Global Shipping Crisis & Supply Chain Disruption | How Insurance Can Help

Construction
Significant delays in the movement of goods due to the closure of ports, redirection of shipping routes, coupled with a surge in consumer spending are impacting whole industries across the globe – from construction to retail. These forces are causing major business interruptions with potentially devastating consequences for profitability and sustainability.

This article examines the global shipping crisis from an insurance and risk management perspective, setting out how insureds can take action to reduce their risk exposures and the impact on their bottom line.

 

HOW DID WE GET HERE?

While many of the above factors can be linked to interruptions caused by COVID-19, supply chain vulnerabilities existed before the pandemic.  Over time, global economic factors have caused shipping companies to restrict their operating costs, leading to reduced investment in new vessels, reliance on older containers, and the rerouting of inefficient shipping routes.  Meanwhile, demand for larger capacity container vessels grew, leaving older, smaller capacity fleets idle.  Fast forward to 2020 when an almost overnight surge of online consumer demand triggered the reopening of abandoned shipping routes.

The scarcity of available vessels and containers, combined with the increased consumer demand for goods has seen a dramatic increase in freight rates.  For example, the World Container Index has seen prices climb for 40ft containers by 360% since August 2020, and over 600% for the Shanghai to Rotterdam route. It is expected that sustained freight cost increases will eventually be added to the cost of goods.

Further delays are occurring in some of the world’s largest container ports in China and the United States caused by closures following COVID-19 infections amongst dock workers as well as additional biosecurity measures being applied.  These disruptions cause spillover into other ports and congesting spikes. Freight companies implemented workarounds such as leasing passenger and cargo aircraft to transport goods. This provided some relief while international travel was restricted, but as borders reopen, this is no longer such a viable solution.   

 

WHAT DO IMPACTED INDUSTRIES NEED TO CONSIDER?

Industries that import or export products or raw materials have felt the impact of these supply chain disruptions, particularly the Food & Beverage, Retail, and Construction industries. From an insurance perspective, there are key policy considerations that can help reduce your business’ changing risk profile and ensure the appropriate cover is in place to minimise losses.  These are outlined below.

 

MARINE
Deterioration of stock (fresh food and perishables) caused by delays

Delays are normally excluded in most Institute Cargo Clauses, however, deterioration of stock is usually covered (depending on the cover written into the policy). This adds an element of complexity when settling a claim and often leads to partial or commercial settlements.  Insurers are willing to offer forms of extended cover to write back some protection for loss or damage caused by the delay with terms and conditions (pricing, limits, and deductibles) linked to the exposure and likelihood of loss.

Insurers are also starting to see claims arising from failure of older, refurbished shipping containers (e.g., refrigerated motor failure) so a policy review to ensure stock deterioration is covered is encouraged.

 

Conveyance limits

With the shortage of containers, limited access to ship tonnage, and increased freight rates, some insureds may look to consolidate loads, which can cause increases in conveyance limits.  What was deemed appropriate in the past may need to be reviewed and the insurance policy should reflect this.

 

Additional risk management and inspection conditions

Inspection of containers prior to transit and upon delivery is sound risk management practice and where possible, it should be built into your overall risk protection/mitigation strategy. Larger conveyances can include inspection warranties/conditions at the port. If this is not completed and a claim is made, it can impact an insurer’s view on indemnity. Therefore, clear instructions and effective communication with logistics providers can help prevent claims from being denied.

 

PROPERTY
Indemnity period(s) and limits of liability

Delays in the delivery of raw materials or critical plant and machinery items can, in turn, delay the rebuild, reinstatement, or replacement of insured property in the event a loss occurs.  Increased turnaround times may exceed the policy indemnity periods. This can lead to a portion of the loss not being paid out, underinsurance, or inadequate insurance in the form of the policy limit.

When assessing an adequate policy limit, freight is often considered an uninsured working expense and is factored in the Rate of Gross Profit.  A formal Business Interruption review should be regularly undertaken to ensure cover and limits are appropriate.

 

Expediting expenses

Costs that are reasonably incurred to expedite the transportation of insured raw materials, plant, and equipment following a loss are covered under most Property policies.  An example here is the additional costs of leasing an aircraft instead of a ship.  Some insurers may have different stances on clients paying additional fees to ‘buy their way up the line’, and whether this is covered under expediting extensions. Therefore, open, and early communication with your broker is vital.

 

CONTRACT WORKS
Contract value/limits

Contract Works insurers have also seen significant increases in the cost of construction projects, fuelled by the growing costs and limited availability of raw materials (timber, bricks, glass, etc.) and labour.  Clients are encouraged to undertake regular reviews of their limits, values, and contracts with their customers to ensure they have adequate insurance in place.

 

Fines and penalties

Supply chain disruptions are also impacting completion periods within the construction industry as well as industries downstream where project completion has been postponed. Most Contract Works insurance policies do not provide cover for fines and penalties incurred as a result of shipping/transport delays pushing out completion periods.  Some insurers can write this cover back in, however strict underwriting protocols will be applied when assessing the risk to determine pricing, terms, and conditions.

 

WHERE TO FROM HERE?

While many factors continue to disrupt the global supply chain and the impacts can be devastating to businesses, our message to clients is that having the right insurance policies in place and reviewing these closely with your broker is an effective risk management strategy. Feel free to reach out at any time to discuss your business needs.

 

Travis Wendt

Head of Placement

travis.wendt@honan.com.au 

Changes to Personal Income Protection Policies

Employee Benefits
The Australian Prudential Regulation Authority (APRA) is making changes to new individual personal retail income protection policies after years of material losses have made the product offering unsustainable.

 

The changes do not impact Group Income Protection cover (companies with 20+ employees) or existing individual personal retail income protection policies.

