2010 ANZIF Turks Legal Claims Scholarship Essay
2010
The policy wording was sometimes disregarded by insurers when attempting to resolve bushfire claims in Victoria in 2009. Peter Hardman of the FOS described this as the ‘Mother Teresa’ approach by insurers. In light of the intense media spotlight on insurers during major disaster events, should insurers approach claims by applying the strict wording of the policy or should a more liberal approach to the intention of the policy be adopted? Is sole reference to the intention of an insurance policy, at the expense of the policy wording, an effective tool for claims management of natural disasters? Should it have a wider application for the approach of insurers to claims? In your answer you should provide examples to support your arguments and discuss the possible ramifications of each approach.
A policy wording according to Rejda (2008, p19), is a document outlining the terms and conditions associated with a contract of insurance involving the transfer of risk for fortuitous losses. The intention of a policy is the “presumed, not the actual, intention of the parties to a contract of insurance” (Mark & Balla, 1998, p343). Insurers can realise benefits by taking a more liberal approach when dealing with natural disasters, such as securing a competitive advantage over their competitors, increasing market share and saving on advertising. However, decisions of this nature are particularly delicate and careful consideration of a variety of factors is necessary to ensure the long term interests of all stakeholders are properly considered. These
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factors include the insurer’s social responsibility, setting or adhering to precedents, policy ambiguity, government involvement, exposure and solvency, professional fees and reinsurance. An examination of natural disasters in Australia will demonstrate the importance of these factors, covering the major loss types of bushfire, flood, storm, earthquake and hail. Commercial decisions are made relating to other types of claims and a similar approach to evaluate the effectiveness of these decisions should be adopted by insurers. It is important to note the main factors that have bearing on these decisions can coalesce.
Natural disasters have cost insurers in Australia staggering amounts. The four largest events when converted to 2007 equivalent dollar according to the ICA (2010) were the Newcastle earthquake in 1989 ($4296m), Cyclone Tracey in 1975 ($3655m), the Sydney hailstorm in 1999 ($3300m) and the Victorian bushfires in 2009 ($1070m). The solvency of insurance companies is of prime importance. Unless that solvency can be guaranteed there is no meaningful protection for policy holders (Mark & Balla, 1998, p205).The most obvious factor to consider for an insurer when deciding to cover claims which have not been factored into underwriting is the solvency of the organisation and the capacity to settle claims that fall outside the policy wording. The effect of not accurately calculating the risk of natural disasters can be seen through the near collapse of GIO following Hurricane George (Sexton and Murray, 2005), that was taken over by AMP only to nearly cause AMP to collapse.
One of the most critical aspects of a natural disaster for an insurance company is the media exposure they may often attract. Depending on the insurers response this
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exposure can either be negative or positive and can have a huge bearing on whether an insurer chooses to take a more liberal approach. An insurer must consider the effect negative advertising may have on their brand should they decide not to cover claims and stick with a strict interpretation of the policy wording. Major Australian Insurers spend enormous amounts on advertising each year. For instance the Suncorp Annual Report (2009) where in 2008 they spent $195 million on advertising and promotional expenses. If an insurer decides they have the capacity to “generously” settle claims and announce it in the media they may avoid the risk of poor media exposure and gain the added benefit of positive free advertising.
Moreover, social responsibility is a business obligation as increasingly perceived by society, beyond that required by law or economics, to pursue long-term goals that are good for society (Robbins et al, 2006, p164). Studies have shown a steadily increasing positive relationship exists between social involvement by organisations and company performance (Robbins et al, 2006, p166). A natural disaster can have devastating and emotional impacts on society when families have lost their homes or casualties are high, for example, during the Victorian Bushfires in 2009 where 173 people were killed (Victoria Police, 2009). Society focuses on the behaviour of insurance companies and expects them to “do the right thing”. Insurers can take advantage of this by offering emergency assistance as soon as possible and make commitments they will assess and settle claims quickly. For example, APIA took this approach by making a press release once the Northern NSW floods swept through the region (APIA, 2010). Social responsibility can also have a major bearing on commercial decisions. Similarly, the public expects more of businesses when dealing
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with someone who has just lost a family member in a serious motor vehicle collision for example and in my experience, can persuade an insurer to settle prematurely.
Precedence is another major factor that should be taken into consideration by insurers when making any natural disaster or commercial decision. Insurers need to be aware of setting precedence that they may reasonably be expected to repeat for a future event, just as they need to be mindful of community expectations from previous decisions. For example, Dennis O’Brien told insurance news (2010) that if insurers decide to pay ex-gratia payments for the 2009 Northern NSW riverine flood damage claims they will set a dangerous precedent that is hard to avoid for future events. Furthermore, precedents can be set by other insurance companies when deciding to cover a natural disaster or not. These precedents are difficult to avoid for other insurers and can be catastrophic for their margins. For example, following the 2009 Northern NSW floods one niche insurer found themselves with a relatively high exposure compared to their market share. They appointed hydrologists who discovered a high percentage of the claims were caused by flood or rising water from a swollen river rather than storm or rain water run off. CGU and NRMA announced that they would be covering all claims as they could afford to with their much smaller exposure level. The niche insurer found themselves in a difficult position and were forced to deny some claims and bear the negative publicity as a consequence.
