Claims Preparation Costs: An Essential Yet Overlooked Insurance Cover

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.