Topics Schadenspiegel 1/2012 - Munich Re

TOPICS Schadenspiegel

Issue 1/2012

SOS Rena More and more shipping routes pass through marine reserves, where accidents can cause large-scale environmental damage and bring major losses for insurers. PAGE 6

Floods Tram factory under water

Remediation Large fire at a transformer substation

Water damage Disinfection with side effects

Editorial Dear Reader, On 4 April, 12-m-high waves finally sent the stricken container ship Rena to the bottom of the ocean. This was after the vessel had run aground off the coast of New Zealand, causing the greatest oil spill in the country’s history. The Australian authorities now fear that debris and containers from the wreck may be carried up to 160 km and pose a danger to shipping. Their concern is justified – both the number of ships and size of the cargoes are increasing all the time. And just like in the case of the Rena, many of the routes they take go straight through marine reserves, as our cover story describes. The sinking of the Titanic still shocks and fascinates us one hundred years after the event. But this tragedy also did much to increase safety levels on ships and create international standards for shipping. The same is true today of the Rena and the Costa Concordia. However, now we are dealing with insured values that have reached completely new dimensions. Ships today can accommodate up to 8,000 passengers or carry as many as 18,000 containers. You can find out what this means for hull insurers in the interview with marine expert Dieter Berg. But sometimes it is not the sea but water from above that causes problems. Several consecutive days of rainfall in August 2010 caused flooding at a rolling stock plant in Bautzen, Germany. Although it was feared this would produce a significant claims amount, excellent loss management ensured that the loss cost only half what was originally envisaged. We hope you will find this latest issue of Topics Schadenspiegel both useful and informative. If you have any questions on the articles, the authors or your client manager will be pleased to hear from you. We wish you an interesting read. Your Schadenspiegel team [email protected]

NOT IF, BUT HOW

Munich Re Schadenspiegel 1/2012

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Ship runs aground in marine reserve

111 containers were lost overboard before the Rena sank. Shipping accidents in marine reserves cause long-term damage to the environment and losses worth millions. Even so, more and more shipping routes now go through such areas.

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Contents

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After the fire come the repairs. Success factors of delayed remedial action.

Marine Ship runs aground in marine reserve Complex salvage operations and disposal of the oil cause costs to spiral

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Property Late success Large fire at a transformer substation

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Claims literature A Cultural History of Climate How people react to climate change

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Property Flood causes loss worth millions Continuous rain in August 2010 floods a rail vehicle plant Property Difficult demolition Fire destroys skyscraper in Madrid LIABILITY Disinfection with side effects Since 1 November 2011, commercially operated drinking water installations must be tested for Legionella bacteria

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Wading into work – this was the case at one manufacturing plant for rolling stock following the floods of August 2010.

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Property Production stoppage at aluminium plant CBI losses following power failure liability Oil spill off Brindisi Italy’s environmental pool settles its costliest loss Column Pillar for growth and wealth Why infrastructure significantly influences a country’s economy Editorial News Imprint

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News

Renewable energy

Natural hazards

Munich Re Foundation

To complement its performance guarantee for photovoltaic manufacturers, Munich Re has now launched a new product that insures against the risk of their insolvency. It covers the risk borne by operators that solar module output may, in the course of time, fall below the level guaranteed by a manufacturer which can no longer be held liable under its warranties due to insolvency. Developed in conjunction with Deutsche Bank, Munich Re first used the new optional cover to insure a solar park project in southern Italy jointly financed by Deutsche Bank and Rabobank.

Munich Re’s NATHAN (Natural Hazards Assessment Network) Risk Suite is an application that optimises your assessment of natural hazard risks worldwide. The Commission of Geo-Information Business (GIW) of the German Federal Ministry of Economics and Technology has presented NATHAN its GeoBusiness Award. The independent jury, comprising representatives from industry and the scientific community, chose NATHAN Risk Suite for the following reasons: The system is able to perform risk assessment and risk analysis of individual risks and full risk portfolios so that current and future risks can be correctly priced. At the same time, Munich Re clients can use the analysis results to monitor and optimise their individual risk portfolios.

The 8th International Microinsurance Conference will be held in Dar es Salaam, Tanzania, from 6 to 8 No vember 2012. This event will be hosted by the Munich Re Foundation in collaboration with the Microinsurance Network. It offers some 400 experts from around the world the chance to exchange views and discuss the challenges facing micro insurance. The participants will include representatives of insurance and reinsurance companies, inter national organisations, NGOs and development aid agencies as well as academics, policymakers and supervisory regulators.

Insurance covering the insolvency risk of photo voltaic manufacturers

Award for natural hazard assessment NATHAN Risk Suite

8th International Micro insurance Conference in Tanzania 2012

News in brief In terms of natural catastrophes, 2011 is the costliest year on record, mainly due to the devastating earthquakes in Japan and New Zealand. Furthermore, losses from extreme weather events were the second highest on record. You can find more detailed information on this subject in our publication Topics Geo at http://www.munichre.com/en/topicsgeo-2011. The jury at the MENA Insurance Awards has voted Munich Re Reinsurer of the Year. The jury said Munich Re is the reinsurer with the strongest capital base, the highest quality of technical underwriting and the most

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consistent revenues in the difficult MENA markets (Middle East, North Africa). The fire safety organisation VdS will be holding its 25th burglary protection conference in Cologne on 12 and 13 June. The main focus of the conference will be on the subject of perimeter security. Further information can be found at www.vds.de/tagung-eds. Topics Online complements Munich Re's wide variety of print publications. This online magazine is now being presented in a new format. You can discuss all manner of subjects with us via the comments section in Topics Online at www.munichre.com/en/topicsonline.