Policy ambiguity refers to expressions whose meaning cannot be determined from its context or a lack of clarity that could lead to multiple meanings (Rejda, 2008. p189). As the insurer drafts the wording, ambiguity in the policy wording is the insurer’s
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liability (Rejda, 2008, p190). In relation to natural disasters, insurers should be certain that their policy is clear and any loss that is not intended to be covered is clearly outlined and defined. They should also be sure the integrity of the wording is likely to be upheld should the matter be determined by the FOS. Given the fees the FOS will charge for the determination, and likely media attention surrounding disasters, any denial needs to be certain. If the insurer believes the policy intention is for cover not to extend for a loss but some ambiguity exists, they should strongly consider settling the claim to avoid the potential extra cost and risk of media exposure. This consideration of policy ambiguity should have a wider application to claims. For example, Lloyds recently denied a motor claim relying on an off road exclusion in their policy that stated, “We do not cover any loss, damage or liability incurred whilst the car is being: used for trail driving or any off-road activity, whether it be recreational or otherwise”. The insured went through the FOS who determined the policy was ambiguous and as the exclusions did not specify “off road” that it could be interpreted as anywhere off the road including a driveway or a car park. They continued to determine the insurer should settle the claim as the wording was not consistent with the intention of the policy (Hardman, 2010, p3). The FOS fees were approximately 40% of the claim cost.
The government plays a fundamental role in managing natural disaster events. They can issue emergency payments to families who have lost their homes and have the ultimate duty of care when cleaning up public property. They can also make public announcements and demand insurance companies undertake immediate action. Recently, during the VIC bushfires, the government assisted the uninsured victims of the fires. In particular, they organised the disposal of bushfire debris covering
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uninsured properties. Not all insurance policies cover debris removal as standard cover which left some insured properties covered in debris while their uninsured neighbours had the debris removed by the government. The media highlighted which companies were responsible for not clearing the debris and these companies were subsequently vilified. Prime Minister Kevin Rudd addressed the nation with a strong statement during the days immediately after the fire that any insurance company “would be brave not to cover all the damage” (Green 2009, p4).
Some exclusion causes generally relate to all policies where some may relate specifically to the type of cover provided by the policy (Berwick, 2001, p61). As noted by Mark & Balla (1998, p2438), “The burden of proving that the loss falls within an exclusion clause lies on the insurer, although this can be modified by the express terms of the policy”. Insurance companies must be particularly prudent in ensuring they collect enough evidence to prove a loss is not covered if they intend to deny any claim, especially one related to a natural disaster. For example, as noted by Hardman (2010, p21), the recent earthquake in Korumburra Victoria resulted in many claims being reviewed by FOS for cracks in walls and ceilings. Many of these claims were denied with very little evidence, simply the loss adjusters that attended the property informed insurers that the damage was more consistent with earth movement due to a lack of moisture in the soil and rather than the earthquake. However, a seismologist had completed a report which was submitted to FOS for the local area stating the earthquake was strong enough to cause:
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“Vibration like an object striking walls. Windows, dishes and doors rattle, crockery clashes. Standing cars, rock. In upper ranges, wood walls and frames creak” The loss adjusters responsible for these reports did not prove, on the balance of probabilities, that the damage was not caused by the earthquake therefore the majority of denials were overturned (Hardman, 2010, p22). Although the media exposure to this event was not as prominent as more serious disasters, the $2000 (approx) each insurer had to pay FOS for each decision, combined with the extra costs of initially denying the claim and having it reviewed by IDR could possibly have been avoided. Although the negative opinion this approach has generated is not measurable within the local communities concerned but it undoubtedly exists.
Conversely, the professional fees that are unavoidable in proving some claims are outside the policy cover or are specifically excluded may be commercially unjustified to pursue. For example, an engineer’s report may not be worth obtaining if a motor vehicle assessor believes some minor hail damage was not caused by a hailstorm. These types of commercial decisions are made by insurers everyday and should be more closely scrutinised when dealing with natural disasters to account for the additional media risk (Tilley, 1997, p23). This certainly can encourage insurers to make commercial decisions, gestures of goodwill or refer to the intention of a policy rather than the wording when assessing small claims.
Reinsurance is an arrangement by which the primary insurer that initially underwrites the insurance, transfers to another insurer part or all of the potential losses
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associated with such insurance to protect their solvency (Rejda, 2008, p116). This transfer usually occurs at a certain point for an event. Reinsurance is particularly important for general insurers when dealing with natural disasters. For example, on a much larger scale than the natural disasters that occur in Australia, the September 11 terrorist events in America, show clearly the importance of reinsurance, insurance losses totalled $36B however reinsurers covered two thirds of those losses. Moreover, reinsurers agree to reinsure based on the policy wording. Thus if an insurer wants to make ex-gratia payments or disregard the policy wording they should be aware of the implications it may have on their reinsurance cover.
