Is your forest insurance cover still suitable?
Jo McIntosh, New Zealand Tree Grower August 2015.
There is nothing like a significant disaster to get people rushing to review their insurance cover. That sinking feeling and wondering if you are covered is never a good experience. Rather than that uncertainty, we recommend taking a little time each year, when your insurance policies are due, to review and consider your risks.
What has changed? What new assets have you bought? What new contracts have you signed? Does your liability placement still reflect your activities? What is happening outside your business, such as law changes or court cases which might affect your risk, liability and insurance requirements?
Forest owners are in many ways at the coal face for some of the pending regulatory changes. In particular, the focus on health and safety, an increasing emphasis on the Resource Management Act, and the unique way in which rural fires are funded under the Forest and Rural Fires Act are all contributing to make forest owners liability risk higher than many others.
This article reviews the potential effect of these changes. If it has been a while since your last insurance review, the chances are that your insurance cover may not be suitable for the current environment.
What liability cover do you need?
The insurance cover you need is going to depend on your business activities, your appetite to carry the risk yourself or transfer risk to insurance. We would suggest that at the very least, all forest owners should have public liability cover and statutory liability cover.
Public liability policies, also known as general liability, provide you with protection against claims of unexpected and unintended third party personal injury or property damage for which you become legally liable as a result of your business activities. A common example is the liability associated with fire spreading from your property causing damage to neighbours. Most public liability policies will also include a limit for liability under the Forest and Rural Fires Act. The standard default limit most insurers include for the Forest and Rural Fires Act is $250,000.
As outlined in some of my earlier articles, that limit is too low for most forest owners. Every year on a number of occasions we see the cost for extinguishing a significant fire exceed $250,000. In fact, over the last six months, there have been multiple fires for which control and extinguishing costs exceeded $1 million in each case. It is important to be aware that the Forest and Rural Fires Act can make owners of forests, small or large, strictly liable for fire-fighting costs regardless of fault. For this reason you need to carefully consider your Forest and Rural Fire Act cover and the limits.
Statutory liability is an increasingly important policy for forest owners. A statutory liability policy provides protection to businesses for legal defence costs associated with alleged breaches of most Acts of Parliament and most other statutes affecting commercial activities.
The policy also pays the costs of representation at an investigation or inquiry. For most Acts the policy covers any fine or cash penalty payable by the insured following conviction for an offence under the insured statutes.
The notable exception is that you cannot insure fines under the Health and Safety in Employment Act. However, while it is not possible to cover any fine, the policy can still extend to defence costs and awarded reparations.
Safety and the RMA
The big governmental and regulatory focus at the moment is in respect of health and safety. Forest owners need to be very vigilant and ensure that they have robust health and safety procedures and systems in place, particularly when they have work undertaken on their sites. The pending increases in fines and penalties are significant.
However, consideration of other statutes is just as important. For example, the Resource Management Act is another common area of liability for forest owners. Aon have a specialised forestry team and understand the claims process, what can go wrong and why. Some recent claims we have been involved with include the following −
- A quality forest operator, who had previously been the recipient of an environmental award. Suddenly, and much to their dismay, they inadvertently contravened council bylaws and were held liable for a land use contravention under the Resource Management Act. The result involved a claim payable under the forest owner’s statutory liability policy.
- A forest owner engaged a contractor to harvest their forest.The contractor in turn engaged a sub- contractor who caused a fire on their plantation. The sub-contractor’s liability policy included strict warranties, which had not been fully complied with.The sub-contractor’s insurer initially declined cover.The local fire authority was not in a financial position to fund the legal costs to pursue the sub- contractor and as a result, sought costs directly from the forest owner.The result was that the forest owner’s liability policy kicked in.The forest owner was able to negotiate directly with the sub- contractors insurer for a contribution, resulting in a much fairer resolution and allocation of costs.
What to look out for
There are a few common mistakes we frequently see when asked to review liability programmes.
Incorrect business descriptions
The business description shown on your policy schedule needs to be broad enough to reflect all your activities, including farming, forestry and any others. We have seen a number of problematic claims where the liability cover in place did not even mention the forestry activities. An insurer will look closely at any claim where the loss arises from a business activity not included in your schedule and, in the worst case, may see this as grounds to decline coverage.
Unworkable warranties and conditions
This is another common area where we see problems. Many insurers have experienced large claims from the forestry industry and as a result have looked to manage their risk by adding various forestry conditions and warranties on the cover. Some of these are almost impossible for the insured to comply with and specialist advice is important.
As an insured you need to understand these conditions and make sure that, if there are such conditions on your policy, you can and do comply with them and can easily demonstrate at claim time that is the case. Not all insurers apply such conditions. For most NZFFA members, Aon can offer clean and simple policy coverage which is easy to understand and more importantly easy to comply with.
Inadequate limits of liability
Inadequate cover continues to be one of the most frequent problem areas. Very often people realise too late that, for a relatively small cost, they can increase the coverage to limits which are appropriate to their needs.
When setting your limits there are a number of questions we encourage forest owners to consider −
- The cost of fire fighting in your area including items such as access and distance to water
- The value of neighbours’ properties and their infrastructure
- Activities on your block for the coming period such as harvesting where there is an increased risk
- Consider the planned changes to legislation such as to the Health and Safety Act and the new penalty limits.
The benefit of a specialist
As is evident from the points above, it is important to receive quality advice to ensure you get the insurance protection and assistance you require. The Aon forestry team specialise in helping forest owners and understand your business and the risks you face. We manage claims and help with the claims process. We also monitor insurer’s responses to these claims, always making sure we are getting the best results possible for our clients.
For the last two years we have been working closely with the NZFFA and have developed a scheme designed for NZFFA members which offers comprehensive coverage for standing timber, clear policy wording and a wide range of benefits. Additionally, an extra benefit for members is that for all business placed with Aon we make a contribution to the NZFFA.