News

The Costa Concordia accident

The alarm bells should now be ringing among hull insurers Dieter Berg, Head of Marine Insur ance at Munich Re, discusses the significance of the Costa Concordia incident for the insurance industry and for Munich Re. Schadenspiegel: Mr. Berg, what does this accident mean for the insurance industry? Berg: It is by far the largest marine hull insurance loss I have ever ex perienced. Even the Exxon Valdez is unlikely to come close. The alarm bells should now be ringing among hull insurers.

Dieter Berg, Head of Marine Insurance at Munich Re

... because so far they have got it wrong as regards the risks involved? Many insurers do not get their sums right and underestimate the potential of a major loss. It is simply mindboggling when you see how the values of vessels have been developing. Yet, surprisingly, in my view this niche segment does not even appear on the Board’s radar in many companies. Have the shipping companies learned nothing from previous loss occurrences? The world fleet is now younger. Many shipowners took advantage of the last crisis to scrap old vessels. As a result, there are fewer losses but those that do occur are more costly. This is due to the higher values and spiralling repair costs, including steel and labour.

What is the actual significance of the Costa Concordia for insurers?

Will smaller marine insurers be able to stay in the game?

For one thing, it means that insurers and reinsurers will be left to foot a massive bill. I am assuming it will be a total loss. The ship’s hull insurers have to ask themselves seriously whether potential major losses are adequately priced.

The alarm bells from Italy will be followed by critical analysis by man agers. Smaller players will recognise that hull insurance for ships is not a profitable venture for them.

Has the risk landscape for shipping changed in the last few years? The Costa Concordia accident is the latest in a series of losses that have been characterised by unpreced ented loss amounts. Ships today can accommodate up to 8,000 passengers or hold 18,000 containers. For us this involves a new dimension in insurance values.

Meaning that, with fewer competitors, the premiums are set to go up ...? It remains to be seen whether there will be an upsurge in premiums. In this kind of hull business, you can get a lot wrong with relatively little capital. And you can create a lot of pressure in the market with relatively little capacity. And let’s not forget that, at the end of the day, shipowners are also very shrewd buyers of insurance.


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Marine

Ship runs aground in marine reserve In October 2011, the container vessel Rena ran aground in the immediate vicinity of a nature conservation area, causing an oil slick. It is one example of many shipping accidents with spiralling costs due to complex salvage oper ations and disposal of the oil.

Corinna Schröder and Benedikt Funke

At 2.20 a.m. on 4 October 2011, the Rena was sailing from Napier to Tauranga, New Zealand, when it ran aground on the Astrolabe Reef in the Bay of Plenty, about 7 km north of Motiti Island, in good visibility and calm seas (refer to the map on page 9). The reef seriously damaged the vessel’s hull. Water leaked into the ship, causing it to list strongly. Its cargo comprised 1,368 containers with wood, machine components, dairy, fish and meat products, as well as 11 containers with hazardous materials. Of this total, 74 containers were salvaged from the sea, 649 were stranded and 43 are currently still missing. In addition to the financial loss due to losing the cargo, the containers also posed a danger to the environment and other shipping. Tauranga Harbour had to be temporarily closed.

The Rena carried some 1,700 tonnes of bunker oil (heavy fuel oil) in its tanks. About 400 tonnes leaked out after the accident, polluting the sea and beaches in the Bay of Plenty, one of the world’s most important marine conservation areas and a popular tourist des tination. More than 2,000 sea birds have died since the ship was grounded. Salvage teams were at least able to pump off most of the oil by mid-October 2011.

In January 2012, the Rena broke in two after a heavy storm.


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Marine Fig. 1: Oil slick off New Zealand

Ta u ra n

Bay of Plenty

ga

H

ar

bo

ur

Position of the Rena Polluted coastlines Oil slick

Tauranga

Source: Munich Re

In January 2012, the ship broke in two after a severe storm. The stern of the Rena was washed away by the heavy swell and has now sunk completely. New Zea land authorities had ordered that the wreck be removed back in October 2011. Human error considered likely Built in Kiel in 1990, the Rena sailed under a Liberian flag. The container ship measured 236 m in length with a breadth of 32 m and a draught of 12 m. It con sequently belonged to the Panamax class. This class denotes ships with the maximum dimensions that would allow them to pass through the Panama Canal. When it ran aground, the ship was travelling at a speed of 17 knots (maximum speed 21 knots) in calm weather – but some way off its actual course and out side the usual shipping routes.

Human error caused the disaster. The Philippine captain and his second officer have pleaded guilty on almost all charges. They face a fine of up to NZ$ 300,000 and up to seven years in prison. The two men were charged with operating the ship in a dangerous manner and subsequently manipulating the entries in its logbook. Sentence is expected in May 2012. Dangerous salvage operation Work to salvage the ship had to be interrupted several times on account of bad weather. In addition, the ves sel was in constant danger of breaking apart due to cracks in the hull. To obtain a level surface for work ing on, the salvage team first had to weld steel plates onto the shell of the ship.

Limitation of liability for property damage and personal injury While New Zealand has ratified the Convention on Limitation of Liability for Maritime Claims, 1976 (LLMC 1976), it has not ratified the 1996 Protocol to the LLMC. In the case of the Rena, the 1996 Protocol would have increased the possible limits of liability for personal injury and prop erty damage from the present level of around US$ 9.7m to US$ 23.5m.

