums typically involved in ISR policies make it even more pressing, particularly as underestimating property or business interruption valuations can have a severe impact on policy co-insurance clauses.

It’s the reason Censeo Risk Services Manager Hugh Khull says risk surveys are such a vital part of the process.

“The benefit of a full risk survey is that we put a realistic estimated replacement cost on a property, or a series of properties, before any loss occurs,” he says.

“We recently worked with a nursing home that had been built in stages over 16 years. Our survey resulted in a replacement cost of $12.8 million and their original reaction was shock. It turned out they were very underinsured.

“In another case we worked with a regional council whose properties were in several remote areas and that remoteness made replacement costs considerably more expensive.”

Risk surveys can also provide maximum loss or sum insured figures for business interruption using figures drawn from the company’s accounts.

– Cerno