“The sum of Turnover and Closing Stock, less the sum of Specified Working Expenses and Opening Stock”.

Following on from last month’s article in relation to how a Business Interruption claim gets adjusted, we thought it appropriate to outline how to come up with a company’s Insurable Gross Profit sum insured. Arguably the best way to do this (and to reduce the risk of being underinsured) is to take the turnover of the business, add the closing stock and then deduct the value of the opening stock and purchases during the last financial year. This ensures every other expense of the business, other than purchases, are insured.

Some policies (Typically ISR) also allow other expenses of the business, which vary in direct proportion of sales, to also be deducted.

We provide our commentary below on our opinion of their variability to turnover.

Advertising is variable in that it is a discretionary expense. During a significant business interruption in which you have no goods to sell you would typically stop advertising. Why would you create demand that you cannot satisfy? However, any savings during the initial months of an interruption will probably be eroded by additional advertising later when production has resumed, and the business wants to regain market share after the temporary absence.

The possibility of savings, even the probability of savings in a major interruption does not imply that an expense should be uninsured. Advertising is in this category. It is not directly variable with sales or production and although it might be saved in a major interruption Advertising Expenses should be insured.

Bad Debts are a normal cost of doing business. They should be uninsured because they will vary directly with sales. Suppliers and building-related trades would be in this category with lots of small customers and typically a percentage of them not paying their accounts. However, if bad debts are shown in your P&L, they can be viewed as a “one off” reduction in Net Profit which is insured, rather than typical of your variable cost structure.

Depreciation, is it an expense or is it a tax deduction? Does it vary with production or over time? Will a saving in non-cash depreciation reduce the cash settlement of a BI claim? Whatever the complications in BI claims, one thing is clear, depreciation does not vary directly with turnover or output. Depreciation should never be listed on a BI policy as an uninsured expense.

Inwards Freight and Duty (i.e. on Imports). These are expenses associated with purchases and can therefore be listed as uninsured.

Outwards Freight might not be as variable as it appears. e.g. A bakery has two ovens, one baking buns and another baking bread. After a fire in the bun oven it still bakes bread and its contractor, or its own delivery truck still makes the regular daily delivery trips to all the customers but with only partly full loads. There is a loss of sales (no bun sales) but no savings in delivery costs. Therefore, for this cost structure outwards freight should be insured.

This is uncommon, however illustrates the selection of insured/uninsured expenses is unique to each business’ own cost structure.

Outwork is the cost of sub-contracting part of a process, usually to a specialist such as printing companies sub-contracting or “outsourcing” plate-making or a garment manufacturer outsourcing “cut, make and trim functions”. It is the purchase of a service directly related to production (and sales) and like the purchase of materials it should normally be an uninsured expense. If the business is not making sales it will not be incurring this type of variable expenses.

Packaging is usually directly variable with sales and therefore can be uninsured.

Power & Gas always has a fixed cost element (fixed reticulation charges and maximum demand charges in larger users), which should be insured. Factory heating and lighting is fixed and even boiler fuel is not completely variable in many industrial plants. The boiler has to operate at similar rates of fuel usage whether the factory is running at capacity or, say, 50% of capacity. Power and gas therefore should never be listed as an uninsured working expense.

Repairs & Maintenance. If a major interruption occurs and the factory’s plant is damaged or just idle for a significant period there will be savings in repairs and maintenance. However most claims are for “non-major” interruptions in which repairs and maintenance are not saved.

If you decide to reduce your sum insured by designating repairs and maintenance as an uninsured expense it should be done so with the knowledge that it will be under-insured in a “non-major” interruptions. Sales can be lost without savings in repairs and maintenance.

Royalties are usually directly variable with turnover (therefore uninsured) but sometimes there is a fixed annual minimum that should be insured.

Sales Commissions are, in normal circumstances, variable with sales levels however if a business interruption prevents a sales person achieving budgets and earning the commissions they have come to rely on, they may resign. In most business interruptions sales reps are paid compensation in lieu of commissions and no savings result. Therefore sales commissions should be insured.

Tool Replacements, Indirect Materials, Crockery, Cutlery & Linen Replacement – Tool replacements and indirect material costs in a factory are usually variable with activity levels and we would consider them to be candidates as uninsured expenses. The same applies to crockery, cutlery and linen in a restaurant.

Wages and how to insure them is a topic for discussion on its own. It is the most difficult decision any business must make, and wages are rarely variable with turnover unless they are paid as “piece rates” for throughput or output. McKenzie Ross recommends insuring wages 100% as part of Gross Profit for the duration of the indemnity period. Wages should not be an uninsured expense or split.