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Limitation of liability is calculated on the basis of the type of damage and the vessel’s tonnage. The right to limit liability is lost in cases of wilful intent or recklessness on the part of the shipowner (not the captain). In the majority of cases, proving this is an insurmountable obstacle.

According to the MTA (Maritime Transport Act), however, the limita tion of liability under the LLMC does not apply to the expenses incurred to salvage the Rena. It is doubtful whether the LLMC covers the cost of raising a wreck (Art. 86 (4) MTA in combination with the Local Govern ment Act and Maritime Transport Act).

Marine

Navigation Ships often use paper charts as well as electronic charts to navigate at sea. Depending on their area of use, these charts are available in different scales ranging from inshore charts (harbour approach charts) to ocean charts (plotting charts) with a corres ponding degree of detail.

Planned and actual course followed by the Rena

When planning a route in accordance with the internationally mandatory Standards of Training, Certification and Watchkeeping (STCW 95), course points are plotted in the charts to obtain a safe compass course. The charts, GPS and radar systems ensure that the watch officer always knows his exact pos ition in relation to the next course point and also when a change of course is needed. Problems arise if obstacles are overlooked when plan ning the route or if a wrong route has been plotted or the watch officer overlooks a course point during the voyage.

Planned course Actual course Source: LINZ Crown Copyright reserved.

Further factors made the salvage team’s work extremely risky and proved extremely troublesome when salvaging the containers and pumping off the bunker oil: namely, the ship’s strong list, the reef, the loose containers, the power failure on board, the viscosity of the oil due to the lack of heating and the damaged pump system. Some containers were so badly damaged that they broke apart when the men attempted to lift them on board. What is more, the salvage team was in many cases only able to reach the ship by helicopter. Despite this, however, most of the bunker oil was successfully pumped off the Rena before the end of October. In January 2012, salvage operations were further impeded when the ship broke apart and the stern of the Rena slipped under water. By April, about 1,298 containers had been recovered from the ship’s holds, the sea and the beach. The remaining containers are either still inside the ship or near the ship at the bot tom of the sea. Efforts to salvage floating debris from the wreck and clean-up efforts are still under way. In the period up to April 2012, 1,041 tonnes of scrap had been disposed of.

The salvage operation was agreed between the ship ping company and the salvage contractors under a Lloyd’s Open Form standard contract including the so-called SCOPIC clause (Special Compensation P&I Club Clause). This clause guarantees that the salvage contractors are compensated for their efforts. Before the SCOPIC clause was introduced, the salvaging fee depended on the total value of the recovered goods. As a result, salvage contractors often refused to con tinue their efforts if the operation entailed very high risks or if it was foreseeable that the recovered value would be low. The SCOPIC clause was established in order to prevent the resultant environmental damage and pollution.


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Marine Fig. 2: Timeline of events

14.10.2011 Most of the oil is pumped off

16.11.2011 Work starts to salvage the containers

11.10.2011 Crew members evacuated; the first containers go overboard

11.11.2011 Wreck removal order

10.1.2012 Stern partly sinks after a storm

4.4.2012 Stern sinks completely

2.1.2012 Ship breaks apart after a storm

10.10.2011 The first oil is washed ashore 8.10.2011 Oil is pumped off (start) 5.10.2011 Oil leaks from the ship 4.10.2011 Rena runs aground

Cover Damage to the vessel and the total loss of a vessel are covered by the Hull & Machinery policy. In addition to the total loss, the hull policy also includes a cover for Increased Value (IV) to protect the shipowner in the event of a discrepancy between insured value and market value of the vessel, for instance if raw material prices or other new replacement costs rise during the term of the insurance. The hull policy also covers the costs incurred for rescue attempts.

Among other things, the owner’s P&I cover for liability claims includes the costs incurred for removing the wreck and the damage caused by the oil spill. The cargo is usually insured through various cargo insurers. The freighters Shen Neng 1 and Olivia also ran aground The case of the Chinese coal freighter Shen Neng 1 is very similar to that of the Rena. In April 2010, the ship ran aground in the Great Barrier Reef Marine Park, causing extensive damage there after the first officer failed to make a necessary change in the ship’s course.

The Titanic sank 100 years ago

The Titanic on its maiden voyage.

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It was primarily in response to the sinking of the Titanic on 15 April 1912 that safety standards for shipping were raised and internationally standardised. The first International Convention for the Safety of Life at Sea (SOLAS) came into force in 1914 and was revised several times in the following years. The International Maritime Organization (IMO) which had been set up within the frame work of the United Nations took over this International Convention from 1958 onwards and has continued to develop safety standards ever since.

The Titanic sent its communications in Morse code via short-wave radio. Today, ships can use digital satellite links almost everywhere in the world for communication and to ascertain their position. Although SOS had been officially introduced by all sea faring nations back in 1908, the Titanic is believed to have sent an older type of signal first – one which unfortunately went undetected. The Global Maritime Distress and Safety System (GMDSS) – a worldwide radio system combining technical facilities, service centres and rules for assistance following emergencies at sea – was introduced in 1999 on the basis of SOLAS.

Marine

3D illustration showing the position of the Rena after breaking apart in January 2012. Source: Munich Re

According to the Australian authorities’ investigation report, the accident was attributable to an overtired crew and inadequate planning of the route. The acci dent led to an extension of the statutory regulations in Australia and a tenfold increase in the fines imposed for accidents caused by oil spills. For reasons unknown, the bulk carrier Olivia ran aground near Nightingale Island in the middle of the Atlantic in March 2011, causing an oil slick there. The cause of this accident is still being investigated. Here too, however, human error is considered likely. The grounding of the Rena could be another example of a major shipping accident caused by an avoidable error on the part of the bridge crew.

