What is Insurance? Things that all Engineers should know about Insurance

What is Insurance? Things that all Engineers should know about Insurance

 This Article is based on a discussion held by me with the well-known Insurance Consultant/Loss Adjuster/Presenter, Eng. Sreenath Bandula. Amarasekera C Eng. via Skype.

Interviewed by,

Eng. M. K Chandrasekera/Lusail City/Qatar

 

This Article is based on a discussion held by me with the well-known Insurance Consultant/Loss Adjuster/Presenter, Eng. Sreenath Bandula. Amarasekera C Eng. via Skype.

Q: What is Insurance?

A:It can be generally described as ‘an economic device for reducing and eliminating risk through the process of combining a sufficient number of homogeneous exposures into a group in order to make the losses predictable for the group as a whole’.

 Q: What is risk as understood in the Insurance practice?

A: It could be described as ’a condition in the real world in which there is possibility of loss. In another way it refers to ‘the property/asset insured’ or ‘the peril insured against’ as applicable to insurance practitioners.

Q: I did not understand what you meant by ‘peril’

A: Peril is the cause of loss. Usually, an Insurance Policy covers a number of perils.

Q: How does one quantify the Risk?

A:Risks applicable to a Policy is determined by applying the ‘law of large numbers’ or in other words ‘the probability analysis’. In the Insurance companies there is a group of professionals called Actuaries whose job is to analyse the risks applicable to each policy and to determine the Premium to be charged for the Policy to provide covers for the identified risks.

Q: What do you mean by a Premium?

A:It is the payment the Policy holder is asked to pay for an Insurance Policy. It can be a periodic payment or once and for all payment.

Q: Are any types of Risks Insurable?

A: No. Depending on the Client’s brief, the Insurer will assess the Insurable risks and inform the Client what and what risks could be covered depending on the Premium he/she is prepared to pay.

Q:  Could you elaborate it a little more?

A: Insurance Policies cover the types of risks which are ‘sudden’ and unforeseeable’. For example, if you are a known heart patient the Insurer may not insure you against death due to a heart attack. However, a healthy person will be insured against sudden death due to heart attacks. Client is required. Insurer expects the Client to answer all questions given in the Application form, truthfully. In case of doubt, when a Claim is made, Insurer will deploy Investigators to verify if there were any wilful non-disclosures in the Application.

Q: Insurance Companies? Do they perform a social service or operate with profit motives?

A: They are business companies with profit and growth motives.

Q: If they operate on profit motive, how can a customer obtaining an Insurance Policy expect a fair deal?

A: That is a good question. Fair deal is limited only to what they agree to cover in the Policy. They will never compensate your full loss. Compensations will be always subject to ‘excess’ and ‘exclusion’ Clauses indicated in the Policy.

Q: What do you mean by Excesses and Exclusion Clauses?

A: ‘Excess’ is a specified amount indicated in the Policy. Client will agree to absorb this amount by himself. From each Claim, the Insurer will deduct this amount when making payments.

      Justification for doing so is,  because the expenses incurred by the Insurer to process a Claim of small value will be out of proportion ompared to the value of the damage assessed.

    ‘Exclusion’ means an exempted risk indicated in the Policy. The exclusion clauses are given as attachments to the standard Policy Formats .For example, a Policy issued for a motor vehicle which is ‘fully insured’ may contain an exclusion clause for damages caused due to ‘floods’. Client may simply assume that since his vehicle is fully insured, he could claim the damages caused to his vehicle due to a flood. But the reality is that it is not, unless you have obtained ‘flood cover’ by paying an additional Premium.

     In addition, the Policy will have clauses to ensure that the Insured will take due care of the insured asset  and take all precautionary measures to avoid or minimize the damages caused due to a particular  occurrence.

    In short, the term ‘fully insured’ is totally misleading.

Q: What do you mean by an ‘occurrence’?