As previously foreshadowed, riverine flood is one of the core issues relating to the adherence of policy wordings when dealing with natural disasters. Until recently, industry practice is not to cover flood where a property is damaged by “water rising up out of a river or and creek and inundating a dwelling.” (Lui & Andrews, 2009, p25). This avoidance was due to the fact that flood is a binary peril, meaning a property is either in a flood zone or not. In order for an insurer to deny a claim based on flood the usual practice is to obtain a hydrologist report to prove whether the water had entered the property from storm/rainwater run off or was from a river level rising. This has caused negative media publicity for insurers who denied claims, so much so that ex gratia payments have been authorised (Lui & Andrews, 2009, p25). This negative media exposure has further been compounded by some of the major insurers such as Suncorp and Zurich now covering flood. Moving forward, the National Flood Information Database has been established for insurers to identify flood risk properties so it appears obvious that insurers will need to change their
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policy wording to incorporate flood or risk ongoing ex gratia payments and negative publicity.
As noted by Hardman (2009, p31) insurance companies approached the Black Saturday bushfires with a “Mother Teresa” approach. He further discusses whether the $1.2B cost insurance companies bore as a result of these fires would be as easily accepted if a similar event occurred last bushfire season? Thankfully it didn’t, however, he does raise an important point on how insurers may deny bushfire claims. Insurers could deny a bushfire claim for policy holders not taking reasonable care to protect their property by leaving unnecessarily or by not removing highly flammable flora surrounding the property (Hardman, 2009, p32). This approach would generate significant negative media even for minor fires given that insureds are likely to say they aren’t prepared to take any risks following Black Saturday. How could an insurer reasonably expect them to? In particular, as homeowners are not fire experts and as Black Saturday demonstrated, communication from experts is not always timely or readily available (Victoria Police, 2009). As a result, if the risk of bushfire is increasing, insurers should increase premiums as they will need to apply the same liberal approach to settling bushfire claims.
Further, pressures on executives can impact an insurer’s decision to settle natural disaster claims or make commercial decisions in the wider realm of insurance claims (Rejda, 2008, p54). Pressure is applied by the ICA, the media and policy holders to insurers for an announcement on how a disaster is going to be handled and whether
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claims will be covered (ICA, 2009). In the case of natural disasters an effective way to deal with this is by having a disaster committee advise proactively and obtain accurate projections of losses and potential responses before or at least on par with the industry. However, before decisions can be reached by the smaller insurers, they should sensibly wait for the larger insurance companies to announce their positions. For example, as one niche insurer did in Lismore, they began denying claims for flood before they understood the rest of the industry would be covering the claims. Consequently, they attracted significant media scrutiny and ultimately reversed their position and settled claims.
Larger insurance brands with smaller subsidiaries have specific issues they need to factor from the point of view of consistency when dealing with natural disasters. With different brands having different levels of exposure and different management teams, senior management must ensure these decisions are coordinated and consistent for the parent company. For example, in response to the recent northern NSW floods, NRMA announced they would be settling all flood claims while at the same time CGU began denying claims. The policy wording is similar for the two brands and as both brands are owned by IAG their differing positions exposed the company to obvious criticism once the media became aware.
When dealing with commercial decisions and considering settling claims for goodwill or policy intention, commercial insurers or insurers that use intermediaries should consider some alternative factors. The size of a broker and the impact of a denial on the business relationships can have a bearing on an insurer’s approach to assessing
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2010
claims and their decisions relating to indemnity (Berwick, 2001, 102). While other factors like premium and service are clearly taken into consideration, an insurer may affect a broker’s decision to refer business based on claims outcomes. For example, in my recent experience, an insurer client decided to settle a multiple farm machinery claim worth $1.4m without proceeding with a factual investigation, even though the cause of the fire could not be determined and questions relating to the circumstances remained unasked. The explanation given by a senior manager was the importance of the broker involved and the quantum of referred business commercially justified the decision not to proceed to investigation.
To conclude, in light of the significant media coverage that natural disasters attract, whether insurers rely on policy wording or take a more liberal approach and refer to the policy intention is a complex issue. While sole reference to policy intention can be an effective approach in some scenarios many factors must be considered to maintain the solvency of an organisation and the long term best interests of shareholders and policy holders. These factors include, the level of media exposure and the likely response from the public when social responsibility is considered, anticipated costs, the existing and potential precedents, policy ambiguity, government intervention, professional fees, intermediary relationships and reinsurance coverage. This network of considerations can be demonstrated by examining the major forms of natural disaster in Australia and the many examples that have, and will continue to have significant implications on insurers.
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