The Titanic was travelling at almost top speed when it struck the iceberg at around 22 knots. Today’s masters are required to reduce speed when sailing in waters where icebergs may occur. Icebergs are regularly reported by the International Ice Patrol whose ships and aircraft scour the North Atlantic. This organisation also owed its foundation in 1914 to the sinking of the Titanic. More recent incidents, such as the grounding of the Exxon Valdez, have also inspired new and more stringent regulations to im prove safety at sea. The same is likely to be true of the Rena.

Fatigue among the crew is often one of the main causes. To save money, the number of crewmen on board has been reduced, less qualified personnel are sometimes hired, and statutory regulations on rest periods are often violated on board due to time pres sure. Thorough checking of the planned route and a permanent watch on the bridge as stipulated by the STCW are essential if such accidents are to be avoided in future. What is more, the area in which the Rena ran aground was not covered by New Zealand’s traffic monitoring system, which could also have helped to prevent the accident. Rising cost of clearing up oil and wreckage In recent years, there has been a drop in the incidence of oil spills from ships polluting the sea and coasts. But the cost of clearing up such spills has risen of late. Around the time that the Rena ran aground, 20 states submitted a proposal to the International Maritime Organization (IMO) with the aim of raising liability limits under the LLMC.


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Marine

Environmental liability Liability for environmental damage due to leaking fuel oil is governed by the International Convention on Civil Liability for Bunker Oil Pollution Damage (Bunker Convention). More than 60 countries have ratified this international convention. New Zea land has not ratified it although a cor responding recommendation was submitted by the Transport and Industrial Relations Committee in 2008.

For this reason, liability for oil pollu tion is governed by New Zealand law as embodied in the Maritime Transport Act 1994 (MTA) and the Resource Management Act 1991 (RMA). Under the MTA, however, li ability for oil pollution is significantly lower (around US$ 11m) than it would have been under the Bunker Convention (around US$ 19m). This limitation of liability can also only be disregarded in the event of wilful intent or recklessness by the ship owner.

The higher costs associated with oil spills are one of the reasons cited for this proposal. New Zealand’s response to the Rena incident can be expected to mir ror that of Australia following the grounding of the Shen Neng 1: it will probably adjust its statutory regu lations in line with ratification of the corresponding conventions while supporting efforts to raise the limits under the LLMC.

The RMA appears to include a pos sibility for holding shipowners liable for the full amount of the clean-up costs (estimated at NZ$ 130m), but the liability limits of the MTA (US$ 11m) apparently also apply to the RMA.

The authorities used to demand no more than the removal of masts and other parts projecting above the water level. Complete removal of the wreck was only required when it posed a hazard to shipping. But technological advances mean that increasingly com plex and difficult salvage operations can now be car ried out, and these new possibilities are being put to use, too.

Raising the wreck is another cost-driving factor. National authorities are now almost always demand ing that the wreck be cleared completely even when all the hazardous substances have been removed. Until a few years ago, the grounded vessels were often allowed to remain where they ran aground and served as artificial reefs.

OUR EXPERTS Corinna Schröder is a lawyer and qualified forwarding agent. She works for Munich Re as a Legal Counsel in Marine Claims. [email protected]

Benedikt Funke is an industrial engin eer specialising in maritime transport with practical experience on many dif ferent ocean-going vessels. He works for Munich Re as a nautical and tech nical consultant. [email protected]

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What is it that makes reinsurance so exciting?

You can find out the answers to this question in TOPICS ONLINE. Our magazine for insurers takes you behind the scenes at Munich Re and shows what drives us. We will introduce you to interesting personal ities, pick up on current topics in the worlds of insurance and finance, and present the latest trends, solutions and services. Have your say: use the comment function to start interesting discus sions with us. Your opinions are reflected in interactive surveys. http://www.munichre.com/en/topicsonline not if, but how

Property

Late success A newly built transformer substation was destroyed by a fire in one of the transformers. The rehabilitation work only began a year later, but was successfully concluded despite numerous obstacles. Local value added tax was an important aspect.

Klaus Wenselowski and Karin Streb

A new transformer substation was built to step down electricity so that it could be transmitted to a nearby town. The substation was built by a local state-owned electricity distribution company. Due to the low temperatures prevailing in winter, the transformers were housed in a three-storey building roughly 100 m long and 40 m wide, together with power cables as well as electrical components and electronics for the control systems. Some of the transformers for stepping down from extra-high voltage to high and medium-high voltage had already been successfully tested when fire broke out during another test run. Oil leaking from a transformer had ignited and flowed into the adjacent underground cable pit. Power cables in the pits and parts of the building were damaged by the fire.

The roof over the transformer hall collapsed as a result of the scorching heat. Smoke-borne soot was deposited everywhere, on the walls, machines and inside control cabinets. It took more than a dozen firefighting teams and two fire helicopters almost four hours to bring the fire under control. Fire presumably caused by micro-cracks in the insulator The policyholder swiftly took stock of the damage. A survey commission set up by the local authorities came to the conclusion that the fire had probably been caused by short-circuiting which, in turn, had presumably been caused by damage to the insulator during installation work, resulting in undetected micro-cracks. The insulator was probably damaged when a tool slipped several times while being used to undo a bolt secured with adhesive. A short-circuit occurred when power current was applied, heating the transformer oil in the expansion vessel, which then leaked out and ignited. Since the newly installed extinguishing system was not working, the fire spread to 60 tonnes of transformer oil.

It took four hours to bring a transformer fire under control with the aid of two helicopters.


