Top 10 causes of insurance claims
A FIRE at a busy warehouse leaves a company struggling to replace its buffer stock; a ransomware attack paralyses a company’s IT systems; the use of industrial adhesives in manufacturing results in a costly product recall. Every day, companies around the globe (together with their insurers) experience losses, in multiple forms, in the millions of dollars. Over the past five years, fire and ex-plosion, natural catastrophes, and faulty workmanship or maintenance have been the major causes of loss by value of insurance claims, according to the Global Claims Review 2022 from Allianz Global Corporate & Specialty (AGCS). Insurance claims from companies have become more severe over the past five years due to factors such as higher property and asset values, more complex supply chains, and the growing concentration of exposures in one location, such as in natural catastrophe-prone areas. The future does not look brighter anytime soon. Companies and their insurers have shown resilience to weather the loss impact of the pandemic, but the ongoing war in Ukraine, a spike in the cost and frequency of business interruption losses, and the sustained elevated level of cyber claims are creating new challenges. At the same time, the top two causes of claims-fires, and natural hazards-remain significant loss drivers for companies. Last but not least, the impact of soaring inflation around the world will bring further pressure on claims costs. Inflation puts undervaluation of assets in the spotlight Ultimately, inflation brings pressure on claims costs from multiple angles. Property and construction insurance claims, in particular, are exposed to higher inflation, as rebuilds and repairs are linked to the cost of materials and labour, while shortages and longer delivery times inflate business interruption (BI) values. Other lines of insurance, such as directors and officers, professional indemnity, and general liability, are also susceptible to inflationary pressures through rising legal defence costs and higher settlements. Replacement costs more, and replacement takes longer-and this means both the property damage and the business interruption loss are likely to be significantly higher. Updating insured values for all new contracts is therefore a pressing concern for insurers, brokers, and insureds. If this doesn’t happen, our clients run the risk of not being fully reimbursed in the event of a loss, while insurers run the risk of under-pricing exposures. The insurance market has already seen a number of claims where there has been a significant gap between the insured’s declared value and the actual replacement value. For example, in a claim for a commercial property destroyed in the 2021 Colorado wildfires, the rebuild value was almost twice the declared value, due to a combination of inflation, demand surge, and underinsurance. What are the top causes of business insurance claims? In one of the industry’s most comprehensive analyses, AGCS has identified the top causes of loss for companies from more than 530 000 insurance claims in over 200 countries and territories that it has been involved with between 2017 and 2021 (typically a number of insurers provide coverage jointly considering the huge values at stake in the corporate sector). These claims have an approximate value of €88.7 billion, which means that the insurance companies involved have paid out-on average-over €48 million every day for five years to cover losses. The analysis shows that almost 75% of financial losses arise from the top 10 causes of loss, while the top three causes account for close to half (45%) of the value. Despite improvements in risk management and fire prevention, fire / explosion (excluding wildfires) is the largest single identified cause of corporate insurance losses, accounting for 21% of the value of all claims. Fires have resulted in more than €18 billion worth of insurance claims over five years, according to the analysis. Even the average claim totals around €1.5 million. Natural catastrophes (15%) ranks as the second top cause of loss globally by value of claims. Collectively, the top five causes (based on more than 20 000 claims around the world) – hurricanes / tornados (29%); storm (19%); flood (14%); frost / ice / snow (9%) and earthquake / tsunami (6%) account for 77% of the value of all disaster claims. Hurricanes and tornados are the most expensive cause of loss, driven by the fact that two of the past five Atlantic hurricane seasons (2017 and 2021) now rank among the three most active and costliest on record, as well as recent record-breaking tornado activity. Insurers are also seeing new scenarios. During 2021, the unprecedented cold weather known as the ‘Texas Big Freeze’ in the US, as well as flooding in Germany, stood out as events that were both large but had unexpected claims. For example, the ‘Texas Big Freeze’ caused huge disruption to infrastructure and manufacturing, with many companies forced into shutdowns by widespread power outages, resulting in property damage and in some large contingent business interruption (CBI) losses. This event alone is estimated to have caused economic losses up to $150 billion. Faulty workmanship / maintenance incidents are the third top cause of loss overall (accounting for 9% by