If taken out as an uninsured expense, always be mindful of what your leave liability is on your balance sheet plus also what your severance obligations are. Quite often insuring this obligation can cost the same as insuring wages 100% where you get ultimate flexibility.

If you are concerned about how to correctly calculate your Insurable Gross Profit and what Uninsured Working Expenses to include, contact your Account Manager today.

 

Recent multi-level building fires in Australia such as Melbourne’s Lacrosse building and the tragic Grenfell Tower fire overseas have resulted in Federal and State governments inquiring into the potential exposure for buildings in relation to non-conforming and non-compliant building products. Governments are particularly focused on the potential exposure caused by inappropriate use of some types of aluminium composite panels.

Aluminium Composite Panel (ACP) cladding has been used on the exterior of buildings for more than 30 years. If the cladding is combustible, fire can spread rapidly on the exterior of the building and represent a significant risk to occupants and property.

A recent report from the Insurance Council of Australia (ICA) noted that insurers are providing policy cover for buildings, and premiums are set according to the residual risk (after any effective risk mitigation is considered) of damage occurring and a claim being made against the policy. The higher the probability of a damaging event occurring, the higher the premium.

Through the ICA, insurers have agreed upon a Residual Hazard Identification Protocol for the identification of residual risk presented by the use of this building material.  The following list outlines some of the key risk factors that should be considered when evaluating the level of risk:

  • The composition and combustibility of the ACP core material;
  • The building height and occupancy;
  • The amount of ACP cladding and its location on the building;
  • The extent of continuous vertical sections of ACP cladding on the building;
  • The type of substrate and/or insulation located behind the ACP;
  • Proximity of ACPs to balconies and other potential fi re ignition sources;
  • Installed building fire protection and fire detection systems;
  • The Fire Resistance Level as defined in the Building Code of Australia of the building construction and fire compartments;
  • The distance from nearby buildings not protected by fire sprinkler systems;
  • Installed building emergency warning systems and fire exits; and
  • If the building design is based on Alternative Solution provisions of the Building Code of Australia by a fire safety engineer.


Identification of materials

The identification of Aluminium Composite Panels is the critical first step in the process of identifying the potential hazard to life and property presented by the ACP. It must be undertaken with an almost 100 per cent confidence of the results.

The primary purpose is to accurately classify and quantify the materials present in order to determine the fire load along with its location and proximity to ignition sources.

Fire Risk Considerations

The risk factors noted previously can influence the rate and extent of fire spread. A rapidly spreading external fire increases the likelihood of major building damage and can impact of the safe evacuation of building occupants.

Continuous sections of combustible Aluminium Composite Panels provide a pathway for external fire spread. In addition to combustible ACP cladding, combustible insulation materials located behind the ACP add to fire load and can increase fire intensity.

Fire sprinklers systems for residential buildings, offices, educational institutions, hotels and hospitals are typically designed to operate over a relatively small area. For residential buildings, the design can be based on as little as 4 sprinklers operating.

Remedial Actions

Remedial actions (if any are required) will be different from building to building and dependent on the category of ACP and insulation installed. Depending on the quantity of ACP installed, its configuration and installation, there is the potential for actions to be taken that would not necessarily involve 100 per cent replacement.

Inspections, assessments and reports commissioned by a building owner to determine the risk associated with the presence of ACPs on a building should be carried out by competent fire protection professionals and including fire safety engineers.

A consistent methodology able to be accepted by the broadest possible regime of underwriters and other building professionals is essential.

If you have any questions on the potential exposures your building may have to Aluminium Composite Panels, contact your Account Manager today.

 

Machinery, Plant and Equipment, Stock, Items ready for despatch?
What do you consider the most important part of your business is and what makes you lose sleep at night?

In some cases, Management do not consider their employees as “valuable assets”.

Your employees are the back bone and most important part of your business. Without this valuable asset, your business would not exist.

Think about the time and effort you invest in training and upskilling your employees and the cost of replacement should one be injured due to a work place accident.

Sure, accidents do happen but in a lot of cases they can be avoided through the implementation of a robust Risk Management and Occupational Health and Safety Plan.

In Australia there are many workers compensation schemes, one for each State and Territory including Comcare & Seafarers Insurance.

Each scheme has its nuances and all are based on a no fault system.

If you have employees located in different States or Territory’s within Australia you are legally required to take out a Workers Compensation Policy.

Failure to do so may result in hefty penalties and in some cases the actual cost of the claim.