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Property

The gutted transformer.

The survey commission, which did not include any loss surveyors or insurance industry representatives, drew up a comprehensive list of measures to be implemented during the remaining test runs.

The policyholders, however, had already ordered replacements and, like the local technical inspectorate and the loss surveyors, had yet to be convinced that further rehabilitation was an option.

Successful rehabilitation despite late start

Some of the manufacturers demanded that the cleaning process and chemical compatibility of the cleaning agents be tested on the sealants before starting with the actual rehabilitation. The local customs authority demanded disclosure of the chemical composition of the cleaning agents before granting an import licence.

The policyholder immediately commenced with rehabilitation measures only to be thwarted by its insufficient know-how. Two months later, one of the insurance companies ordered an on-site investigation into the possibility of professional rehabilitation to minimise the loss. To its surprise, the company found that further rehabilitation was still possible, despite the considerable time which had already elapsed since the damage occurred. Corrosion products had fortunately hardly formed during this time. Only the transformer oil itself had been burned in the fire and no acids had formed due to burning PVC products, such as cable sheaths. In fact, the oily combustion residues had even had a conserving effect. This meant that, although the experts had only been called in after a relatively long time, rehabilitation of the damage was basically still possible.

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After successfully test-cleaning selected plant parts, it was agreed that several of the larger parts of the switchgear should be rehabilitated. Other parts, such as power cables and control cabinets, were replaced as not all manufacturers were prepared to give a warranty for the cleaned plant parts. Importing the materials needed for the actual cleanup proceeded much more swiftly since the customs formalities for the cleaning chemicals and machines were already known from the cleaning tests. The fact that a rehabilitation agreement was directly concluded by and between the building contractor and the rehabilitation contractor helped to speed up the clarification of potential liability issues and complaints. Although a whole year had passed before the rehabilitation work began, it was successfully completed after only six weeks.

Property An EAR/CAR policy covered a total of two transformer substation projects for a period of four years, including a four-week test phase and an extended 24-month maintenance period. Only property damage and thirdparty injuries were covered by the policy. VAT causes contention VAT proved to be a difficult and time-consuming issue in the claims settlement process. This was due to the parties’ different legal understanding as to the scope of the sum insured. In this specific policy, the sum insured was based on the new replacement value.

During the subsequent negotiations, the parties were unable to agree on whether or not the new replacement value also included VAT, as the policyholder was entitled to deduct input tax. If VAT were to be included, this would mean that the policyholder would receive the amount of tax twice, namely as a refund from the local tax authority and additionally when the claim was settled by the insurer. From the point of view of German law, this would constitute unjustified enrichment on the part of the policyholder. Two legal assessments were ordered from local experts to clarify these tax and civil law issues. The tax law issue concerned the deduction of input tax in the event of a loss. The expert opinion concluded that, under local VAT regulations, the VAT paid by the pol icyholder when purchasing replacements could be reclaimed from the local tax authorities. This essentially meant that the policyholder was not burdened with VAT so that the loss only comprised the net value of the replaced assets.

Reconstruction following the t ransformer fire.


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Property

The other legal assessment was concerned with the policyholder’s entitlement under civil law to indemnification plus VAT if the policyholder is entitled to deduct input tax and VAT is covered by the insurance policy. According to the expert, VAT did not constitute part of the loss and therefore was not to be indemnified on the basis of the property policy. This finding applies regardless of whether or not VAT was included in the premium. In this particular case, the VAT had to be indemnified, as initial payments on account including VAT had already been disbursed to the policyholder during the protracted legal clarification of the issue. Settlement of the claim

Conclusion Even belated rehabilitation measures can prove successful, although the odds of this are much higher if the measures are discussed with the policyholder at an early stage. The sum insured must be precisely defined, particularly as regards VAT. If in doubt, it is worth including a reference in the policy stating that VAT will not be indemnified in the event of a loss. A detailed knowledge of the VAT and civil law regulations in force in the country concerned is essential when dealing with policyholders of different national ities. This can help to avoid costly and time-consuming claims settlements and to prevent disputes between the parties involved.

The policyholder called in the local commercial court to establish whether or not the control cabinets could have been successfully rehabilitated. The court found that the builder-owner was entitled to replacement of the control cabinets and that this must be indemnified by the insurers. Since an appeal was unlikely to prove successful, the insurers entered into negoti ations with the policyholder in order to settle the claim. These negotiations came to a swift conclusion, with the result that the case was closed after almost three years.

OUR EXPERTS Klaus Wenselowski is Head of the Property Claims Management Section for Global Clients. [email protected]

Karin Streb is a tax consultant specialising in VAT. She has been a member of Munich Re’s Group Taxation unit since 2010. [email protected]

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claims literature

A Cultural History of Climate

Zoran Andrić

Although climate change can no longer be halted, it can still be curbed. Mankind must pursue climate protection and adapt to the inevitable changes. That is the basic tenet of Wolfgang Behringer’s book “A Cultural History of Climate”. In “A Cultural History of Climate”, Wolfgang Behringer, history professor at the University of the Saarland, draws a timeline extending from the genesis of the planet earth to the greenhouse climate of the 21st century. Behringer systematically draws parallels between fluctuations on the temperature scale and the major crises that have afflicted Central Europe. Behringer sees witch hunts as crimes symptomatic of the Little Ice Age. There have been five ice ages to date, but warm periods have been the statistical norm. In more recent history, there have been periods during which the global mean temperatures have been about the same as those prevailing today. There have also been regional phases with higher temperatures, for example during the High Middle Ages, from the 10th to 13th centuries, when wine was grown in Scotland and cereals in Greenland. For Behringer, people’s response to changes in climate is a cultural phenomenon. The author’s chief interest lies in cultural history and the question of how rising and falling temperatures on earth have affected human coexistence. His conclusion is that the periods with lower temperatures have always led to major social upheavals. Coldness and drought were equally as important factors as warfare and the desire for conquest. The author provides fundamental facts and tells an exciting story based on archaeological and historical sources, of good and bad harvests, natural catastrophes, migrations, the rise and fall of civilisations – from the dim and distant past to the present day.