value) and are also the second most frequent driver of claims (accounting for 7% by number, ranking only behind damaged goods with 11%). Costly incidents can include collapse of building / structure / subsidence from faulty work, faulty manufacturing of products / components, or incorrect design. Top causes of loss in South Africa Fires generate the most expensive losses for South African businesses, accounting for more than 60% of the value of all claims over the past five years. Faulty workmanship incidents are another major cause of loss (20%) while natural catastrophes rank third, with storm losses the most frequent driver of these claims. Hailstorm events, while uncommon, can be costly when they do occur if one happens in a metropolitan area. Water damage generates the highest number of corporate insurance claims in South Africa (30%+), although one in five claims also result from crime / wilful acts. South Africa experienced three major claims events in the past three years. COVID-19
The Purpose of the small claims court
The Constitution of the Republic of South Africa (“the Constitution”) does not explicitly provide for a right of appeal from a Small Claims Court judgment. However, section 34 of the Constitution does provide that “everyone has the right to have any dispute […] decided in a fair public hearing before a court or, where appropriate, another independent and impartial tribunal or forum”. Nature and Purpose of the Small Claims Court In Chrish v the Commissioner, the High Court held that the Small Claims Court is a unique court and was developed to act as a forum that adjudicates smaller claims in an expeditious, less complicated and cost-effective manner. The idea behind the development of the Small Claims Court was, therefore, to establish a forum that would operate differently from ordinary courts. The Court, in this case, further held that the rules of procedure and evidence that apply to the ordinary courts in South Africa are not applicable in the Small Claims Court. Therefore, the rules that relate to the granting of an appeal from a judgment in an ordinary court do not apply to a Small Claims Court. Proponents of a Right of Appeal Proponents of a constitutional right of appeal could argue that section 34 of the Constitution implies a right of appeal. Proponents could argue that “fairness” in section 34 relates to the procedural elements of a hearing (and therefore implies a right to review), as well as the merits of a hearing (and thereby implies a right of appeal). It follows, proponents may argue, that it makes little sense for the Small Claims Court to recognise a right to review, which it does, but not a right of appeal. This is because both a procedural error and an error made on the merits of the case affect the fairness of the hearing. Opponents of a Right of Appeal Opponents of the constitutional right of appeal argue that if South Africa were to allow for an appeal of right, the very nature and purpose of a Small Claims Court would be compromised. The Small Claims Court was designed to reach lower-income citizens and to operate expeditiously, thereby save the court as well as the litigant time. If South Africa were to allow an appeal of right, the Small Claims Court would no longer be able to act as expeditiously as intended, as it would be occupied more and more by judgments that have been appealed. The Small Claims Court would therefore not be able to focus its attention on allowing other citizens the right of access to courts, and the Small Claims Court would ultimately diminish into but another ordinary court. In so doing, the innovation behind the creation of such a court would be lost. It is furthermore argued that it would be counter-intuitive to subject indigent litigants to a complicated appeal process. The Small Claims Court process should be conducted in a manner that seeks to accommodate ill-educated and unsophisticated litigants. This will only happen if the Small Claims Court process remains uncomplicated and straightforward. Opponents argue that South African courts are already overburdened, if it allows for appeals from Small Claims Court judgments, it will only aggravate an already pressing backlog. Although proponents for a right of appeal argue that it is only fair that a right of appeal should be implied in section 34 of the Constitution, opponents seem to be convinced that a right of appeal will have the very opposite effect of fairness. If South Africa allows for a right of appeal, citizens will ultimately be denied access to the Small Claims Court because of the overburdened court system in South Africa. And therefore, those citizens will be unfairly denied their section 34 right of access to courts. Conclusion In conclusion, it appears that opponents and proponents of a constitutional right of appeal from a Small Claims Court judgment have equally convincing arguments for their respective causes. Only time will tell, however, whether proponents of a right of appeal from a Small Claims Court judgment have made their case strong enough to convince the Legislature. Reference List: The Constitution of the Republic of South Africa, 1996 Chrish v Commissioner- Small Claims Court- Butterworth and Others (774/2005) [2007] ZAECHC 114 This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)