A: An’occurrence’ is defined as a happening that progresses and ends within a certain period of time. To suit different Perils, the Policy will specify the durations of ‘occurrences’.  As an example, the damage caused by a flood might be linked with the duration of a rainfall event. You can make only one Claim for the damages caused due to the specified duration of the occurrence.

Q: What are the roles of the Insurance Agents, Marketing representatives and the Insurance Brokers??

A: An Insurance Agent is a person or an entity who will get a briefing from  a party requiring an Insurance about his need is and  then explain about the types of covers available. They will assist in the paper work, payments and also will deliver the Policy to you saving your time. For their service, the Insurance Company will pay a commision to them.  However, whether you go through an Agent or directly deal with the Company, the Premium charged by the Company from you will be same.

     Marketing representatives are those who go to the doorsteps of the prospective Clients and convince the Clients to accept a particular package at a negotiated price. When Reps working for several companies visit the same Client, they try to beat each other by offering discounts. An unsuspecting Client who may agree to the lowest premium deal,  may suffer in the end, since those cut price Policies will invariably have some exclusion Clauses to limit the compensation.

     Insurance Brokers are those acting with the authority of Insurance Company. They could negotiate a package, accept money and issue a Policy signed by them.

     Company pays them the standard Brokerage fee of 3%.

     They are also allowed to keep the money and the Policies issued by them for a specified period without handing over to the Company.

     In Sri Lanka, up to recently, the Brokers were allowed to keep the money and the papers for six months. This period has been recently reduced to 2 months, after insured parties made claims based on such policies while the company was unaware of the existence of such policies until the time the Claims were received.

Q: That means there is hot competition among the Insurance Companies for business?

A: Yes, of course. Currently there are about 24 Insurance Companies in Sri Lanka. All of them try for the most rewarding deals. There have been many incidents of Insured parties having been taken for rides by the ‘cut throat’ Policies  promoted by the Marketing representatives or issued by some of the brokers.

Q: In such backdrop,   as a layman, what factors should one consider before going to a particular Insurer?

A:.One consideration would be to  go by the declared Rating of the Companies. It will give an idea of the stability of the Company. However, there is no guarantee that the best rated Company will give the best policy due to prevailing price war among the Companies. In the end, the loser will be the party who obtained the Cover as the Company could reduce the amount paid by using of some hidden Clauses that they had introduced to compensate the lower premium charged.

     It will be good for you to read the Draft Agreement. These Agreements are deliberately printed in very small font. However, you should try to read it in full and ask a lot of questions from the persons you deal with, at an Insurance Company, before you obtain the cover. Once you sign the papers and make payments,you are restricted by the Clauses in the Policy

Q:  Once you obtain an Insurance cover against a certain risk can you rest assured that any loss  caused due to incidents covered by the Policy could be recovered from the Insurer?,

A: No. No. You have to check the Policy to see what protective/preventive action you are required to take, to safeguard the Insured Asset from the named Perils. If you neglect this, your chances of getting fair compensation  may not be realized.

Q:  If some damage was caused to the Insured Assets due to an occurrence which could be classified as ‘sudden and unforeseen’ as defined in the Policy, what is the procedure you should follow to get a Claim?

A: First and foremost, you should inform the Insurance company of the damage as soon as possible. You should not disturb the damaged asset, until inspected by the investigators sent by the company, unless there is danger to someone’s life or safety. You will have to obtain the services of a qualified/competent person to work out the cost of the damage estimated together with any supporting evidence(for example the  rainfall records, in the event of a flood damage) and submit a Claim to the Insurer in accordance with their prescribed forms.

     The Company appointed investigator (Loss Adjuster)  will eventually come to inspect the damaged asset. He will ask pertinent questions to which candid answers should be given. He may collect original construction drawings (if any available with you), does surveys, take measurements, photos etc. interview the witnesses if any. Make inquiries from the statutory authorities like the Police, Meteorology Department etc.

Q: How will a Loss Adjuster make a fair estimate of a Loss?

