• Different Goals
  A property insurance policy covers financial risks associated with owning a building. If a building material is safe to use but costly to repair, this may concern an insurance company more than it concerns the Australian Building Codes Board (ABCB.)

• Different Risk Appetites
  Risks deemed acceptable by the ABCB are not always acceptable to insurers.

• Different Response Times
  Information about the safety of building materials is always changing. A government body like the ABCB cannot always adapt as fast as a private insurance company.

This, coupled with the already hardening insurance market, has created a difficult environment for building owners. A hard market is defined by reduced capacity and higher prices. In a hard market, insurers are less willing to compete against each other for business.

• Risk-averse insurers
• Stricter rules for issuing new policies
• Fewer options
• Higher premiums
• Higher excesses

Insurers and Australian state governments reacted differently to this news. NSW enacted a ban on ACP products that are more than 30% polyethylene. Insurers were much harsher:

• Buildings with ACP cladding became difficult to insure and the cost of covering buildings with ACP skyrocketed.
• Building codes can allow some ACP products with small amounts of polyethylene, but many insurers take a stricter approach by refusing to insure buildings with ACP containing any amount of polyethylene, classifying it as “flammable”
• Insurers have begun restricting coverage and increasing prices for other highly-combustible code-compliant building materials too. This includes Expanded Polystyrene Cladding (EPS) and Timber cladding.

If you plan to build, renovate, or refurbish a premises: an insurance broker can tell you how different building materials affect insurance cover. This may not change your mind, but it will mean you understand the implications of your decision and are prepared at renewal time.

• To be kept in the loop about market changes.
• To get expert help sourcing cover for difficult to insure buildings.
• To get the information you need to make informed decisions around your building and renovation projects.

• Ask a Professional Valuer to do a Replacement Cost Valuation every 3-5 years. This could include machinery, stock and any other assets which you are responsible for insuring.
• Ask a Specialist Insurance Broker to tailor a policy around your valuation.

If you under-insure your building, the cover you get will depend on your policy terms. Three possible scenarios are below (with examples based on common building insurance policy terms.)

➤ Best-case scenario: Your insurer covers you up to the value that you insured.
Company A insures its building for $8m. A total loss occurs. The building will cost $8m to rebuild. The building has been insured for the appropriate amount and the building is fully rebuilt at the expense of the insurance company.

➤ Co-insurance scenario: Your insurer will only cover a portion of the amount you insured.
Company B insures its building for $2m. Their policy has a Co-Insurance clause. It states that the building’s Insured Value must be more than 80% of its Replacement Cost.

When Company B makes a claim, the Insurer checks the Replacement Cost. They find it to be $3m. Company B insured less than 80% of their building’s Replacement Cost. Company B is now a policy Co-Insurer under the policy’s Co-Insurance clause.

When a claim occurs, Company B must split the cost of the claim with the Insurer. How this is done will depend on the policy. Here is one way it could look:

Co-Insurance Requirement: 80%

Required Amount of Insurance: $2,400,000

Actual Amount of Insurance: $2,000,000

Claim Amount: $1,000,000

In the example above, Company B claims $1m in damage, but because of the Co-Insurance clause, they will only receive $833,000 from the Insurer, leaving them $167,000 out-of-pocket.

➤ Worst case scenario: The Insurer thinks you have under-insured on purpose and they refuse to pay your claim.
Company C insures its building for $1m. A total loss occurs. The quote for rebuilding is $1.5m.

The Insurer accuses Company A of under-insuring on purpose and misrepresenting material facts Insurer denies cover for any of the claim, leaving Company A out-of-pocket for the entire amount.

If your building has a recent professional Replacement Cost Valuation, it can make claim processing faster. There are three reasons why:

Reason 1: It is easier to lodge a claim
When you lodge a claim, insurance companies often ask you to prove the value of the assets that you are claiming for. Your valuation is an easy and reliable way to show this. It is much quicker than trying to assess value on the spot – especially if you do not have access to your building or records.

Reason 2: It is easier for the Insurer to assess your claim
If your policy’s Insurance Value calculation is unclear or unreliable, your Insurer might need to ask follow up questions or do their own building valuation. These things take time, and the Insurer will not pay your claim until the process is over.

Reason 4: You are protected in the rare event the valuation is wrong
Sometimes you can do the right thing at every step and still get the wrong result. It is very rare, but the valuation can have an error. In this situation, the Insurer will take a favourable view of your situation and may choose to waive some of the negative outcomes from under/over-insuring your building.