It is therefore imperative that you have the appropriate Workers Compensation Program in place.

Should you require advice in respect to your workers compensation insurance program or to obtain assistance for a Risk Management or Occupational Health and Safety assessment please contact your McKenzie Ross account manager.

Victoria – News Update

WorkCover Victoria is currently conducting a contract review with the current insurers who manage the scheme.

Initial tender responses have been lodged by existing insurers together with potential new players.

We understand that a “shortlist” will be announced around April this year with the announcement of the successful insurers to follow.

Implementation of the new insurance panel is likely to start on or about the 1st July.

We will keep you informed of developments as they occur and how they may impact on your business.

Over the last 15 years, significant losses have occurred associated with large fires where sandwich panels (EPS) have been a feature. Whilst many are related to businesses within the food manufacturing sector, a high profile fire in the Lacrosse Apartments in La Trobe Street, Docklands was found to have been fuelled by the use of external polystyrene cladding which caused more than $2 million in damages.

Over the last 15 years, significant losses have occurred associated with large fires where sandwich panels (EPS) have been a feature. Whilst many are related to businesses within the food manufacturing sector, a high profile fire in the Lacrosse Apartments in La Trobe Street, Docklands was found to have been fuelled by the use of external polystyrene cladding which caused more than $2 million in damages.

The fire began from a cigarette on a balcony of the eighth floor of the Lacrosse Apartments on November 25 2014, and spread quickly to the top of the building. All building residents were successfully evacuated, and the MFB acknowledged that the building’s sprinklers, smoke detection and early emergency warning systems operated well within their designed capability.

Expanded polystyrene is flammable. Polystyrene is classified as a “B3” product which means it is highly flammable or “Easily Ignited.” Although it is an efficient insulator at low temperatures, its use is prohibited in any exposed installations in building construction unless the material used is flame-retardant.

Normally in an exposed construction, EPS is concealed behind drywall, sheet metal or concrete. The sheet metal can be either aluminium or metal. The cladding used in the Lacrosse Apartment building has been found to be imported from China and does not meet Australian standards.

In the past two years, there has been two multimillion dollar fires in Australia involving this type of material, The Lacrosse Apartments mentioned above and a food manufacturing fire in Queensland.

This has made the insurance industry cautious around risks where EPS is present. The result is effectively a shrinkage in capacity with some insurers pulling out of the market altogether. Those willing to insure EPS risk do so under strict underwriting guidelines and risk control measures.

Sandwich panels do not start a fire on their own, and when EPS gets implicated in a fire spread, it has generally started in a high risk area such as a cooking facility and spreads as a result of poor fire risk management, prevention and containment measures. As such, prevention of ignition and containment of early fire spread are critical. In reference to EPS, we note as follows:

  • EPS panel ceilings are very susceptible to fires starting beneath them;
  • Fires under EPS panel ceilings spread very rapidly, the fire spreads across the ceiling as the panels progressively delaminate and the EPS melts and vaporises to fuel;
  • Fires can also spread inside wall and ceiling panels, before bursting out at the panel seams.
  • The fire load from EPS wall and ceiling panels is enough on its own to cause deformation and collapse of major steel roof beams;
  • Fire brigades are unlikely to contain a developed EPS panel fire as they will not enter the building due to the risk of collapse.

When considering risk acceptance and pricing, a major factor considered by insurers is a recognition that the business is proactive in minimising their own risks and not solely relying on an insurance company if anything goes wrong. Whilst this is pertinent for EPS risks, it’s also relevant for all industrial businesses. Every operator should have a carefully created risk management plan for the building and businesses associated operations.

Sound Risk Management plans for industrial risks should include:

  • hot work controls;
  • cold work’ controls for work carried out on insulation;
  • electrical installation and maintenance programmes including thermographic imaging;
  • dedicated fork lift charging areas;
  • management of cooking equipment;
  • housekeeping practices including not storing combustibles against the outside of the building;
  • regular building inspections and prompt repair of damaged insulation panels;
  • when cutting holes in EPS panels for services ensuring the exposed EPS is ‘sheathed’ or a collar is fitted;
  • plant maintenance, and where ammonia is used, providing gas detection;
  • site and premises security;
  • general awareness amongst staff and management of the potential problems, and how to action risk improvement.

Your McKenzie Ross broker is always available to provide insurance and risk management advice. We have an uncomplicated commitment to drive efficiencies, consistently achieve benchmarks and create value for our clients. If your risk management plan or insurance program needs reviewing, why not give us a call?

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