Wolfgang Behringer: A Cultural History of Climate


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Property

Flood causes loss worth millions In August 2010, days of continuous rain caused the water level of the River Spree to rise dramatically. Rapidly rising flood waters spilled over a dyke and inundated the production site of a manufacturer of rail vehicles. Due to exemplary loss management, the final loss was only half as costly as originally estimated.

Some of the bogies were safely rescued from the flood and silt in 2010.

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Property

Isabella Stankowski

After several days of continuous rain, the River Spree burst its banks in Bautzen on 7 August 2010. The production site of a manufacturer of rail vehicles was flooded with water up to 1.5 m deep. Both the production halls containing valuable machinery and tramcars in various stages of production and the company-owned test circuit were flooded. Production was suspended completely.

Although around 100 volunteers from the Federal Agency for Technical Relief (THW) were on site as early as 9 August 2010 to help clear up and set up a temporary power supply with the aid of emergency generators, the policyholder’s production was disrupted for several months.

Insufficient flood defences

Since the policyholder is a manufacturer of rail vehicles, especially tramcars, it was not surprising that more than one-third of the overall loss fell under the headings of “project stock” and “third-party property” which were covered by the property/business interruption all-risks policy.

The production site adjoins the River Spree. Assembly halls and the test circuit are located in the western part of the site, directly alongside the river. The office building, two inspection and test halls and the company archives are located further east. An earth and concrete dyke was supposed to protect the site from flooding. However, heavy rain on 7 August first caused a water reservoir to overflow. As a result, the water level in the River Spree rose so rapidly that water spilled onto the policyholder’s site and flooded the test circuit just one hour after the first flood warning was issued. Although some of the river water was diverted into a spillway area, the dyke still failed. Water gushed over the crest, flushing soil and concrete out of the dyke over a length of more than 10 m, sweeping away walls and iron gates in the process and engulfing the site, leaving a wake of destruction. All that remained were flooded production halls and foul-smelling silt.

Loss only half as high as originally assumed

−−Project stock comprised tramway projects in the final stages of completion. To a large extent, this stock comprises finished bodies which have already been mounted on the undercarriages – known as bogies – and are soon to be delivered to the customer, though they are still owned by the policyholder. However, project stock also includes large components which are still being assembled, such as bogies or bodies, as well as individual parts which are not yet assigned to a particular project. −−Third-party property encompasses tramcars owned by various customers which are to be repaired by the policyholder, as well as vehicles, tools and machinery which have been made available to the policyholder by customers (so-called “free issue parts”), or which have been leased by or consigned to the policyholder. The policyholder expected the damage to buildings, infrastructure, machinery and tools to total several tens of millions of euros. On the basis of an agreed 18-month liability period following the occurrence of the loss, the experts contracted initially estimated the business interruption loss to be in excess of €100m. The actual business interruption loss ultimately proved to be considerably lower. Among other things, the sum total includes loss of gross profit due to the break in production, ordinary payroll expenses as well as increased costs of working. These were incurred as a result of outsourcing several ongoing projects to the policyholder’s other European locations.


21

Property Fig. 1: Map of the areas affected by floods in August and September 2010 in the Free State of Saxony (as at 20 October 2010)

Sp

We i Els ße ter

Freib erg er

Mu lde

El be

Schwarze Els ter

e re

lde Mu

Leipzig

Ne iße

Bautzen

Görlitz

Dresden

Chemnitz

rM ue ka

u

ter Els ße

Zw ic

Plauen Wei

ld e

Zwickau Areas affected by the August flood Areas affected by the September flood Areas affected by both floods Source: Munich Re after the Saxon State Ministry of the Interior

Successful loss management The THW volunteers were able to pump the river water off the policyholder’s site within a matter of days and remove most of the silt. Emergency gener ators ensured that the company was able to use at least some of the lights and telephones. The insurers also reacted swiftly and remained in constant contact with one another. They hired loss adjusters, engineers and a salvage expert with the necessary know-how to survey the extent of the loss on site and set up a crisis management team involving all the parties concerned. A first estimate of the loss was consequently available within less than a week.

22


To further mitigate the extent of loss, the policyholder developed a two-phase long-term strategy together with the loss adjustment team. Phase 1 encompassed the following points: −−Rapid initiation of clean-up efforts and measures to safeguard the production facility. This included professional cleaning of the flooded machines and transformers, freeze-drying damp documents from the archives and repairing the damaged flood defences. −−Systematic classification of the inventory, machinery and tramcars into the categories “scrap”, “reusable” and “requires further investigation”. Those machines which were no longer fit for use were auctioned off.