 

From October 1, 2021, changes to new individual personal retail income protection policies are as follows:
  • Income replacement ratios will be reduced from 75% to 70%. This means in the event of an income protection claim after October 1, 2021, the claimant would receive up to 70% of their income after 6 months of the claim.
  • During the first 6 months of a claim, a claimant is entitled to up to 90% of their income, depending on the policy they have entered.
  • Income will be calculated over the 12 months before the claim, compared to some current policies which use the highest rolling 12-month income over the last 2 or 3 years to smooth out fluctuating income.
  • Guaranteed renewable policies will no longer exist. Long benefit periods, such as up to age 65, will be managed and reviewed to help ensure there is motivation to return to work. Insurers understand that long-term claims are costly to businesses and in effect, cause premium increases for existing clients.
  • This may include changing from “Own Occupation” to “Any Occupation” definition after 2 years on the claim. “Own occupation” refers to the individual’s job when they make a claim, “any occupation” refers to an occupation the individual can fulfil, despite still being unfit for their own occupation.
  • Income protection policy terms must not exceed five years (from 1 October 2022). After the five years, a new policy must be entered into that reflects the terms and conditions that apply to new contracts then on offer by the life insurance company. If an individual enters a new contract after the initial five years, medical underwriting is not required. Any changes to the client’s occupation, financial circumstances, and dangerous pastimes must be updated and reflected in the new policy.

 

Companies with existing Group Income Protection cover or those looking to establish one (minimum headcount 20+ employees) will not be impacted by these changes.

 

A FINAL NOTE

To find out more about these changes or to understand your options for implementing Group Income Protection cover, please reach out to your dedicated Honan Global Benefits contact.

 

 

Learn about Superannuation Stapling – coming on November 1, 2021

CORPORATE INSURANCE MARKET UPDATE: Q1 FY22

Insurance Updates
By Poppy Foxton – National Head of Corporate Insurance & Risk Solutions

 

KEY TAKEAWAYS FROM FY22: Q1?

The last quarter has seen further stabilisation within the property and liability insurance markets, as rate increases continue to moderate with insurers clawing back profit following a difficult natural catastrophe season (CAT) season in 2020-2021.  Whilst the cost of transferring risk still favours the seller, the pricing pendulum has started to swing towards buyers. Longtail liability lines however are still seeing rate increases of 15-20%.  Certain segments are seeing much higher increases. For example, purchasing molestation cover remains highly challenging, with markets withdrawing capacity and decreasing appetite for these types of exposures. Honan is continuing to guide clients through more sophisticated risk transfer and retention program structure options as a strategy to manage these risks, either by electing aggregate deductible structures to offset premium increases, or through non-traditional forms of insurance such as discretionary mutuals or captives. 

In addition, the second COVID-19 Business Interruption (BI) test case was heard in the Federal Court recently, with the outcome handed down on October 8, 2021. An overview of the second test case, along with the key findings is available here.  An appeal date has been scheduled for November 2021 – we’ll provide an update when that judgment is delivered. 

 

 

KEY MILESTONES / CONSIDERATIONS FOR CLIENTS FOR THE NEW QUARTER (FY22-Q2): 

As NSW and VIC commence their paths out of lockdown, clients in the hospitality, tourism and retail industries are expecting improved business results for the quarter ahead. Honan is working closely with clients as they navigate the complexity of returning to the office and liability exposures around the relevant State/Territory orders concerning vaccinated vs unvaccinated customers.

Australia’s east coast experienced severe weather over the first weekend in October, a possible harbinger of events to come in the natural catastrophe (CAT) season. Meteorologists are again predicting equal chances of La Niña events, bringing with it a risk of associated storms and flooding.  Marking the official onset of Australia’s CAT season, October is the time for clients to work with their broker to ensure they’re adequately prepared. A CAT plan and undertaking preventative maintenance on your assets in advance are advisable at the beginning of Q2. 

 

 

ANY INDUSTRY TRENDS YOU CAN SEE ARISING IN  OVER THE REMAINDER OF FY22?

Insurers will continue to take a conservative approach to underwriting through pricing and capital deployment. For clients, this will mean insurance supply will continue to remain ample, leading to increased competition and further stabilisation of pricing. Following the Haynes Royal Commission, a raft of new financial services industry regulations come into effect in FY22 including the Claims Handling AFSL license requirements, revised Dispute and Complaints Processes, and the implementation of Target Market Determinations. The industry is preparing to implement new policies and processes designed to give greater protection to consumers, particularly retail clients.  

 

 

Market Update: Q1 FY22

 

 

 

STRATA & REAL ESTATE MARKET UPDATE: Q1 FY22

Insurance Updates
By Kieran Drum- National Head of Strata
Matthew Henderson – Operations Manager: Underwriting Facilities & Strata

 

KEY TAKEAWAYS FROM FY22: Q1?

SOCIAL ENGINEERING ATTACKS

The Real Estate sector has been hit hard by an increase in frequency and severity of cybercrime incidents. Having moved much of their interactions and processing online over the last 18 months, real estate agents and property managers are especially vulnerable to social engineering attacks. Social engineering is a general term referring to an attack where the fraudster successfully impersonates a trusted employee, vendor, supplier, customer, or even a CEO or CFO; manipulating the victim into disclosing security details and sensitive information. These attacks often come in the form of phishing emails. Sadly, Honan clients are by no means immune to such threats. In the last quarter alone, we have seen multiple successful cyber attacks on our clients. Fortunately, in each instance, an appropriate level of cover was in place via a bespoke cyber policy.

While many organisations believe they can rely on extensions to Professional Indemnity and Management Liability policies to provide adequate cover in the event of a cyber incident claim, this is not the case. To ensure their level of insurance is truly fit for purpose, real estate agents and property managers are strongly encouraged to review their internal cyber security strategies with their broker.

