Insurance is central to the survivability of any business in a disaster. We spoke with David Keys of AB Phillips about what businesses and insurers get right and wrong.
Over the last few months, around Australia, thousands of people have been feeling relieved they took out insurance policies.
It’s not a sexy topic. Few people love insurance. Yes it’s appreciated, respected and needed, but most discussions about it focus on rising premiums and the stress of making claims. Like blood pressure, it’s something we know we should focus on, but most of the time it’s hard to get excited about it, and when it is urgent, everything is a bit of a panic.
After any natural disaster, some people will find themselves under-insured, some will find their insurance company a genuine friend in a time of crisis and some will start exploring the limits of their swearing vocabulary.
TTN sat down with David Keys, director and manager Corporate Department at AB Phillips, to discuss some of the places where timber businesses could be managing their insurance better and some insider hints to make sure things work smoothly for you when the time comes to claim, as well as a few sober predictions about the future of insurance and the timber industry.
AB Phillips is a leading insurance broker and probably Australia’s biggest timber industry broker. “We deal with retail, foresters, sawmillers, fabricators, the whole box and dice,” says Keys. “So we see a lot of the broader patterns on both sides: from customers and insurance companies. The number one area where things could be improved is information sharing.”
Both personal and business policies can have problems from not being kept up to date. “In terms of when people should reassess their policies, it’s at a minimum once a year,” says Keys.
Unfortunately, most people don’t review their policies regularly. Which leads to them being caught out when disaster strikes and building, plant and gross profit insurance values haven’t kept pace with the company’s growth over time.
“Some people just keep renewing on the same levels each year,” Keys says, “or they fail to make note of the fact they bought additional equipment during the year and therefore at renewal they need to increase the value of their policy because they’ve no longer got $6 million worth of equipment, they’ve now got $7 million worth.”
While it sounds wild to forget a million dollars, it happens all too frequently as people automatically renew their existing policies rather than taking the time to go through them carefully.
“There are real penalties to under-insurance,” says Keys. “Even with a partial loss, you’ll be penalised. Basically, on that example, if the insurer says your plant was worth $7 million and you’re insured for $6 million, that’s about 85%, and so they’ll only pay 85% of any claim.”
While over-insurance is rare for obvious reasons, it does occasionally happen when people downsize and don’t advise their insurer. “People hate paying extra for insurance, because they don’t get any benefit from it, but sometimes they forget to update the values in their policy and they’ve still got historical high values that haven’t been reassessed,” Keys says.
An annual review is a minimum, but Keys emphasises that you should also get in touch with your insurer whenever there’s any notable change to your business.
“Clients really need to be checking with their broker on whether it impacts their policies, because a slight change in business activity may in fact be in breach of their policy and people don’t realise it,” he says.
To use an illustration, if you’re running a timber yard that just stores timber for sale, that’s a lower risk operation than many others in the industry. “So the insurance company puts a particular price on that,” Keys says. “But if you’re actually processing timber, that’s a much higher risk. So if you suddenly decided halfway through the year to start processing timber as well as just storing it, that completely changes the risk from the insurance perspective.
“If you haven’t advised your insurance broker of the change in advance, there is a likelihood that any claim would be denied, because the insurance company would say ‘Hang on, I thought we were insuring a timber yard, but this fire started as a result of timber processing, which is a higher risk. You didn’t tell us you were doing it, so we’re not paying the claim.’”
Some knowledge is assumed. Foresters working in bushfire areas after a fire don’t need to make a point of alerting their insurers to the changed conditions because it is assumed the insurer will be aware.
“People don’t have to disclose anything that is in the public domain or that the insurer ought to know,” says Keys. “So you wouldn’t have to disclose the bushfires, because they’re in the public domain, nor would you have to disclose what foresters do in the forests after a fire, because it’s expected that an insurance company would know what a forester does, and also what a sawmiller does and what a fabricator does.”
Any change in business that will bring about a change in risk should be discussed with your insurers, even one that might lower risk, such as a fabricator/installer adding offsite panelisation to what has traditionally been a light weight F&T manufacture and installation outfit.
“If a fabricator started to take on jobs that fabricator doesn’t normally do, they would have to disclose it,” Keys says, “because it’s outside the norm of what the insurance company would expect they are insuring. Take for example an F&T fabricator that just manufactures and has people who install their output. Their insurance company wouldn’t be exposed to the installation part of things. Halfway through the year they decide to install jobs themselves and make more money, but they don’t tell their insurer that they’re now a manufacturer and installer. It’s all added risk from the insurer’s perspective and once again a claim would probably be denied on the basis that they hadn’t alerted their insurers to the change.”