• Estimate building values sensibly (in the years between valuation.)
• Allow for GST.
• Have suitable sub-limits.
• Cover the likely cost of replacing your building.
• Have a suitable indemnity period that factors in rebuild times.
• On top of this, your Broker may be able to use your valuation to save you money.

Some insurance companies offer discounts to Owners who take a pro-active approach to insurance. If you have based your insurance on a professional valuation, then you could fall into this category. When you renew your policy, your Broker will be able to talk to Insurers about this on your behalf.

Water Damage Risk Mitigation

Fire Prevention & Mitigation

• Other fire prevention equipment & practices to consider
• For Cooking Tenants

Risk Improvement Surveys

Change in Tenants

Considerations for a Risk Mitigation Plan

This plan should include a list of the personnel involved in the water damage risk mitigation and action plan. Senior management personnel within commercial businesses should be fully behind the plan and should proactively promote and enforce it. Notification charts should be upheld on an organisational, employee, and contractor level. The plan should outline how you will inform personnel as quickly as possible, including staff within the areas of risk management, facilities, security, maintenance, and engineering.

These areas should be treated with care in terms of prevention techniques and safety measures. Ensure that you clean equipment thoroughly, store it safely, turn everything off when you finish using it, oversee the regular removal of all dust, and use dust extractors and spray booths while working. These simple measures can cut the risk of fire and damage dramatically.

It is also crucial that you conduct adequate maintenance and detection within the building to prevent the accumulation of risk factors. A fault that goes undetected and is allowed to manifest can spell disaster in the long-run. You should have all equipment scheduled for annual inspections in order to stay on top of any necessary maintenance

Storage areas represent a common fire risk, especially when people rarely visit them throughout the day. As such, you should keep storage away from ceilings and walls where possible. You should also avoid using HID lights as they have been known to burst and ignite within storage rooms.

• Smoke Detection or Thermal Detection throughout
• Thermographic Scanning
• Hydrant and sprinkler flow testing

• Fire extinguishers, hose reels, hydrants and fire doors are unobstructed for quick access
• Flammable liquids & gases are stored in secure containers

• Sufficient and fire protection equipment (extinguishers, alarms, blankets), which is serviced regularly
• Professional cleaning of filters

• Professional cleaning of ducts
• Fryers fitted with automatic cut off thermostats & exhaust extraction

Deterring vandalism and preventing break-ins is the first step on the road to reducing risk and improving insurance renewal outcomes. Therefore, it is important to ensure that you implement as many of the following measures as possible, with insurers actively looking out for such systems and practices:

• Back to base monitored alarm installed
• Regular security checks, especially for vacant or partially unoccupied buildings
• Deadlocks and locks on windows

For example, if a panel beater moves out and a wholesaler moves in, how would that impact the insurance?

When it comes to inspections, you should look to organise a periodical check plan for older pipes, water heaters, and connections, as well as the roof and boiler rooms. Establish your property’s high sensitivity areas and install leak detection and/or automatic shutdown devices in these parts of the building accordingly. It is also important to identify and tag safety valves to indicate which part of the system they control. Finally, pay special attention during times of heavy rain and storms as gutters and drains may become blocked, resulting in a build-up of water and potential property damage.

Where Are We Now?

Why are we in a Hard Market

• Financial Lines

• The KBI Profiling Process
• Common Challenges Clients Face

One of the high-level reasons for this is related to something that most people don’t know – insurers actually buy their own insurance, called “re-insurance”. Catastrophic claims across the world hit this re-insurance layer, causing the re-insurers to increase rates and apply cover restrictions, which then trickles-down to the consumer level across the world.

This translates to an estimated loss ratio (claims paid versus premiums collected) of over 200%, while most insurers try to operate around 60%. There have also been serious claims hitting Professional Indemnity policies across several different industries, such as the legal, engineering and property services industries.

• Commercial / Strata Property
• Directors and Officers & Management Liability
• Professional Indemnity
• Workers Compensation

With this market shift in mind, KBI have been proactively working with insurers to build solutions, as well as with our clients to implement proactive risk management practices to maximise their policies. Insurers are now scrutinizing their portfolios more than ever and if they don’t feel comfortable with a risk they will price on the side of caution – if they agree to offer insurance at all.

• Engineering firms in all areas, including mechanical, electrical and mining enginers, design and fabrication
• Professional Advisory Firms, including corporate advisors, company secretaries, etc
• Investment Managers
• Architects
• Surveyors
• Builders

• Resources Sector
  We find that firms operating in the resources sector are at a higher risk due to the activities they are performing and the insurance requirements that are needed but not always met.

