Bridging the gap
Operators should check that insurance policies contain 'new for old' clauses
HFW's Costas Frangeskides discusses the important aspects of property and business interruption cover
Prudent port and terminal operators purchase global industrial risks insurance policies which incorporate cover for property damage and any resultant business interruption losses. But the smallprint can contain a host of overlooked limits and liabilities.
The general rule under English law is that the insurer must make good the damage to the insured property by making a payment of a money indemnity to the insured or, if the insurance policy allows it, by way of "reinstatement" of the damaged or lost property. By reinstatement is meant the repair or replacement of the damaged property.
The idea behind giving the insurer the right to insist on reinstatement is that it may be cheaper to reinstate than to make a money payment. The insurer must however choose to reinstate within a reasonable time, failing which it may have lost the right to reinstate.
The indemnity is generally defined as what it would cost to put the insured in the position he was in before the loss (e.g. to pay the cost of repairs so that the port operator has a fully working crane). However, an alternative measure for indemnity is the difference between the value of the undamaged property and the value of the damaged property (where the value of the damaged property is calculated by subtracting the cost of repairs from the repaired value of the property).
The issue which sometimes arises is where the insured does not want to repair the property or even to have it replaced, but rather wants to replace it with a new and much improved version. In these circumstances the insured does not want the insurer to elect to replace the property, or to repair it. Instead the insured wants the insurer to contribute by paying what would have been the cost of the repair.
In such a scenario it will of course be difficult for the insured to demand a cash indemnity, if the insurer has the right to elect to reinstate, as described above, and does so elect. It is therefore important that the insured appreciates the nature and scope of the cover it has purchased, including whether the insurer may have the right to reinstate rather than pay a money indemnity.
A policy will often define "reinstatement" differently depending on whether the property is damaged or is a constructive total loss or has been destroyed i.e. is an actual total loss. So, for examplHowever, again, this does not mean that it will be replaced by the latest and most technologically advanced new property but rather the most equivalent new version of the property which was lost or destroyed. In such circumstances, an insurer electing to "reinstate" a destroyed property will replace it with a similar, new item. On the other hand, if the property is damaged, the policy will often define "reinstatement" to mean only the "repair" of the damaged property. However, an insurer electing to reinstate a damaged property will be obliged to restore the damaged part to a similar standard the damaged part was when it was in before it was damaged or (if there is a "new for old" clause) when it was new.
There is also the issue as to whether the insured can claim a "constructive total loss" (CTL), i.e. where the cost of repairs exceeds the repaired value. In those circumstances, the policy may allow the insured to claim a replacement on a "new for old" basis. However, the insured may need to give notice of abandonment to insurers, and will usually need to do so if the policy is a marine policy, although there are exceptions to this rule.
Also, under some policies an insured may be obliged to notify the insurer by an express contractual provision that it is electing to treat a loss as a CTL. The insured must also be careful not to take any steps which could be construed as waiving its rights to claim a CTL for example where it proceeds with formal repairs.
In recent years, as businesses outsource more, the focus is on business interruption as a result of the inability of these suppliers to service customers as well as other interruption of critical services. Therefore, businesses increasingly also have contingent business interruption cover often triggered by non-physical damage events. For example, the floods in Queensland affect port and terminal operators since it disrupts the transport of commodities, such as coal supplies, for export.
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