A: As per my answer to your previous question, when the Loss Adjuster visits the Site, he will collect the necessary information. This entire information gathering will have to be done in one visit. At times, the Insured parties will refuse to give even the available details. At times the Loss Adjuster  will have to make risky manoeuvres such as climbing to unsafe heights without any personal protection attire,  to creep into dark places, hollow towers, underground basements etc. Since you will have to go to all kind of odd places near and far and sometimes abroad you cannot pre plan anything. Whenever you go to faraway places like Seruvila, Kilinochchi, Mannar etc. you will have to rough out. In my case, very often, irrespective of the distance, I try to complete the information gathering as quickly as possible and return on the same day Fortunately, I have a reliable driver, who is my assistant and the companion.. When I go to Resorts in Maldive Islands, soon after I disembark in Male, I will fly by seaplane or get a sea ride by speedboat to the destination. Those are very risky trips. Same day or the following day I do as much work as possible and return on the following day. Some Clients attempt to mis-lead us and try to hide some evidence. They also make highly inflated Claims.

     In the case of damages to roads under construction, caused by Landslides etc., by the time you reach the damage site, all the debris has been removed and the road cleared for traffic without leaving an evidence of the damage. In such cases, the Loss Adjuster will have to ask for ask for available records such as pre-damage survey cross sections, if any, design cross sections and current cross sections etc. to make an estimate of the extent of damage. If the damage is within the design excavation section which the Contractor was anyway required to remove under the Contract, then we could recommend compensation for debris clearance only.

     Other difficult exercise is the determination of the value of the asset at the time the damage occurred. Since the Asset is seen in the damaged form, Loss Adjuster will have to develop a replica of the Lost /damaged Asset by way of Drawings and Sketches. He will have to then prepare a Bill of Quantities of the damaged parts. Then derive rates for each Bill Item and Value the Loss. In some of the Policies, the value will have to be the depreciated to  the present value at the time of loss. In some other Policies, it should be the replacement cost. However, the replacement will be only to bring back the asset to the pre-damaged condition, without involving any modernization. All this is not very simple. In some policies, the loss of business too is covered. It will need another study.

     Next step is to find whether the cause/s is/are within the named Perils in the Policy barring any exclusion clauses. In a way it is similar to the role of a forensic doctor. In some countries there are Engineers called ‘Forensic Engineers’ who have specialized in this field.

     In some Insurance Policies certain very common Perils are placed within the exclusions. For example in the landslides which occur in roads under construction, Items such as ’debris clearance’ are in the exclusions). Hence the Insured will not get any compensation although they have to incur a large sum of money for restoration work.

Q: Will the Insurer accept the Loss Adjuster’s report in Toto?

A: Never. They have their in house staff who will scrutinize the Loss Adjuster’s Report thoroughly and seek various clarifications. Not only that.  When the claim values are large, even the Insured parties sometime retain experts when they find the amount recommended is less than their expectations. In fact, the Claim preparation too is a very complicated process, which could be handled only by competent persons.

     There were many instances where I was required to defend my Reports against cross examinations by hordes of expatriate Claim Consultants, in the number of cases I handled, especially in those related to damages caused to holiday resorts in Maldive Island

Q: Are there any compulsions by the Insured party to boost up the Loss estimation?

A: Why not.

     But, if you want to earn the reputation of the Insurers to ensure that you get assignments from them, 100% integrity is required. They have various sources to check how you act in handling the given assignments. If you get one black mark from even a single case, you will loss your good will built up with the other companies too. The expectation of the Insurers is to get out of a Claim by paying the smallest amount of compensation but without losing their customers. When the Claims are submitted by valued customers, at times they go to the extent of making ‘ex gratia payments’  even when the Claims could not be paid in accordance the agreed  Policy conditions.

Q: We hear very often the stories of Clients who are unhappy about the payments they received. From which it appears that the winning of an Insurance Claim is far more difficult than obtaining a Policy?