• Contracts
  We also encounter situations where liability is be buried deep into contractual agreements between Principals, Contractors and Sub-Contractors. On reviewing Professional Indemnity policies, it’s not uncommon for us to find a policy with multiple exclusions and although ‘the box is ticked’ with a policy in place, the policy holder does not have any cover at all.

• Multiple Jurisdictions
  During reviews of insurance programs, we also hear of the problem’s businesses face when trying to find correct insurance with the multiple international jurisdictions they might be operating in.

• Broad Industries
  Some industries can be painted with a single brush by the insurers. Engineers are a good example of this, where insurers have bad claims experience in one sector (such as geotechnical engineers) which causes others to be affected by that experience.

The market shift is seeing so many revisions to policy wordings and business owners are often put in a position where insurance simply will not be there for them when it’s needed.

The fundamental purpose of a typical Commercial Property insurance policy is responding in the event of a physical loss to the Building (Material Damage), resultant Business Interruption through Loss of Rent/Income and any Public Liability related events (Third Party Injury/Property Damage).

• Machinery Breakdown (e.g. hydraulic, mechanical or electrical failure of machinery)
• Glass (e.g. replacement of internal and/or external glass panels)
• Rent Default (e.g. if tenant defaults on rent or is evicted while under contract)
• Environmental Liability (e.g. sudden or gradual escape of pollutants)

If you dig a little deeper into a policy, there are numerous sub-limited coverage sections which are not always discussed between the broker and insured. Examples include:

• Removal of Debris
• Additional Increased Cost of Working
• Extra Cost of Reinstatement
• Flood (if applicable)

Ensuring your policy is set-up correctly is a straightforward process:

1. Make sure your Claims Preparation limit of insurance is sufficient

If you have an Industrial Special Risk (ISR) policy for a high insured value – let’s use a $30,000,000 replacement value as an example – we recommend a Claims Preparation limit of $500,000 to ensure the policy will respond sufficiently. For smaller assets in the circa $10,000,000 range, it’s not alarming if the limit is set at the $250,000 mark.

The apartment was recently valued at $5,000,000 and was badly damaged during an electrical fire. The insurer carried out an assessment of the damage and their appointed builder provided a scope of works at a cost of ~$150,000. With several rounds of back and forth with the insurer, we decided it was time to engage a Claims Preparation expert to advocate on the client’s behalf. They brought in their own engineers and builders who formulated an alternative scope of works which was far more detailed than the original.

The alternative was backed up by laboratory testing showing evidence of hazardous smoke residue which provided an airtight case for a total renovation of the entire apartment.

Fortunately, the Claims Preparation Costs limit of insurance was $500,000 – just one of 30+ sub limits of cover on an Industrial Special Risks policy. It shows the value of reviewing your overall insurance cover with a broker that knows what they are looking for, and having the right services built into your policy for when it matters most. Our recommendation is to have your policy constantly reviewed and designed to reflect the insured risk as it changes – by someone who knows what they are looking for.

What about insurance cover against environmental or pollution related incidents? The potential for a major pollution related incident is more likely than one may think, especially for high risk industrial businesses and property owners where the resultant cleanup and legal costs could be astronomical.

• Historical Pollution (long-term or delayed effects of pollution related incidents)
• Air Pollution (including dust and odour)
• Soil Pollution (including sudden or gradual)
• Water Pollution (including surface water runoff and wastewater discharge)

Typical Environmental Liability insurance products include:

• Contractors Pollution Liability

This policy responds to:

• Errors and omissions in environmental technical/geotechnical reporting;
• Third-party bodily injury, property and environmental damage events arising from such errors and omissions;
• Pollution release during operations; and
• Such liabilities arising from a contractor’s activity and introduction of new/aggravation of new pollution conditions (this can also be taken out on behalf of contractors).

• Pollution Legal Liability

• This is a selection driven policy that can be site specific or across numerous locations.
• Business Interruption cover may also be built into this policy.
• It provides options for miscellaneous contracting operations and transportation of goods.

A proactive strategy for Property Owners to take is to include an Environmental Liability policy as part of the outgoings under their lease agreements. Building and Public Liability insurance are typically included and passed onto the tenants this way, so why not also include Environmental Liability? This can be done in house by property management agencies and will look after the best interests of the owners and their tenants, as the Environmental Liability insurance will respond as a first port of call should a pollution incident occur.

• Q. Is Environmental Liability insurance applicable to my Industry type?

A: The insurers that offer an Environmental Liability product policy generally have a broad appetite; the most common industries provided with this policy type include (but are not limited to):

Manufacturing – chemical, automotive, beverage, transportation, logistics and aviation.