 

EARTHQUAKE

On September 22, 2021a 5.9 magnitude earthquake struck Victoria, with tremors felt across the state and as far away as Newcastle in NSW. While there were no immediate reports of serious injury or death, damage included collapsed walls, shattered windows, and cracked roadsEarly estimates place the total cost of damage at $150 million, with almost 10,000 claims. At the time of publication (October 14, 2021), the earthquake has not been declared a catastrophe by the Insurance Council of Australia (ICA)Head here to find out more about how a catastrophe is defined and what this means. If you believe you have a claim, please contact your broker directly. 

 

KEY MILESTONES / CONSIDERATIONS FOR CLIENTS FOR THE NEW QUARTER (FY22-Q2): 

With heavy rainfall, hail, and tornadoes marking a busy start to the Australian storm season, the Bureau of Meteorology has predicted a 50% chance that La Niña conditions will return this spring (double the normal likelihood). As a result, there is a higher probability of damaging events taking place such as flooding. Clients are encouraged to prepare early (now) bensuring their level of cover is sufficient for the season ahead. If in doubt, please reach out to your broker to discuss.  

 

ANY INDUSTRY TRENDS YOU CAN SEE ARISING IN  OVER THE REMAINDER OF FY22?

Global supply chain interruptions due (in part) to COVID-19, along with Australia’s Black Summer bushfires in early 2020 have contributed to building material shortages; a trend which is expected to continue over the next 12 months. Materials most affected include steel, timber, roofing products, PVC, and electrical products. In addition, the prices of both containers and dry bulk shipping are increasing, with serious shortages in haulage between Australia and other countries.

These shortages, together with pricing increases, have driven the cost of insurance repairs and replacements upwards. Unknowingly, many property owners may no longer have adequate insurance in place to reflect such increases in costs to repairs/rebuilds. Two simple insurance solutions can assist clients with this: 1) updated property valuations, and 2) those in strata buildings can review the Catastrophe Insurance percentage of the building sum insured 

 

 

Market Update: Q1 FY22

 

 

Market Update: Q1 FY22

Construction

Discover our forecast of insurance trends and business implications in the quarter ahead across the following sectors:

 

CORPORATE     FINANCIAL LINES    STRATA & REAL ESTATE    BRIC CONSTRUCTION INSURANCE   WORKERS’ COMPENSATION   

 

 

CORPORATE

By Poppy Foxton – National Head of Corporate Insurance & Risk Solutions
KEY TAKEAWAYS FROM FY22: Q1?

The last quarter has seen further stabilisation within the property and liability insurance markets, as rate increases continue to moderate with insurers clawing back profit following a difficult natural catastrophe season (CAT) season in 2020-2021.  Whilst the cost of transferring risk still favours the seller, the pricing pendulum has started to swing towards buyers. Longtail liability lines however are still seeing rate increases of 15-20%.  Certain segments are seeing much higher increases. For example, purchasing molestation cover remains highly challenging, with markets withdrawing capacity and decreasing appetite for these types of exposures. Honan is continuing to guide clients through more sophisticated risk transfer and retention program structure options as a strategy to manage these risks, either by electing aggregate deductible structures to offset premium increases, or through non-traditional forms of insurance such as discretionary mutuals or captives. 

In addition, the second COVID-19 Business Interruption (BI) test case was heard in the Federal Court recently, with the outcome handed down on October 8, 2021. An overview of the second test case, along with the key findings is available here.  An appeal date has been scheduled for November 2021 – we’ll provide an update when that judgment is delivered. 

 

 

KEY MILESTONES / CONSIDERATIONS FOR CLIENTS FOR THE NEW QUARTER (FY22-Q2): 

As NSW and VIC commence their paths out of lockdown, clients in the hospitality, tourism and retail industries are expecting improved business results for the quarter ahead. Honan is working closely with clients as they navigate the complexity of returning to the office and liability exposures around the relevant State/Territory orders concerning vaccinated vs unvaccinated customers.

Australia’s east coast experienced severe weather over the first weekend in October, a possible harbinger of events to come in the natural catastrophe (CAT) season. Meteorologists are again predicting equal chances of La Niña events, bringing with it a risk of associated storms and flooding.  Marking the official onset of Australia’s CAT season, October is the time for clients to work with their broker to ensure they’re adequately prepared. A CAT plan and undertaking preventative maintenance on your assets in advance are advisable at the beginning of Q2. 

 

ANY INDUSTRY TRENDS YOU CAN SEE ARISING IN  OVER THE REMAINDER OF FY22?

Insurers will continue to take a conservative approach to underwriting through pricing and capital deployment. For clients, this will mean insurance supply will continue to remain ample, leading to increased competition and further stabilisation of pricing. Following the Haynes Royal Commission, a raft of new financial services industry regulations come into effect in FY22 including the Claims Handling AFSL license requirements, revised Dispute and Complaints Processes, and the implementation of Target Market Determinations. The industry is preparing to implement new policies and processes designed to give greater protection to consumers, particularly retail clients.  

 

 

 

FINANCIAL LINES SNAPSHOT

By Henry Clark – Head of Professional & Executive Risks
KEY TAKEAWAYS FROM FY22: Q1?

In September, the Australian Cyber Security Centre (ACSC) published its annual cyber threat report for the 2020-2021 FY, revealing total self-reported losses from cybercrime in Australia in excess of $33 billion.  The escalating prevalence and severity of cyber attacks, along with changes in governance expectations, director liabilities, and regulatory reform is seeing business leaders place significantly more emphasis on their organisations’ cybersecurity and risk management strategies. Head here for our in-depth analysis of the cyber insurance market and updates across a range of different industries, including financial institutions, professional services, and technology. 

Following consecutive years of rate increases, there is clear evidence pricing is beginning to plateau for the public company D&O insurance market. Whilst insurers still applied rate increases during the Q1 renewal period, these were much lower than the prior quarter. This suggests the corrective portfolio measures required in the D&O space have largely been achieved and pricing is reaching a sustainable level for insurers. Challenges remain for companies with poor financials and industries heavily impacted by COVID-19. The ability of brokers to differentiate these clients by communicating in-depth knowledge of their risk exposures and being able to provide quality information about their risk management and risk mitigation activities is crucial to securing positive renewal outcomes for clients.  

