Loss of profits cover is the prudent route

Insurers see escalation of claims in the R2m-R2.5m range JOY ORLEK INSURERS ARE taking a knock in the capital equipment sector as growing import volumes translate into growing numbers of hefty claims. Poor planning and execution seem to be at the heart of the issue and risk management is now more crucial than ever, says Johannesburgbased Eikos director Hugh Reimers. While some fingers point to the freight sector, Reimers believes it’s also an infrastructural problem. “Our roads are not in good condition and the level of skill in various sectors of the logistics chain seems to be deteriorating. We’ve had big cargo literally dropped off ships this year and a number of claims for machinery hitting bridges and or trees, which is indicative frankly of poor planning and carelessness.” Complicating the issue is the rise in the number of second hand machines being imported. “Local manufacturers are upgrading their plant with equipment that’s been in operation overseas for some time – and that means you have dismantling risks at source and re-erection risks at destination. “They’re also in many cases insuring these goods on a new for old basis as replacements are not always readily available. This leads to additional risk management costs at the preshipment stage which need to be budgeted for, as well as additional complications when losses arise.” And it’s not only the volume of claims on capital equipment that has escalated – it’s the severity of the claims as well, says Reimers. “We’ve seen more claims in excess of R2m– 2.5m in the past year or so than we’ve had in recent memory – and it’s a situation that insurers can’t continue to carry at the current premium levels.” Reimers predicts that the premiums for this type of equipment will need to increase. “SA insurers have also been hit quite badly this year with losses related to the Napoli and Agulhas and as a result they're starting to talk the rates up.” From a client perspective, the focus must fall on risk management, says Reimers. “Act as if uninsured – insurance should be seen as the last resort.” And this means employing contractors who are experienced in the movement of sensitive and heavy or abnormal loads and who have the right equipment to ensure safe delivery. According to Reimers, the damages he has seen appear to have occurred largely after discharge. “In a limited number of instances suppliers have had to carry the blame for not having packed the goods properly, but in general the losses have been local and that’s purely a decline in skills levels and risk management possibly as a result of the increase in project cargo coming into the country.” It’s also important for importers to understand the limitations of an insurance policy when it comes to time-sensitive projects, says Reimers. “Specific additional cover is available in the market but is very seldom taken up because it seems to be expensive during the planning stages of a project and the risks seem remote. When the goods arrive damaged and there’s pressure to get plant up and running by a particular date, the value of this type of cover becomes clear. Unfortunately it’s often too late when this becomes apparent.” Lead times for replacement or repair (if the plant needs to be returned to source for repairs) are long and suppliers of new machinery are generally unhappy about local engineers carrying out these repairs. These additional costs incurred to ensure that a project is not delayed are not generally picked up by the standard marine insurance cover. “Importers need to be very careful about the cover they buy and must not think that by saving a few thousand rand on a big project by not buying advanced loss of profits cover they are necessarily saving money. “We’ve had a recent example where a client was required to incur additional uninsured costs of approximately R80 000 to ensure the project was not delayed whereas the premium to procure Advanced Loss of Profits cover (which would have provided the cover) was well below this cost. “Shippers should be looking beyond merely covering damage to the equipment and recognising that the consequences of delays are often more serious.”