Protecting your business
Insurance can help to protect more than your buildings and equipment. Loss of profit insurance replaces income while you are unable to trade.
“Unfortunately, a lot of people either don’t have loss of profit insurance or the cover they do have has been worked out on their accounting gross profit, which is different to insurance gross profit,” says Keys.
“Everyone needs loss of profit insurance because if a business burns, the insurance company will pay you however many millions you’ve insured the physical part for, but that doesn’t happen overnight. It might take three to eight months before they pay. So what will you do for cash if you can’t trade?”
A loss of profit policy effectively pays your lost income every week or month while the claim is sorted and while you recover from the loss of income or reduction in turnover. The staff payroll can also be insured, and you can decide whether you would like to insure all your full-time and casual staff or just the permanent team.
“Most people tend to let the casuals go but protect the full-timers as they don’t want to lose good staff to the opposition,” Keys says. “If you have payroll insurance, your staff are protected. If you don’t, they can’t wait till you start trading again, they’ll have to go and get another job and you’ll lose them.
In extreme cases, circumstances can change so absolutely that it may not be possible to trade as before. Keys gives a hypothetical of forestry being banned in some areas by the government. Even then, your policy can protect you, he says: “You can’t insure against everything, but you can always insure for replacement value of what you own. The government can’t stop that. They might be able to stop you from trading again, but they certainly can’t stop you from insuring your equipment at replacement values, regardless of what legislation says.
“So if the legislation did change, and your business burned down and a policy change said you couldn’t be in forestry again, the insurance company will still pay you, but probably in cash rather than replace the goods. The government’s not going to give you a license again, so you can instead start another business, either moving to an area where forestry is allowed, or staying put and working in another field.”
While making an insurance claim is no-one’s idea of fun, it’s vastly better than not being able to make one. Keys recommends compiling as much information as possible about your business, especially the physical business, including buildings, machinery, materials and stock. Office computers and any fleet should also be on the list.
“The more information you have, the merrier,” he says. “Unfortunately, a lot of the time, receipts and those sorts of things are lost in a fire or misplaced in the clean-up. We strongly recommend keeping backups offsite. These days with the cloud and similar, it’s a lot easier.
“You don’t need hard copies and for most companies it’s already all electronic, but some of the older companies that have been trading for a long time may still have equipment bought before computers or before the internet was sophisticated and they might have the old traditional filing cabinet with everything still in there. So it’s worth going through and scanning papers. Make sure you update your backups regularly and that they’re kept in a separate, safe location or securely in the cloud.”
The faster clients can provide documented evidence of their loss, the faster the claim will be processed, but the client does need to be able to demonstrate the loss.
“You might say you had the Rolls Royce manufacturing machine, but the insurance company doesn’t know that and they’re not going to write a cheque for a million dollars on the strength of you telling them you had the Rolls Royce,” Keys says. “They’ll say, ‘Just give us a purchase order so I know that you bought the Rolls Royce and we’ll happily pay you for it.’ But if you can’t demonstrate proof of ownership or provide purchase receipts, then it can be a long, drawn-out process. They’ll take your premium for $5 million in equipment, but it’s up to you at claim time to demonstrate you had $5 million in equipment. Once you do that, they’ll quickly pay you.”
That said, most insurers know that claims are being made at times of enormous stress. Many provide staff they called loss assessors. As Keys explains it: “The insurer appoints a loss assessor to go out there and hold the client’s hand and pick up the information. Quite often the client doesn’t even have to provide the documentation, they can just tell the loss assessor, ‘this is where I bought the equipment’, or ‘here’s my account, can you talk to them?’”
It can be frustrating for clients who feel they have paid premiums for a certain amount and can’t understand why that needs to be substantiated. Keys points out that the insurance companies are bound by due diligence and have responsibilities to their own shareholders and other stakeholders. And, sadly, fraud does exist.
“But in times of large disasters like this, quite often they do issue large up-front payments,” Keys adds. “Say you had a house policy for $500,000 and contents for $50,000. They might as a goodwill gesture send you an initial $50,000 very early on just to keep you going with bills and cash flow and so on until the claim is sorted out, knowing full well the house and contents are worth more than $50,000.”