The professional indemnity (PI) market remains challenging for certain professions, particularly design and construct professionals, digital banks, mortgage brokers, financial planners, and non-bank lenders. These professions still face supply and demand issues due to several insurers withdrawing from the market. Premium rates increased on average 15-20% in the last quarter, with insurers being highly selective in risks they choose to insure.  

 

KEY MILESTONES / CONSIDERATIONS FOR CLIENTS FOR THE NEW QUARTER (FY22-Q2): 

For management liability (ML) and insurable exposures for private enterprises, the full effects of COVID-19 remain unknown. As a result, underwriters are cautiously monitoring their portfolios and the solvency of Insureds. Crime and employment practices liability coverages continue to be the main triggers for ML claims, accounting for over 70% of combined losses for ML insurers.   

 

In this hardening insurance market where demand outstrips supply, Honan is working to ensure all clients understand the outlook for their renewal programs to ensure the right level of cover for their organisation. Our insurer partners expect strong underwriting submissions, based on the best available information, in order to optimise the price, terms, and conditions for your risks.  

 

ANY INDUSTRY TRENDS YOU CAN SEE ARISING IN  OVER THE REMAINDER OF FY22?

At the forefront of renewal negotiations are cyber placements. These remain challenging for certain risks and risk management around ransomware attacks in particular. Insurance carriers and cyber underwriting practices continue to evolve from a traditionally narrow focus on factors such as revenue, number of employees, record count and industry class, to a wider underwriting lens encompassing loss modelling tools and continual system scanning, both in-house and via outsourced IT security. Insurers are delicately balancing the growth of their portfolios, whilst remaining disciplined in the face of surging claims and declining profitability.   

As always, engagement with your broker well in advance of renewal dates is essential. 

 

STRATA & REAL ESTATE SNAPSHOT

By Kieran Drum- National Head of Strata
Matthew Henderson – Operations Manager: Underwriting Facilities & Strata
KEY TAKEAWAYS FROM FY22: Q1?

SOCIAL ENGINEERING ATTACKS

The Real Estate sector has been hit hard by an increase in frequency and severity of cybercrime incidents. Having moved much of their interactions and processing online over the last 18 months, real estate agents and property managers are especially vulnerable to social engineering attacks. Social engineering is a general term referring to an attack where the fraudster successfully impersonates a trusted employee, vendor, supplier, customer, or even a CEO or CFO; manipulating the victim into disclosing security details and sensitive information. These attacks often come in the form of phishing emails. Sadly, Honan clients are by no means immune to such threats. In the last quarter alone, we have seen multiple successful cyber attacks on our clients. Fortunately, in each instance, an appropriate level of cover was in place via a bespoke cyber policy.  

While many organisations believe they can rely on extensions to Professional Indemnity and Management Liability policies to provide adequate cover in the event of a cyber incident claim, this is not the case. To ensure their level of insurance is truly fit for purpose, real estate agents and property managers are strongly encouraged to review their internal cyber security strategies with their broker. 

 

EARTHQUAKE

On September 22, 2021a 5.9 magnitude earthquake struck Victoria, with tremors felt across the state and as far away as Newcastle in NSW. While there were no immediate reports of serious injury or death, damage included collapsed walls, shattered windows, and cracked roadsEarly estimates place the total cost of damage at $150 million, with almost 10,000 claims. At the time of publication (October 14, 2021), the earthquake has not been declared a catastrophe by the Insurance Council of Australia (ICA)Head here to find out more about how a catastrophe is defined and what this means. If you believe you have a claim, please contact your broker directly. 

 

 

KEY MILESTONES / CONSIDERATIONS FOR CLIENTS FOR THE NEW QUARTER (FY22-Q2): 

With heavy rainfall, hail, and tornadoes marking a busy start to the Australian storm season, the Bureau of Meteorology has predicted a 50% chance that La Niña conditions will return this spring (double the normal likelihood). As a result, there is a higher probability of damaging events taking place such as flooding. Clients are encouraged to prepare early (now) bensuring their level of cover is sufficient for the season ahead. If in doubt, please reach out to your broker to discuss.  

 

ANY INDUSTRY TRENDS YOU CAN SEE ARISING IN  OVER THE REMAINDER OF FY22?

Global supply chain interruptions due (in part) to COVID-19, along with Australia’s Black Summer bushfires in early 2020 have contributed to building material shortages; a trend which is expected to continue over the next 12 months. Materials most affected include steel, timber, roofing products, PVC, and electrical products. In addition, the prices of both containers and dry bulk shipping are increasing, with serious shortages in haulage between Australia and other countries.  

These shortages, together with pricing increases, have driven the cost of insurance repairs and replacements upwards. Unknowingly, many property owners may no longer have adequate insurance in place to reflect such increases in costs to repairs/rebuilds. Two simple insurance solutions can assist clients with this: 1) updated property valuations, and 2) those in strata buildings can review the Catastrophe Insurance percentage of the building sum insured 

 

 

BRIC CONSTRUCTION INSURANCE

By Chris Bovill – Chief Executive, BRIC
Travis Gauci – Head of Professionals, BRIC
Chloe Pham – Senior Consultant, BRIC

 

KEY TAKEAWAYS FROM FY22: Q1?

Building surveyors have continued to experience increases in Professional Indemnity (PI) premiums, excesses, and reductions in limits over the last quarter. However, we are now seeing the emergence of more stable PI premiums. Volatility in engineers’ PI has increased, with multiple insurers leaving the market during Q1, and new entrants simultaneously entering.

Builders operating in the SME construction market have faced several challenges, including shortages in the availability of contractors and sub-contractors, ongoing supply chain problems, and (for some states) restrictions to the number of workers on sites – all leading to increased project costs and delays. This requires constant monitoring to ensure insurance coverage reflects the sums insured, maximum construction periods, and vacant sites.