Construction – Residential/commercial constructions, demolition and excavation

Services & Real Estate – Waste treatment, landfills, airports, marinas and petrol stations

Tourism & Hospitality – Hotels & resorts, boat yards/marinas and national parks

Energy – Refineries, gas works, terminals and tank farms, wind farms and hydro power facilities

Healthcare & Life Sciences – Hospitals, aged care facilities, clinics, laboratories & diagnostic facilities

• Q. A fire in my warehouse caused toxic smoke and run-off from stored chemicals into a neighbouring creek. The investigation and clean up costs are extremely high, and worse still is the tenant has gone into liquidation. Will my Public Liability insurance respond to this?

A: The resultant action from this event would fall under Statutory Liability, which is generally a standard exclusion under all General/Public Liability policies. Where such an incident is a possibility, we recommend an Environmental Liability policy which includes cover for the statutory clean-up costs that can be required under Environmental Law or incurred by a government entity.

• Q. Can we de-risk the purchase of a new development site by taking out an Environmental Liability insurance policy to cover off pollution exposures?

A: The history of a development site can certainly pose a risk to any planned new development, especially if that site was previously used as industrial land or as a gas service station, for example. In the right situations, purchasing an Environmental Insurance policy will de risk this scenario and give the buyer a safety net that may otherwise have made the deal too risky.

An Environmental Liability policy not only responds to bodily injury and property damage coverage for pre-existing and new conditions, but it will also respond if a site surveyor fails in their due diligence of the site and did not identify contamination that was in fact present. Instead of letting a prime location site opportunity slip by, mitigate and overcome the risk by purchasing the applicable Environmental Liability policy at the beginning.

The incident responsible for prompting immediate global action was the horrendous incident in June 2017 at Grenfell Tower in London, which nobody hopes to ever see again. 71 people lost their lives that night and countless more families have been impacted by the event; several who are still seeking some form of closure. The public enquiry (The UK’s largest) is set to run into 2020 and around 15 households are still living in hotels over a year after the events occurred.

Further to the above, it is becoming increasingly important for Builders, Developers, Strata & Property Managers, Tenants and all parties involved to be well educated in these ongoing Cladding issues.

The Building Commissioner will publish fortnightly updates on the audit and will report on the findings at the conclusion.

Source: https://www.commerce.wa.gov.au/building-commission/state-wide-cladding-audit

Here in WA, an issue with builders is that so many have gone into receivership over the last few years. This leads to the question: what’s going to happen in this situation? Building defects are an ongoing cause for concern as to who is going to pay to rectify faults (leaking windows is a common one). In some cases, the strata sinking fund (the contingency fund all owners place money into) is being used to rectify defects – at a cost to owners. If insurers are not going to foot the bill regarding defects, then they are probably not going to replace millions of dollars’ worth of non-compliant material.

All eyes will be on this system and perhaps we’ll see other States follow suit where an outcome does not fall in favour of owners.

As mentioned in the previous section, with so many WA builders going bust it’s a scenario without clear answers.

As a Building insurance policy comes up for renewal (6-8 weeks out), insurers are sending out questionnaires to the party managing the policy, asking to confirm whether cladding is attached to the insured building in question. If the response is yes, insurers typically want to know the type of cladding being used and the percentage attached to the building; the risk is assessed from there.

One major strata insurer told us that if the potential for a large loss is calculated to be anything over $10,000,000 they would consider not providing insurance terms at all – this may provide some perspective on the size of properties with cladding that insurers are still willing to insure. Premiums are set according to the residual risk of damage occurring – the higher the risk, the higher the premium.

The above tells you that each Building really is assessed on a case by case basis, as there are so many factors for insurers to consider. The more information the insurer can be given, the better chance you have of being offered favourable terms at renewal.

One revolutionary idea is to use expandable graphite in the construction of cladding: these coarse flakes (when treated with acid and heat) split apart and increase in volume by up to 300 times. The expandable graphite (when pressed into sheets) is already used for heat and fire protection in applications ranging from building materials to consumer electronics and fuel cells – cladding is certainly a realistic possibility.

Multiple projects are underway in Africa to increase stocks of graphite, so while the technology is still in its infancy, companies and creative minds are striving to improve the safety of construction materials being used and take the recent tragic global events very seriously.

The story is a little different regarding industrial property, especially here in Western Australia where the heavy reliance on our resource sector has allowed supporting businesses based in industrial areas to ride the wave of financial success – until recently. It’s across the industrial property sector that insurers are really turning the screw and making it harder to insure vacant properties.