Property −−Assessment of the legal situation: In addition to claiming force majeure in relations with customers and suppliers, the company also had to obtain the consent of its customers to transfer projects to other locations. The legal situation concerning the tramcars owned by customers, but in the policyholder’s possession for repair, also had to be clarified. Phase 2 of the strategy focused on resuming business as quickly as possible. The following action was taken: −−Current projects were outsourced to the policyholder’s other locations in order to fulfil the ongoing contracts and minimise the loss of production to the greatest possible extent. −−Construction of new halls and conversion of existing production halls to reduce production bottlenecks. −−Employment of additional personnel. The adjustment of the loss proceeded smoothly thanks to the policyholder’s decision to outsource ongoing tramway projects to other locations, reducing the business interruption loss from the high level originally estimated. But this success was hard-won. First of all, measures had to be taken to ensure that the other production facilities would be logistically capable of handling the additional work. Some of the policyholder’s locations specialised in the manufacture of individual parts, while others focused on the final assembly of the tramcars. Another concern was that the flooded Bautzen location was no longer able to manufacture and supply individual parts for the policyholder’s other production facilities. This issue was partly solved by purchasing the required parts from local manufacturers. With this strategy, it was hoped to compensate the delay in delivery within the 18-month liability period.

The policyholder’s active loss management measures were also highly commendable when it came to salvaging the machines, inventory and tramcars. The system mentioned above for separating scrap from reusable material was set up in a matter of days. Unclassifiable material was sent to the respective manufacturers or experts for further appraisal. This made it possible to evaluate and in some cases repair damaged items, particularly the bogies with their electronic components. The policyholder also adopted an open-minded and flexible approach when replacing machines that had to be scrapped. Secondhand replacements were found for many of the damaged items, thus cutting costs.

Conclusion Just two months after the loss occurred, the policyholder was able to report initial successes: most of the plant had been cleaned, production had been resumed and the company confidently expected to be back on track within the 18-month liability period. The policyholder was able to drastically reduce the business interruption loss by specifically outsourcing ongoing projects to available locations elsewhere and enlisting external suppliers to overcome bottlenecks. The policyholder’s systematic approach to salvaging tramcars, machinery and inventory as well as its willingness to purchase second-hand replacements reduced the overall loss to significantly less than the very high level originally estimated. Effective communication between all parties considerably speeded up the loss adjustment process.

OUR EXPERT Isabella Stankowski works as a lawyer in the Claims & Operations Department (SFR1.7) of CIP. She is licensed to practise law in New York, Missouri and Washington DC. [email protected]


23

Property

Difficult demolition On 12 February 2005, one of the worst fires in the history of Madrid destroyed one of the landmarks of its financial district. The claim was finally settled seven years after the 106-m-tall Windsor Tower was demolished.

Following the fire on 12 February 2005, parts of the Windsor Tower were in danger of collapsing.

24


Property

Julio Veloso Montero and Luis Martín Rodríguez

Only a handful of people were still inside the office building when the fire alarm was logged by the secur ity service shortly after 11 p.m. A fortunate coinci dence, otherwise the consequences could easily have proved catastrophic. Normally, 2,000 people work in the building. The fire spread rapidly in all directions, completely destroying the upper part of the high-rise building. Due to unclear instructions when fighting the fire, it took hundreds of firemen 24 hours to bring the fire under control. Fortunately no one was injured. The cause of the fire remained unclear. Located in the heart of a thriving business district in Madrid, parts of the skeleton of the Windsor Tower, as it was known, were in danger of collapsing after the fire. For this reason and on account of the high property losses, it was decided to demolish the building. It is the only total loss of a high-rise building in the Spanish capital to date. With 30 floors above ground and five underground, the Windsor Tower was the eighth tallest skyscraper in Madrid. At the time of the fire, the high-rise build ing was encased in scaffolding for renovation work, with a huge crane on its roof. Among other things, various fire prevention fixtures were being installed. A refractory coating was being applied to the building’s outer steel columns, as well as a fire protection spray coating on the steel girders. Sprinklers and an emer gency staircase on the outside of the building were also to be installed. The fire prevention measures for all steel structures below the 17th floor were complete when the fire broke out on the 21st floor. Active and passive fire prevention measures Active fire-fighting measures included manual fire extinguishers and wall hydrants on all floors. Fire pumps were installed between the floors. In addition, a dry riser with water connections and a central sys tem of fire alarms had also been installed. An auto matic extinguishing system with separate control centre was installed in the basement.

In high-rise buildings such as the Windsor Tower, it is exceedingly difficult to build up the required water pressure to reach the highest floors via the dry riser. Without the required pressure, it is impossible for firemen to fight the fire from the outside. That is why sprinklers in the ceilings and an efficient fire alarm system are particularly important in high-rise build ings. The Windsor Tower had neither sprinklers nor an efficient fire alarm system. The design of a building also influences its fire pro tection properties. The Windsor Tower was made of steel and reinforced concrete elements. The individ ual floors and their secondary supporting structures were secured to a central core of reinforced concrete. This core was able to withstand the fire and pre vented the high-rise building from collapsing. Who is liable? Three different parties are liable for the fire: the owner of the Windsor Tower, the tenant who rented the 21st floor, and the security service contracted by the owner. The company responsible for the building’s safety and security was discovered to have cut corners, increas ing the amount of the loss. As so often in office fires, stored office materials con stituted an enormous fire load in the Windsor Tower, too. These were the tenant’s responsibility. Large vol umes of highly combustible material, such as paper, and inadequate isolation of individual building sec tions helped the fire to spread rapidly. Two criteria determined the owner’s liability. For one thing, the available fire extinguishers did not operate properly and there were no modern extinguishers at all. For another, the building’s architectural features promoted the rapid spread of the fire.

The passive measures comprised an external emer gency staircase and separate anterooms fitted with RF-60 fire doors.


25

Property

Robots were used to demolish the tower to avoid putting workers at risk.

