We often comment that Material Damage, Section 1 of an Industrial Special Risks (ISR) policy, is easier to understand than Section 2, Consequential Loss. This is largely because you can see or touch property which is physically damaged and obtain a quote to replace it.
Our previous articles have discussed the Basis of Settlement and Reinstatement or Replacement Memoranda to Section 1 including its 5 provisions. Where property is destroyed the policy responds to the rebuilding or replacement of the damaged property and where property is damaged it responds to the repair of the damage. In both instances, reinstatement is to a condition substantially the same as, but not better or more extensive than, its condition when new.
How does the policy respond though when an Insured receives a letter outlining upgrades required on the damaged and undamaged portions of the property to comply with Building Codes?
Council requirements may not be considered to be “reinstatement of the damaged property insured” as the Basis of Settlement states. Such requirements may also be considered “better or more extensive”.
The Memoranda to Section 1 provides additional cover for Extra Cost of Reinstatement. This requires a sub limit be specified in the Schedule of Insurance.
Extra Cost of Reinstatement extends the cover to include “the extra cost of reinstatement (including demolition or dismantling) of damaged property necessarily incurred to comply with the requirements of any Act of Parliament or Regulation made thereunder or any By-Law or Regulation of any Municipal or other Statutory Authority;”
It is subject to 5 provisions:
- The work must be carried out within reasonable dispatch.
- It does not include the additional cost to comply with any such regulations etc which the Insured was required to comply with prior to the loss.
- The test for under insurance is not applied to this cover and any amount determined under this extension is not included in the adequacy test.
- All other similar insurance covers are on the same basis.
- If the cost of reinstatement is less than 50% of the cost of reinstatement if the property had been destroyed then it limits the amount recoverable.
It is often the last provision that is most scrutinised. Issues arising include:
- Disputes over the cost/s of reinstatement.
- Differences in determining the total reinstatement value.
- It is cheaper to replace the whole rather than just one section.
- Only one (small) part of the building is damaged but we are now required to sprinkler the entire facility.
- Risk Management versus statutory requirements.
Issues for Claims
Obtaining Council and other authorities requirements early in the claim process will assist its progression.
Quantity Surveyor reports and building quotes should separate the costs to meet Statutory requirements so that the correct sections and sub limits of the policy are utilised and under insurance of Declared Values determined appropriately.
In determining the sub limit for Extra Cost of Reinstatement, valuers would consider the age of the property, Building Codes of Australia, changes to property zones including bushfire areas.
The policy wording may also be endorsed for Additional Extra Cost of Reinstatement.
CONCLUSION
Claims are complex and policies should be considered in their entirety including the memoranda and endorsements.
Author
Published with permission of Claim Solutions Pty Ltd.
Insurance Policy
Country: - Australia.
Policy Description: - Industrial Special Risks and many Composite or Businesspack type policies.
Insurer: - Various.
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