Industrial special risks (ISR) professionals know how to "work around" common standard modified Mark IV wording issues, so further altering the wording could give rise to more disputes, Sydney barrister Michael Jones SC warns.

ISR wordings have had a turbulent history. The Mark IV wording, introduced in 1987 to set an industry standard after tariff policies were abandoned, was very complicated. It was reviewed in 1990, and some sections improved to create the Mark V version. But the standard modified Mark IV wording remains the common base for many insurers.

At last year’s AILA-Queensland Law Society insurance law intensive, LMI Group managing director Dr Allan Manning said 90% of Mark IV could be changed relatively easily, but the final 10% was the stumbling block. He said if it were changed, there was a danger reinsurers would “take away the any one loss, any one location” clause. But “perhaps in a few years’ time”, using Mark V as a basis, it could be updated.

But Mr Jones told Resolve existing wording difficulties were well known and could be easily rectified, which was why the courts considered relatively few ISR cases. The wording was reasonably prescriptive, he said.

Mr Jones and Phillip Wotton, a partner at Wotton & Kearney, presented at an AILA NSW seminar on common ISR wording issues.

They said ISR wordings generally achieved the objective discussed by Judge Greer in 1923. "It is common for policies of this kind, to prevent lengthy disputes as to what the actual loss is, that there be an agreed method which can be readily applied without difficulty and without raising a great number of points for dispute."

Under the ‘basis of settlement’ clause in section one (material loss or damage), the amount payable by the insurer was the "cost of reinstatement". Reinstatement of a destroyed building meant its "rebuilding".

The clause raised the question of whether "rebuilding" simply referred to removing the old and erecting the new, or whether it carried a requirement the new building have particular characteristics of the old.

Mr Jones and Mr Wotton said the definition of 'reinstatement' for lost or destroyed property, other than buildings, was the cost of replacing it with similar property. The replacement property must be in a condition equal to, but not better or more extensive than, the property’s condition when new.

It was generally accepted that, subject to policy terms, where an insured’s loss was assessed on the cost of replacement or reinstatement, the claim was discounted by an increase in the value of the property after its reinstatement or replacement over its value immediately before the loss, having regard to wear and tear. That was commonly called an "allowance for betterment".

They said reinstatement compared the reinstated property with the destroyed property's "condition when new". "New is compared with new."

Mr Jones and Mr Wotton said no mechanism was given for valuing an insurer's reduction in obligation for technical advancement or "technological betterment". For example, it was "impossible" to dissect the cost of a newer machine to identify the value or cost of improved technological characteristics.

Treating integrated components as a difference in condition could lead to "commercially nonsensical results". "Does it mean the insurer is only obliged to provide a piece of property without integral componentary, such that the property remains in a semi-dismantled state pending the insured purchasing missing parts and rebuilding it to produce a functional piece of property? Plainly not."

Mr Jones and Mr Wotton discussed section two (consequential loss), which protected insureds against losses not recoverable under an ordinary policy. The losses usually flowed from business interruption (BI).

The crucial issue was the connection between the loss, destruction, or damage of property, and the BI. The right only existed where the insurer had paid the cost of, or admitted liability for, reinstating the physical loss, destruction or damage to the insured property. The insured must prove, at least to a prima facie level, it was entitled to the whole of the loss it had claimed. It if could do so, the insurer must then dissect from the total loss claimed the parts for which it ought not to be held liable, they said.

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