Fire prevention regulations did not exist when the high-rise building was planned and erected between 1974 and 1975. Despite this, the Windsor Tower com plied with the City of Madrid’s fire protection regula tions of 1976. Although not mandatory, the building’s fire prevention measures were additionally improved shortly before the fire broke out. Indeed, the building passed all the inspections specified by the owner with flying colours. Yet there were no efficient fire alarm systems or additional extinguishing systems, such as ceiling sprinklers, which are standard in all buildings exceeding a certain size and are mandatory in all new buildings.

Demolition – Anything but routine

Nor were all the wall hydrants fully functional. The same applies to the dry riser through which water is pumped to the various floors under pressure. How ever, the owner of the building was not held respon sible for the insufficient water pressure.

Interpretation of the policy

The Windsor Tower’s design also promoted the spread of fire. Cable shafts made it easier for the fire to spread from one floor to the next. Its propagation was further aided by a cavity between the double wall of aluminium and glass on the outer and inner façade.

26


The demolition was something of a challenge for all involved, due to the height and condition of the build ing. Robots were used to demolish the ravaged tower to avoid putting workers at risk. A number of demoli tion methods were used. Access to the ruin was made easier by a security zone around the building, although it simultaneously also impeded other busi ness activities in the area. The pressure on public authorities, the building’s owner, security inspectors, technicians and insurers was intensified by the pres ence of numerous media representatives.

Two points in the policy gave rise to differences of opinion: Did the cover for the fire risk also include the demolition costs? And did the rider for loss of rent also include those costs which were charged to the tenants?

Property Although demolition was not explicitly mentioned in the definition of the insured object, it was assumed to be included in the policy cover, as demolition was a consequence of the fire and also essential to the building’s subsequent reconstruction. The insurers did not indemnify the demolition costs, as they were not included in either the definition of the insured interest, nor were they mentioned among the insurer’s payments in conjunction with the insured object. In their argumentation, the insurers referred to expert assessments, indemnification of the value of the objects which had been destroyed and to payment of the invoices for the insured costs, which once again did not include the demolition costs. Loss of rent was also covered in addition to the risk of fire. Rents and costs were specified as a contractually agreed price in the leases signed for the building. This meant that costs could be passed on to the tenants. What remained was to verify whether or not their inclusion in the cover for loss of rent was permissible. The insurers confirmed this. The purpose of the cover was to indemnify the financial loss incurred as a result of the fire. Loss of rent encompassed both the lost income and the costs which the policyholder charged to its tenants.

Conclusion In order to minimise losses, attention must be paid to the following points: −−Introduction and review of a fire prevention concept for high-rise buildings −−Coordination of the fire prevention measures during renovations −−Training in fire-fighting techniques for security personnel −−Ensuring that the fire brigade is informed in good time −−Instructing firefighters on site −−Dividing the building into different sections to prevent a fire spreading −−Use of fire-resistant material (steel without fire protection, suspended ceilings, glazing)

OUR EXPERTS Julio Veloso Montero is Deputy Director General of Allianz Seguros and responsible for claims in Spain and Portugal. [email protected]

Luis Martín Rodríguez is a claims manager in the Property Claims Department at Munich Re Madrid, Spain. [email protected]


27

Liability

Disinfection with side effects Since 1 November 2011, commercially operated drinking water installations must be tested for Legionella bacteria. Disinfection to eliminate these bacteria can damage the piping and lead to further damage from burst pipes. Such losses must then be indemnified by liability insurers or the building insurers.

Holger Tausendfreund

The new Legionella monitoring requirement applies to all large systems in which drinking water is heated. These include tanks with a capacity of more than 400 litres, as well as pipe systems in so-called commercial drinking water installations with pipes containing more than three litres of water between the hot water tank and the outlet (tap). Once a year, samples must be taken at several representative outlets in such installations and tested for Legionella bacteria by approved test laboratories. However, this requirement only applies if showers or other facilities are installed in which the drinking water is nebulised. The obliga tion to test the water rests with either the owner of the building, the landlord or the property manager. The purpose of these tests is to obtain information on the quality of the drinking water during the next twelve months on the basis of these samples. Such tests are not required for office buildings, unless showers or other facilities in which drinking water is nebulised have been installed.

Danger due to Legionella bacteria must not be underestimated Legionella bacteria owe their name to a 1976 epi demic in Philadelphia, in which 182 of the over 4,000 people attending a convention of the American Legion suffered an acute outbreak of pneumonia. Twenty-nine people died as a result and the disease has since then been known as Legionnaires’ disease (Legionella pneumophila). The infection was caused by the air-conditioning system. More recent cases were linked to a Dutch flower show in Bovenkarspel in 1999, where the infection started in two whirlpools. Of the 233 people infected, 23 died. A hotel at a Spanish holiday resort had to be closed at the begin ning of this year, following three deaths and further outbreaks of Legionnaires’ disease.

A suspected case of infection with Legionella sp. bacteria is investigated in the microbio logical laboratory of the “Water and Environ ment” department of the Pasteur Institute in Lille, France.


29

Liability Studies have shown that, in Germany, up to 30% of the water samples from the drinking water system taken in public buildings display intolerable Legionella contamination levels. Applying this figure to residential buildings, this would mean that roughly 12 million homes in 5.4 million buildings are affected. The real figure will only become clear in the future. Countermeasures Infection with Legionella can have several causes. Among others, these may include the planning, instal lation, commissioning, inspection, maintenance, repair, rehabilitation, renovation, modernisation, oper ation and, last but not least, defects in the serviceabil ity of the pipe material. