Brewery Fire: Average, Business Interruption and Broker Reliance
Tomo owns a small brewery insured under a commercial material damage and business interruption policy. The sums insured are: building $1.2 million, plant $450,000, stock $180,000, and business interruption $600,000 for a 12-month indemnity period. A fire destroys the brewhouse and stock and damages 60% of the plant. The loss adjuster assesses the building's replacement value at $1.55 million and stock at $240,000. Gross profit for the coming 12 months is estimated at $900,000. The policy has an 85% average condition on material damage and a 12-month indemnity period. Tomo had expanded production in the previous six months and had not updated his sums insured. He says his broker set the figures two years ago. The insurer indicates it will apply average to the building and stock. Tomo's claim is about $2.1 million. He asks whether he can claim the shortfall from his broker.
1. Explain how the average condition applies and outline the claim assessment.
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The 85% average condition is a co-insurance test. The insurer compares each sum insured with the value at risk; if the sum insured is at least 85% of the value, no average applies; if below, the claim is reduced by the ratio sum insured / value at risk. Building: $1.2m / $1.55m = 77.4%, below 85%, so the building claim is reduced to about 77.4% of the assessed loss. Stock: $180k / $240k = 75%, below 85%, so stock is reduced by 75%. Plant appears adequately insured on the figures given, but the adjuster must verify. The BI sum insured of $600k against $900k gross profit is only 66.7%; if the BI wording includes average or a co-insurance condition, the BI claim will also be reduced, and the 12-month indemnity period may cap payments if restoration takes longer. The insurer should apply the condition consistently and explain the arithmetic. Tomo cannot simply claim the full $2.1m; maximum recoveries will be reduced for underinsurance, then excesses and any salvage applied.
2. What are the broker's potential responsibilities for the inadequate sums insured, and what should Tomo be told?
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The broker may have exposure if the sums insured were set two years ago and not reviewed after Tomo expanded production. A broker is not an insurer, but owes a duty of reasonable care and skill. The questions are whether the broker advised on sums insured, warned Tomo to review them, and documented that advice. If the broker simply recorded figures without explaining the consequences, there may be negligence. Tomo also has a duty to tell the broker about material changes. The broker should not admit liability; Tomo should be advised to gather the proposal, emails and file notes, and to make a complaint through the FAP's internal process and then the dispute resolution scheme. Professional indemnity cover may respond. Any broker settlement would be separate from the insurer's claim assessment.
3. How should the insurer handle the claim fairly under the Fair Insurance Code, and what information should it give Tomo?
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Under the Fair Insurance Code the insurer should acknowledge the claim promptly, keep Tomo informed, explain the average calculation and the policy conditions in plain language, and give him a reasonable opportunity to provide evidence (for example, a valuation or stock records). It should not delay payment of the undisputed portion. It should set out the claim decision, the amount, the deductions and the complaints process. If Tomo disputes the valuation, the insurer should consider an independent assessment. The insurer should also explain that the 12-month BI period runs from the date of damage and that increased costs of working may be treated differently. Fairness does not mean paying the shortfall; it means a transparent, timely and reasoned assessment.