When things go wrong
Sometimes, the insurer isn’t helpful. Whether through honest error, a less-than-ideal employee or other reason, claims can take ridiculous lengths of time to be sorted, or can be knocked back in part or full for reasons that seem or are spurious. Though frustrating, there are options available.
The first one begins long before the claim. “At the risk of sounding like I’m making a plug, if you deal with a broker, the broker can deal with disputes for you,” Keys says.
“The benefit of a broker is that we’ve got thousands of policies with a particular company, so we can come in there with a big stick and say ‘You guys have to pay this.’ Most problems come about when people deal directly with the insurer. You’re just one person, representing, say, $10,000 in premiums to them. They’re not fussed about losing one client, but when you deal with a broker, if they upset us, we won’t give them any more business, and we represent millions of dollars-worth of premiums.”
If that advice comes too late, all insurers need to have what they call an internal disputes resolution division. “If you get your claim knocked back by an insurer, ask them to send it to their internal dispute resolution centre,” says Keys. “There it’s viewed by different people with a different set of eyes. Quite often that’s successful because sometimes you can get a claims person who has a bee in their bonnet about something and they interpret the policy one way and knock it back. Whereas a different division of that same company could have quite a different view.”
If that’s not successful, for small businesses there’s a free and impartial ombudsman service called AFCA, the Australian Financial Complaints Authority that regulates the insurers.
“If you’re still not happy with what the internal dispute resolution people say, you can escalate it to AFCA, and AFCA is allowed to make determinations on the claim,” Keys says. “The best part of about the AFCA determination is that it’s binding on the insurer but it’s not binding on the customer. So if they say to the insurer, ‘you have to pay that claim’, the insurer can’t dispute it. But if they say to you, ‘we don’t think it is a claim’, if you don’t like that, you can still pursue it through the courts.
“Unfortunately, a lot of people aren’t aware of AFCA. It’s not for everyone, but it can help small businesses up to $5 million.”
Insuring the industry
Keys is certain about the benefits of insurance for timber businesses but admits that this is not the easiest time for the industry, and that the future may not be straightforward, either.
“One of the major issues that insurers have always encountered with the timber industry, particularly sawmillers, is that not only is it a high-hazard occupation and environment, but most of them are located in high-bushfire-risk areas. So you’ve got the double peril of high-risk activity and high-risk area. That makes it very difficult, which is why it’s very hard for insurers to offer cover and very few do.
“Events like this fire season are only going to make it worse. I think there will be people that may struggle to get insurance or who will find themselves paying premiums that potentially could be three or four times what they’re paying at the moment.”
Insurance rates in Australia may feel high due to increases over recent years, but are in fact roughly half or even less what the identical risk is overseas. “That’s why a lot of the European insurers that used to operate here have all gone home,” Keys says. “They’ve said ‘We’re out of Australia the rates are too cheap.’ People don’t like their price going up by 30 or 40%, but on a global basis, the rates on a sawmill, whether it’s here or Canada or Finland, should be the same, however, our rates are substantially less on a global scale compared to everywhere else.
“And of course, our sawmills are located in higher risk areas when it comes to fires and floods compared to overseas. The overseas insurers have left because why would they stay here where they can get $50,000 for insuring a sawmill when in Finland they can get $150,000 for insuring a similar sawmill with decidedly lower risk? It’s just a better use of their capital.”
When asked what would happen if some of the more ‘out there’ suggestions being put forward in the wake of this fire season were made policy, such as sawmills being moved to urban industrial areas, Keys points to the upside: “Then you’d only have one of the hazards, just the high-hazard activity, not the high-hazard location. It would make it easier to obtain insurance and it would almost certainly lower the size of premiums.
“That goes for any business that’s in a bushfire area, because insurers are now focusing on locations as well as occupation. And not only fire risk but particularly flood as well. Anybody near a river will pay a lot more for insurance because they’re more likely to flood under climate change. The geography of all premises regardless of the industry is a big issue for insurance and the industry’s actuaries have very sophisticated data on what’s a bushfire area, what’s a flood area, which pockets of Australia get heavy hailstorms… All of which is being constantly worked on and updated. A lot of money goes into making sure they get accurate predictions.”
While it’s impossible to say what the future will hold, Keys recommends making regular insurance reviews a part of your business calendar: “It will almost certainly save you stress in the long run.”
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