 

 

KEY MILESTONES / CONSIDERATIONS FOR CLIENTS FOR THE NEW QUARTER (FY22-Q2): 

For clients in the construction professions with upcoming renewals, insurers are paying particular attention to measures taken to limit risk exposures. We encourage clients to carefully consider the following in their applications to help improve the attractiveness of their risks to insurers:

  1. What type of buildings are you are providing services on – high rise, complex builds?
  2. The steps you take to minimise risk – written contracts, client selection, record keeping, etc.
  3. How COVID-19 has impacted your business and your ability to provide your services.
  4. If you or any of your employees have been involved in any disciplinary hearing or investigation, please provide detail around the circumstances, the outcome, and what you have done to remediate your processes to prevent a re-occurrence.
  5. For any claims or circumstances, you have reported, please provide a status update, details of what happened, any aspects that can be attributed to your client, the outcome, and how you intend to prevent a re-occurrence.
  6. Have you or your employees improved their qualifications or become members of a professional institute or association?
  7. As always, clients are encouraged to return their paperwork early.

For builders facing the renewal of their policies, further increases to construction insurance premiums are expected, particularly for material damage and liability (the latter attracting increases of up to 50 percent). Significant losses on long-tail liability claims are also contributing to higher excesses, especially for worker-to-worker claims.

 

ANY INDUSTRY TRENDS YOU CAN SEE ARISING IN  OVER THE REMAINDER OF FY22?

The Limitation of Liability through the Building Surveyors’ Professional Standard Scheme (PSS) will have a positive impact on the risk profile of Building Surveyors. However, this will take several years to be fully realised, and we do not expect any immediate reduction in premiums. More information about the PSS is available here. Together with the Australian Institute of Building Surveyors (AIBS), BRIC has successfully negotiated a premium discount with one insurer as an incentive to enhance your professional qualifications. Please reach out to discuss this with us.

Builders’ construction insurance premiums are not expected to stabilise in the short term, as insurers remain concerned about the profitability of these risks.

Engineers in NSW are now subject to the Design & Building Practitioners Act 2020 (NSW), and insurers are beginning to express concern on claims movement on the Statutory Duty of Care. As new insurance markets are becoming available for consideration, an active and early engagement with your broker ahead of renewal is critical.

 

 

WORKERS’ COMPENSATION SNAPSHOT

By Sharon Rutherford – Head of Risk Consulting
KEY TAKEAWAYS FROM FY22: Q1?

Employers are reminded of the Victorian changes around primary psychological injuries that came into force on July 1, 2021.  These changes help eligible workers and volunteers receive treatment for work-related mental injuries. Employers are required to report these injuries within three business days. More information about the provisional payments is available via WorkSafe Victoria

Employer actual wage remunerations are now due and should already be closed for the FY21 policy period. Penalties can apply where wages are not declared. 

KEY MILESTONES / CONSIDERATIONS FOR CLIENTS FOR THE NEW QUARTER (FY22-Q2): 

WorkCover WA has announced significant changes to the Workers Compensation and Injury Management Act 1981. The Bill proposes recommendations by Workcover WA in its 2014 Review of the Workers’ Compensation and Injury Management Act 1981: Final Report. The proposed changes have the potential to alter the way workers’ compensation claims are managed and resolved, in addition to increased costs and burdens on employers in WA.  

A copy of the draft Bill, along with an explanation of key materials and details about making a submission, is available via WorkCover WA. Honan’s Workplace Risk team is committed to keeping you updated on the impacts to businesses and employees as this situation evolves – please reach out at any time with further queries.  

 

ANY INDUSTRY TRENDS YOU CAN SEE ARISING IN  OVER THE REMAINDER OF FY22?

 

The National Return to Work Strategy 2020 – 2030 (the Strategy) drives national action to improve return to work outcomes for Australian employees with a work-related injury or illness. Under the Strategy, Safe Work Australia and Griffith University have produced two reports examining the psychological response to injury among support workers, and the stigma injured or ill employees experience in the workplace. Crucially, both reports provide recommendations around supporting employees and facilitating a successful return to work.  

While the onus of responsibility remains on employers to manage their risk exposures, organisations’ Leadership Teams and WHS Systems alongside wider cultural forces are enhancing awareness about safe work environments and reducing stigma associated with workplace injuries.

 

 

 

Read more from this issue of HoneIn:

 

Interview with Insurance News

 

 

Honing In on Our Partners: Keep it Cleaner

 

 

UPDATE: Second Test Case Decision on COVID-19 Business Interruption Claims

Insurance Updates

In 2020, following the rejection of multiple Business Interruption claims brought by policyholders as a result of COVID-19, the Supreme Court of NSW delivered its judgment on the First Test Case on the issue of whether Business Interruption insurance policies extend cover relating to the COVID-19 outbreak. This test case concerned a specific point, namely whether the expression “other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments” extended to ‘listed human diseases’ under the Biosecurity Act 2015 (Cth). Many insurers had not updated their policies which referred to the repealed Quarantine Act 1908. This point is significant because most policies intending to provide business interruption insurance cover excluded such diseases. Insurers argued that the words “subsequent amendments” in the exclusion should be read as extending to the Biosecurity Act, and a reference to the Quarantine Act was a mistake that could be corrected when interpreting the contract. The Court of Appeal unanimously rejected both arguments, as outlined in our briefing from July 2021. The High Court refused leave to appeal and so that decision stands in NSW.

 

Crucially, however, the First Test Case did not deal with significant policy wording issues.   

A Second Test Case with ten claimants including a dry cleaner, travel agency, stage clothing and costing store, gym, dental practice, property landlord, beauty salon, and bar and restaurant businesses was heard in September 2021 to determine various issues, including:

      1. disease extensions where premises were not closed or evacuated as a result of an outbreak of a notifiable infectious or contagious disease occurring within a 20km radius;
      2. prevention of access clauses including where the clause requires a threat of damage to be within a 50km radius;
      3. listed human diseases exclusion within a 5km limit; and
      4. the proximity of an outbreak to a business.

Insurers also argued that Section 61A of the Victorian Property Law Act 1958 has the effect of substituting in the Biosecurity Act for the repealed Quarantine Act. The relevant section says that where an Act is “repealed and re-enacted”, references in contracts will be taken as referring to the new Act, meaning the former Quarantine Act was replaced by the Biosecurity Act. This argument enlivened the Quarantine Act issue but only for claims in Victoria.

 

FINDINGS OF THE SECOND TEST CASE

On 8 October 2021, Justice Jagot of The Federal Court (NSW Registry) found in favour of insurers in nine out of ten cases presented (on the issues outlined above). The remaining case, case number NSD133/2021 – Insurance Australia Limited and Meridian Travel (Vic) Pty Ltd was determined in favour of the insured/s because of the unique way the relevant clause was worded in the policy document.

Specifically, Justice Jagot found the Victorian Property Law Act, being a State Act, did not apply to Commonwealth Acts, (the Quarantine Act and Biosecurity Act was/are Commonwealth Acts), and therefore insurers are not able to rely on that Victorian Act to argue the Biosecurity Act replaced the repealed Quarantine Act in relation to those claims where Insureds were affected in Victoria.

 

MORE TO COME

This second test case is not the final word from the Courts on BI cover for COVID-19 losses.

An appeal date has already been set for the second week of November 2021 and we will be closely monitoring the appeal so we can provide an update to our clients when that judgment is handed down.

Managing Your Business’ COVID-19 Vaccination Risk Exposures

Employee Benefits

With COVID-19 outbreaks continuing to disrupt life around the country, maximising the vaccination rate has become a national priority.  Reaching the vaccination rate of 80% in Australia is now in our sights, raising questions about the best way to navigate a safe and sustainable return to the workplace.

The issue of whether employers should mandate vaccinations is receiving considerable attention around the world.   Multinational companies such as Google and Facebook have introduced a compulsory vaccination policy for staff. This move has been closely followed by Australian companies such as Qantas and SPC, with others indicating they will follow suit.

As businesses seek to understand their risk exposures, we explain how COVID-19 claims and liabilities are currently being viewed and summarise key considerations for employers as they navigate this next phase.

 

LATEST GUIDELINES ON MANDATING VACCINATIONS

In Australia, four tiers have been set out by The Fair Work Ombudsman (FWO) to help businesses assess where it might be “lawful and reasonable” to mandate COVID-19 vaccinations in their workplaces. The tiers range from Tier 1, where workers are exposed to the most risk and therefore it may be reasonable to enforce vaccinations, through to Tier 4, where the risk of transmission or infection is likely to be lower.

Tier 1 work — employees are required to interact with high-risk people (e.g., border control, hotel quarantine)

Tier 2 work — employees are required to interact with vulnerable people (e.g., health care or aged care workers)

Tier 3 work — employees are required to interact with the public in the course of their employment duties (e.g., retail workers at essential stores)

Tier 4 work — employees have minimal face-to-face interaction with others.

A workplace may have employees performing work in different tiers, which might change over time. With no test cases currently available to show the tier system in action, these guidelines raise the question of what steps are considered “reasonably practicable” for employers to help keep staff safe. At the time of publication, this decision sits with employers.

 

NO FAULT COVID-19 INDEMNITY SCHEME

Having consulted with the medical, healthcare, business, and insurance sectors, the Federal Government has released the details of the national no fault COVID-19 Vaccine Claim Scheme (the Scheme). The Scheme will provide Australians with efficient access to compensation for COVID-19 claims related to the administration of a Therapeutic Goods Administration (TGA) approved COVID-19 vaccine delivered through a Commonwealth Government approved program, irrespective of where that vaccination occurs.

From 6 September 2021, Australians who suffer injury and loss of income due to receiving the COVID-19 vaccine can register their intent to claim from the COVID-19 vaccine claims scheme webpage. The Scheme will be backdated to February 2021.

The Scheme will cover the costs of injuries exceeding $5,000 caused by a proven adverse reaction* to a COVID-19 vaccination. Independent experts will assess the claims, and compensation paid based on the recommendations. Compensation payments under the Scheme will be fully funded by the Commonwealth.

Australians who receive a COVID-19 vaccination and experience an adverse reaction are encouraged to report it to their doctor who can provide the information to the TGA.

 

COVID-19 VACCINES & WORKERS’ COMPENSATION

Separate to the COVID-19 Vaccine Claim Scheme, in some circumstances, an adverse reaction to the COVID-19 vaccine may be covered under workers’ compensation. To be covered, the insurer will need to be satisfied that:

  • the vaccine injury arose out of, or in the course of the worker’s employment; and
  • the worker’s employment was a substantial contributing factor to the vaccine injury or was the main contributing factor for a disease, injury; or
  • in the case of heart attack or stroke injury, the nature of the employment was a relevant factor in increasing the risk of the injury (see below).

While each claim needs to be assessed on the relevant facts and evidence, several issues may increase the likelihood that a vaccine injury is covered under workers’ compensation, including whether an employer:

  • took steps to arrange for its employees to receive a COVID-19 vaccine
  • encouraged or induced its employees to receive the vaccination to obtain benefits for its business
  • permitted or directed employees to have a COVID-19 vaccination during ordinary working hours; or
  • provided instructions to employees relating to the administration of the vaccine.

Workers’ compensation outcomes will always be subject to the individual merits of the claim, however, the key factor determining liability is the relationship between the workplace and how an injury arose out of or in the course of employment.  Therefore, the role of the employer is important when considering the exposures presented by COVID-19 vaccinations and how this can be determined to be in the course of employment. The link between a vaccine injury and the worker’s employment is easier to establish where a worker is influenced by their employer’s requirement to receive the vaccine or is subject to a Government Public Health Order. In these circumstances, there is a greater likelihood of the vaccine injury being covered under workers’ compensation. When lodging a claim, employers and workers will need to provide information on the link between their employment and the serious adverse reaction to the vaccine.

If a vaccine injury is a “heart attack injury” or “stroke injury”, the worker is also required to establish that the nature of their employment significantly contributed to the injury. In practice, this may require the worker to satisfy additional requirements. For example, the worker may need to provide evidence they opted for a particular vaccine brand due to their employment.

 

IMPACTS TO PREMIUM IF A WORKER MAKES A COVID-19-RELATED CLAIM

In NSW, icare has confirmed it will exclude COVID-19 claims and COVID-19 vaccination claims from the individual claims experience, meaning it will absorb the costs of the claim without passing on premium impact to the policyholder. This will protect any individual employer or industry from disproportionate premium increases due to COVID-19. This is a continuation of the Job Keeper exemption during 2020 where regulators supported the exclusion of these payments per the declaration of rateable remuneration. Whether the remaining State regulators follow icare’s lead is yet to be seen, however, Honan is liaising with our regulatory contacts to understand their position.

Businesses are encouraged to report any COVID-19 outbreaks directly to the relevant State or Territory regulator (e.g., WorkSafe Victoria, SIRA, etc.) and consider an employee who has tested positive to COVID-19 as having a reportable injury.

 

COMMUNICATING WITH EMPLOYEES

The TGA has provided guidance on communications regarding COVID-19 vaccinations to support the Government’s roll-out.  Employers should familiarise themselves with these requirements which include conditions around offering incentives to people who are fully vaccinated.

 

A FINAL NOTE

These issues remain a complicated area of discussion in the business community and the situation is evolving each day. We encourage businesses to seek legal advice based on their individual circumstances where appropriate before proceeding.

 

Alexandra Slimming

Head of Global Benefits

alexandra.slimming@honan.com.au

 

Jules Paolino 

Workplace Risk Consultant 

jules.paolino@honan.com.au

 

 

Flexible work: Here to stay, but have you nailed the formula?

 

 

*The TGA will provide clarity on recognised adverse reactions. 

 

Insurers’ ‘Duty of Utmost Good Faith’: Implications for Insureds’ Rights and Insurers’ Obligations

Insurance Updates

Section 13 of The Insurance Contracts Act 1984 (The Act) states that a contract of insurance is an agreement requiring each party to it to act towards the other party (in respect to any matter arising under or in relation to it) with the utmost good faith and failure to do so may result in civil penalties. 

Together with recent changes to the General Insurance Code of Practice, findings in the recent case of Australian Securities and Investments Commission v TAL Life Limited (No 2) [2021] FCA 193 (TAL case) raised awareness around insureds’ rights and serves as a guide for insurers on the extent of their obligations when assessing and investigating an insured’s claim. This piece outlines the recent findings in the TAL case and its implications for insureds’ rights and insurers’ obligations.

 

FAILURE BY THE INSURER TO ACT WITH THE UTMOST GOOD FAITH: A RECENT EXAMPLE

The application of the duty of utmost good faith was recently highlighted when the Federal Court found that life insurance provider TAL Life Limited breached its duty to act with utmost good faith under section 13 of the Act because it rejected cover under an income protection policy based on the insured’s failure to disclose her prior history of depression. A claim was made after the Insured was diagnosed with cervical cancer. Importantly, there was no real dispute that the prior history of depression was unrelated to the cervical cancer.  

The Court found that TAL failed to act with the utmost good faith, first by not notifying the insured about the investigation into her history of depression, and second, in failing to give her a proper opportunity to address TAL and any material it was relying on prior to its decision not to pay compensation. Third, the Court found TAL had failed to act with decency and fairness in reaching its decision without giving the insured a proper opportunity to supply material to TAL. 

This decision serves as a useful guide for insurers on the extent of their obligations when investigating and assessing an insured’s claim.

 

THE INSURANCE INDUSTRY & SELF-REGULATION

In a similar vein, based on a two-year review of feedback and input from member insurers, government, consumer advocates, and regulators, The Insurance Council of Australia implemented changes to the General Insurance Code of Practice (The Code) on 1 January 2021. The Code is designed to set industry standards above those required by law and may require further updates to reflect regulatory changes. Together with Section 13 of The Insurance Contracts Act 1984 (The Act), the Code is intended to maintain fairness and transparency for insureds, moving forward.

 

IMPLICATIONS FOR INSUREDS

Clause 67 of the Code sets out the standard for assessing insurance claims, specifically: “When we are assessing your claim, we will only ask for and rely on information that is relevant to our decision. If we ask you for information, then we will tell you why we need it.” 

While insurers have the right to investigate claims and request related information, it is clear from its obligation under the Act and applicable Code that insurers must: 

  • act with decency and fairness in reaching their decision
  • give the insured notice of their investigation
  • allow the insured an opportunity to address the insurer’s concerns.

 

A FINAL NOTE

The outcome of the TAL case, together with the recent changes to the Code reinforces the obligations and standards insurers are required to uphold when investigating and assessing insureds’ claims. The changes are in line with the industry adapting to better support the rights of the insured.

 

Vanessa Yap

Senior Claims Executive

vanessa.yap@honan.com.au

 

 

Learn about a recent decision set to impact some property damage claims

Regulatory Changes to Income Protection Policies: What You Need to Know

Insurance Updates

Australian Prudential Regulation Authority (APRA) is making changes to income protection policies to ensure the product can continue to be offered in the market. This article outlines the changes coming into force from October 1, 2021, and how these changes may affect you, whether you have an existing policy or not. 

 

WHY ARE THE CHANGES HAPPENING?