A: Yes, I too have come across many such instances. After all, Insurance is not a social service, but a business. Eventually they will have to earn profits while remaining in the good books of the Clients. That is why, they will have a number of restrictive clauses in the Policies. The people who deal with when you buy the Policy are not the people who handle the Claims.  Claim evaluation persons will try to award the minimum amount payable within the provisions of  restrictive Clauses contained in the respective Policies.

     To guard  against unexpected large payments, Insurers themselves obtain re – insurance covers from bigger companies operating in other countries. When the local firm makes a claim to the Re- insurer, they too will subject the local company valuation to thorough scrutiny before obliging with such requests. If there is no such safeguard, the Insurance business may collapse.

Q: Aren’t there Insurance Regulators who have powers to regulate the Insurance Business?

A: Yes. In Sir Lanka, we have the Insurance Board (IBSL) who is the regulatory authority. In addition, there is an Ombudsman to whom the aggrieved party could make representations, if they feel that an Insurer victimized them. Ombudsman’s role is similar to that of a Mediation Board, who will try to get the two parties to an amicable settlement.

Q: Do you handle cases involving all kinds of losses?

A: This is a very vast and a highly specialized field.  My activities are generally limited to civil engineering structures, roads etc. At times, some Insurers compel me to handle certain losses to electro/mechanical assets too. With my background knowledge and long experience, I was able to successfully handle a few such cases too.

Q:  In a Civil Engineering Project, what are the standard Insurance Policies Contractor is expected to obtain?

A: If I confine myself to Civil Construction Contracts, the standard Covers should be: 

a.       For the Work already completed and the materials stockpiled

b.      Temporary work such as offices and similar facilities provided  under the Contract.

c.       Machinery and Equipment mobilized for the work.

d.      Damages caused due to the construction to adjacent properties  belonging to outside parties(third parties). 

     All above are loosely identified as; ‘Contractor’s all risks’. 

     Contractor’s workers are covered by a separate Policy called ‘Workmen’s Compensation Policy’ provisions of which are in accordance with the prevailing Labour Laws.

Q: If a failure occurs due to a Design fault during construction or the Defects Liability period, how could the loss be compensated?

A: It should be the duty of the Designer to obtain a Policy called ‘Professional liability Insurance Cover’ to look after himself from the failures caused due to faulty design. It is customary for Design Firms to obtain Professional liability Insurance Covers and to keep them updated annually, since, you will not know when a failure will occur and you will be sued. The sum insured should be proportionate with the annual average value of the work performed by you.

Q:  Nowadays, we find a lot of property development Projects in which the end user is neither the developer, nor the designer or the Contractor? If the and end user suffers due to a design or a construction failure after several years of occupation of the facility, who will compensate his damages?

A:  This is a very good question. In these cases, several different parties will be involved.

a.       the Developer

b.      Architect

c.       Structural Designer

d.      Contractor

e.       Banker

f.       End User

Initially, the Developer will have agreements with the Architect/Designer. The Developer will have Agreements with the Contractor. Upon completion of the construction, the Developer will arrange a loan Agreement between a Bank and the end user, collects his sale prices and gets out. Finally, the end users will form a Condominium management association and that association will look after the normal maintenance,

Contractor’s liability for the structure will cease at the end of the Defects Liability Period. Developer’s liability will cease once the ownership of the units are transferred to the buyers.

One safeguard the buyers could have is to ask for a decennial liability type of a Policy from the Developer, before purchasing. But unfortunately in Sri Lanka, no Insurance Company markets this type of Policies since the premiums to be charged for such policies will be high and as such, no developer will come forward to buy such policies, even if the Insurers offer them. This type of Policies will safeguard the Interests of the end user caused due to design or construction defects through  specific period of time; e.g. 10 years.

Q:  In the case of Civil Engineering Project related Insurance Policies, what are the principal shortcomings that you have observed in the Policies currently obtainable from the Insurer’s in Sri Lanka?

