Water Damage And Stock Claims

The following case study may assist understanding of claims for stock damage and their settlement. 

It is September 2006 and with the Melbourne Spring Racing Carnival was fast approaching Fascinating Hats Pty Ltd’s head milliner, Florian Ascot, and his team worked around the clock, confident they were creating a show stopping range and that this year’s black is coral!

Then disaster struck. The sprinkler system in the building housing their creations malfunctioned and water emitted for 20 minutes before being shut off.

The loss adjuster arrived to a scene of soggy ostrich feathers, damp daisies, limp boas and curious corsages. They promptly arranged for a clean up expert to assess the damage and advise on treatment options.

They concluded the stock could be specially dried with no lasting effect, the treatment would take at least 3 weeks and the cost of this was the limit of indemnity.

However, as Florian patiently explained, the stock was damaged, it could not be sold without identifying it had been water logged, it cannot be replaced by external purchases and Fascinating Hats Pty Ltd has lost the lucrative Spring Racing Carnival sales. Furthermore, he explained, this year’s coral will be next year’s outdated orange!

The broker advised that the loss was covered under a standard Industrial Special Risks Mark IV policy.

The loss adjuster suggests that the resultant Loss of Gross Profit would be covered under Section 2 -Business Interruption but the Material Damage claim is limited to cleaning the stock only.

This is incorrect.

Fascinating Hats incurred the cost of raw materials, labour and other costs associated with the creation of the hats. This cost is not recovered in the claim for Loss of Gross Profit.

Let’s go back to basics and work through the policy response.

1. Is the stock damaged? - Yes. Even though it may be completely repairable.
2. The Policyhoder is entitled to be indemnified for the damage in accordance with the Basis of Settlement.
3. In relation to the supplies of feathers, beads, combs and hair pins etc, Basis of Settlement (b) provides "On raw materials, supplies and other merchandise not manufactured by the Insured: the replacement cost at the time and the place of replacement or, if such property is not replaced, the value thereof at the time and place of the damage."
4. The hats awaiting trimmings fall under Basis of Settlement (c) "On material in process of manufacture: the replacement value of the raw materials and the value of labour and other overhead charges expended thereon at the time and the place of the damage."
5. The completed hats & fascinators fall under Basis of Settlement Clause (d) for finished goods which states that the value of the damage is "the replacement value of the raw materials and the value of labour and other overhead charges expended thereon before any allowance for profit or the cost of re-stocking such goods, whichever is the lesser".
6. Stock, whether it is raw materials, work in process or finished goods, is not subject to the "Reinstatement or Replacement Memoranda". This means the damaged stock does not have to be "repaired" or replaced for the claim to be settled.
7. So the stock claim consists of stock that will be replaced at replacement values and for stock not replaced the value at the date of the damage. The claim is reduced by any value received by the sale of the damaged stock.

All names & places have been changed to maintain privacy.

Author

Published with permission of Claim Solutions Pty Ltd.

Insurance Policy

Country: - Australia

Policy Description: - Mark IV Industrial Special Risks (ISR) policy

Insurer: - Various

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