The income protection sector has lost more than $3 billion over the last 5 years, after paying out approximately $5 billion in claims during this period (KPMG, 2020). With generous products being offered by insurers to win business, a 53% increase in mental health claims over the last 5 years, and a 36% increase in length of claim time, changes are needed to ensure the industry and income protection product is sustainable (KPMG, 2020).

In a recent insurer webinar hosted by TAL Insurance, it was stated that the original purpose of insurance was not intended to put the claimant in a better position, but to provide a level of cover throughout a time of need. Geoff Summerhayes of APRA said, “life [insurance] companies have been keeping premiums at unsustainably low levels and designing policies with excessively generous features and terms that, in some cases, provide a financial disincentive for policyholders to return to work”. Changes need to be made to ensure the longevity of income protection policies.

 

WHAT IS CHANGING?

One key change to income protection policies occurred on April 1, 2020, namely removing the agreed value. This change means a claimant’s income is assessed at the time of claim, as opposed to at the time of application. The largest effect is likely to be felt by those with fluctuating year-to-year incomes such as the self-employed.

The biggest changes will be imposed for all new policies from October 1, 2021.  These are:

  • Income replacement ratios to be reduced from 75% to 70%. This means in the event of an income protection claim after October 1, 2021, the claimant would receive up to 70% of their income after 6 months of the claim.
  • During the first 6 months of a claim, a claimant is entitled to up to 90% of their income, depending on the policy they have entered.
  • Income will be calculated over the 12 months before the claim, compared to some current policies which use the highest rolling 12-month income over the last 2 or 3 years to smooth out fluctuating income.
  • Guaranteed renewable policies will no longer exist. Long benefit periods, such as to age 65, will be managed and reviewed to help ensure there is motivation to return to work. Insurers understand that long-term claims are costly to businesses and in effect, cause premium increases for existing clients.
  • This may include changing from “Own Occupation” to “Any Occupation” definition after 2 years on the claim. Own occupation” refers to the individual’s job when they make a claim, “any occupation” refers to an occupation the individual can fulfil, despite still being unfit for their own occupation.

 

WHAT ACTIONS CAN YOU TAKE AHEAD OF THE CHANGES?

If you already have an income protection policy:

No immediate action is required.  You will be able to maintain your policy. However, a review to ensure the policy is appropriate is encouraged.

If you do not have an income protection policy:

Until October 2021, you can still take out aincome protection policy that has a 75% income replacement ratio, an indemnity definition with the best 12 month income period over 3 years, and many additional benefits such as a critical illness benefit, defined/scheduled injury benefit, a bed confinement benefit, and minimum weekly working hours.

 

 

WITH YOU ALL THE WAY

Find out more about Income Protection and how it works in our guide Income Protection: Your Top Five Questions Answered. With the changes set to take effect from October 1, this is an opportune moment to review your existing policy or understand your options.  Feel free to reach out at any time.

 

Tyler Scarce

Risk Adviser 

tyler.scarce@honanlife.com.au

 

 

Discover more abouincome protection.

Controversial Decision on Property Damage Claims: Implications for Landlords & Property Managers

Insurance Updates

A landlord takes out an insurance policy on their rental home assuming they will be covered in the event a tenant causes damage to their property. In most instances this is the case;  if a tenant physically punches a hole in the property wall, it is considered an intentional act to cause damage. But what happens when the common requirements for a claim have not been met, specifically, that the tenant has not physically or intentionally caused damage?

This article explores a recent decision by The Australian Financial Complaints Authority (AFCA) that challenges assumptions about the way certain claims will be viewed and settled.

 

DETAILS OF THE CASE

Recently, the Australian Financial Complaints Authority (AFCA) made a controversial decision to uphold an insurance company’s denial of a claim relating to the physical and intentional requirements to cause damage to a rental property.

The loss at hand was methamphetamine contamination to a property where the landlord would have to conduct considerable repairs such as decontamination of walls and floors (including carpets) to return the property to its original state. Details taken from a hygienist’s report suggest the tenants smoked methamphetamine within the property, causing contamination to the kitchen, lounge, and bedrooms.

According to ACFA’s ruling, the tenants did not physically or intentionally cause damage, stating: 

Even if that was in breach of the tenancy agreement, that does not mean the resulting damage was malicious, ACFA said.

In this case, while the tenant smoking an illegal drug made a property uninhabitable, it was not classed as damage, but an ‘unhygienic habit’. It was noted that where tenants manufacture and sell methamphetamine from a premise and the chemicals contaminate the property, then the costs incurred to rectify and decontaminate the related areas would typically be accepted as a valid claim.  

 

IMPLICATIONS FOR LANDLORDS

AFCA’s decision may influence how the industry reviews similar cases. Landlord’s insurance has considered items such as cleaning costs to be an uninsured expense, however, it was not clear whether decontamination due to an illegal action would fall under this category.

Importantly, this decision sets a precedent, meaning in situations where there is no physical loss to the property, but costs are incurred due to tenants’ living habits (such as methamphetamine contamination), this is not considered a malicious act and therefore, the landlord would be out of pocket.

 

PRACTICAL WAYS TO LIMIT RISK

While a tenant’s living habits can mean costs will be incurred at the landlord’s expense and deemed uninsurable, there are actions landlords or property managers can take to reduce this risk, including but not limited to:

  1. Confirming regular inspections are being conducted if the property is managed by an agency
  2. Ensuring all maintenance and or damage noted during inspections is followed up and rectified
  3. The landlords maintaining the property themselves
  4. Conducting adequate background checks before accepting tenants
  5. Securing a deposit (Bond) before authorising the tenancy
  6. Issuing a breach notice if rent begins to fall behind – this shows the insurer that action was taken to mitigate the loss as per the policy’s requirements.

 

NEXT STEPS                

To discuss any concerns or questions relating to property insurance claims, please feel free to reach out at any time.

Megan Peacock

Senior Claims Executive

megan.peacock@risksmartclaims.com.au

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