A: I think this question is on how these shortcomings will affect the customer in a claim issue. Let me list out as follows.

a.       As I mentioned before, Insurance is a very competitive Business. All the Policies are subjected to a written set of Conditions. Any party going to an Insurer should carefully read the Clauses of the Policy before signing of the Agreements. If any questionable/ambiguous Clauses were found in the Draft, those should be well clarified beforehand. Depending on the clarifications, they may add extra perils (such as flood cover, debris clearance cover, which are not in the Standard Format), for which you may have to pay an added Premium.

b.      The Insured Party shall be well aware with the specified precautionary measures he is required to take in terms of the Policy. If he fails to follow the same, then he may lose his Claim or part of it.

c.       Once a damage occurs, you  should inform the Insurer as soon as possible. Unless there is danger to any life or it causes an obstruction to third parties (e.g. obstruction of traffic flow on a road caused by an earth slip), you should not disturb the damaged asset, until it is seen by the Loss Adjuster.

d.      A competent person should prepare your Claim. If the Claim contains questionable Items, deliberately suppresses the true facts or omits to consider some of the damages, you may not succeed in the Claim or may get a lesser compensation..

Q: What are the Qualifications for one should obtain to become a Loss Adjuster?

A: In Sri Lanka, there are no such specialized qualifications. Loss adjuster should be a person who could make quick and fair guesses about the causes of damage. He should have the ware withal to make a fair estimate of the Loss. He should be a person who could reach the damage site promptly by any available means. He has to quickly adjust to erratic work culture to suit the case in hand. He should make investigative inquiries from the affected party as well as the eyewitnesses, if any and the line agency officials in the locality. He should be technically competent in the Designs as well as the Construction aspects. He should be a researcher, always on look out for the necessary literature. He has to have a 100% integrity and should be unbiased in making his opinions. All the opinions will have to be logically reasoned out backed by the technical details.

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Q:  Why do you remain as an Individual Consultant? What prevents you from expanding your activities by retaining juniors, support staff etc.?

A: In my opinion, this is a profession, which could not be handled based on information gathered by third parties. What is the guarantee that the person whom I send to a particular site will gather all the information pertaining to the case? We cannot go to these places repeatedly. Everything should be collected from the first visit. Most of the Drawings I produce pertaining to my Investigations are prepared with the help of: any construction drawings obtained from the Claimant, the photographs I take, the measurement taken at the site, the notes I make at site  and from what remained in my memory. I cannot trust another person’s capacity in these attributes. Some of our Reports are questioned by the Courts of Law. At times, we are required to give expert evidence in Courts. I could not do such things if I did not personally handle everything.

Q: I am aware that you have become a ‘most wanted person’ by all the Insurance Companies operating in Sri Lanka as a Loss Adjuster and also by the State Agencies as an Advisor on Insurance related matters? What is the secret behind this demand?

A: I believe that it is mainly due to their trust on my Integrity, the quality of reports I produce and my ability to defend the contents given in same.

Q:  In the end, what is your advice to a prospective Loss Adjuster who wishes to enter this Profession?

A: Firstly he has to be at least a mid career level Engineer, who has wide experience in his field.  He has to be already a Chartered Engineer since there is no chance for you to get the Charter, once you get into this field. If you wish to change to another form of employment after sometime, which too will be difficult since an average Employer may not value this experience? Overseas experience, such as gulf experience, will be an asset. the experience I gained in working in Saudi,  has been very useful, in my case. You have to have much patience and eye to detail. You must be IT savvy and know your AUTOCAD. Above all, a high standard of spoken and written English knowledge is  a must.

Thank you very much for patiently answering all my questions. I wish you would be able to provide this unique service to the society for a long time.

I am aware that you are being called for presentations by many parties as only few persons  seem to have gathered such vast knowledge in this field.

My only concern is who will carry forward the wealth of your experience to the future generations.

Thank you.

Interviewed by,

Eng. M. K Chandrasekera/Lusail City/Qatar

19^th September 2012