In addition to the foundations a commercial property insurance policy offers (insuring the building), there is a broad scope of options to cover further risks, some of which are included below:

• Loss of Rent

If a unit becomes uninhabitable following an insured event, the owner can claim for loss of rent or alternative accommodation whilst the premises are unfit for occupancy.

• Machinery Breakdown

Complex coverage for large machinery, plant, and mechanical equipment, with options to include coverage for the resultant business interruption costs.

• Rent Default

Protection against the loss of income resulting from tenant eviction, receivership, cease of rental payment, and tenants vacating the property.

• Lease Incentives

Coverage for the costs required to attract new tenants to a property following a loss, including cash payment, reduction of rent, and additional fit-out expenses.

• Additional Increased Cost of Working

This provides coverage for advertising costs, rent-free periods, and to pay tradesmen overtime to speed up repair times and limit downtime. It also limits any reduction in turnover or revenue to maintain normal business operations.

• Claims Preparation Costs

Covers the cost of professional fees for the preparation, presentation and settlement negotiations for various types of large commercial property claims.

• Developments Costs

Allocates additional funds to the development of a property to attract new tenants if a property is damaged or destroyed.

• Loss of Attraction

General Area: Coverage for loss of rental income or disruptions in normal business operations if caused by the damage to a property adjacent from the insured property.

• Loss of Attraction

Anchor Tenants: Provides coverage for the loss of rental income or disruptions in normal business operations should a key tenant vacate the premises (ex. A large supermarket in a small suburban shopping centre).

• Inducements

This covers the expenditure necessary to induce tenants to lease or re-lease a building following reinstatement after a loss (including partial leases).

• Fixed Costs Not Recoverable from Tenants

This covers certain after-loss expenses such as cleaning, taxes, pest extermination, building maintenance, and electricity.

The cover required for vacant commercial property insurance is more basic, in essence only requiring cover for the Building and for Public Liability, it does not include loss of income via Business Interruption. Just because there are less sections of cover being provided, this does not make it easier to put insurance cover in place, quite the contrary in fact.

Some other issues that can occur include:

• Theft of copper piping and other valuable fixtures
• Vandalism such as graffiti and broken windows
• Leakage of hazardous or toxic substances which can contaminate the soil or groundwater

• Drug users or squatters could move in, cause damage and refuse to leave
• Unlicensed parties could be held, causing damage to the property
• Suppression systems might be turned off, so if a fire starts it could spread and cause a total loss

The resultant property damage from such events can cost insurers tens of thousands of dollars in claim payouts. This can lead to insurers building a case for doubling or even tripling a premium at renewal, declining to quote again or even cancelling a policy halfway through due to excessive claims.

Thankfully, some insurers do specialise in vacant commercial property insurance, so all is not completely lost. However, premiums for vacant commercial property insurance policies can be expensive; up to 3 or 4 times that of a tenanted building.

These properties may only be temporarily vacant for a short period of time (say, two or three months) whilst a new lease is finalised or a fit out is being completed. In most cases, these circumstances are normally acceptable to insurers, but insurers must still be notified of any changes as and when they take place.

• Whilst no guarantee, outlined below are certain measures that can be taken to find a solution for insuring vacant property.

• Security fencing (electric an option)
• Live CCTV
• Back to base alarm
• Monitored security/drive-by patrols
• 48 hours inspections
• Inform your broker of any tenant enquiries, leases being signed etc.

• You may also consider undertaking some maintenance on the property to prevent incidents occurring:

• Disconnecting gas and water mains (where appropriate) or draining water tanks and pipes
• Turn off the electricity except when needed to power alarm systems and lighting.
• Having a representative visit the property on a regular basis (insurers prefer every 48 hours) to provide regular updates on the condition of the property
• Clearing the exterior of the building of cardboard, paper, brush and scrap wood to prevent fire
• Ensure parking areas and sidewalks are in good condition to reduce the risk of Public Liability claims
• Removing or securing any toxic/hazardous substances that could leak and cause contamination
• Erect obstacles to ensure pedestrians and vehicles stay out of the parking area (eg. a chain, gate or bollard)

The implementation of all or some of these measures can potentially make the difference to an insurer offering cover for a vacant property or not. At a minimum, putting these measures in place may deter an offender or prevent an incident from occurring in the first place.

• How long has the property been vacant and when do you foresee a tenant moving in?
• Are you actively seeking new tenants through leasing agents and advertisements?
• Have you received any enquires to lease your vacant property?
• What type of tenant activity are you likely/hoping to attract?
• Has a formal contract been signed to lease the property?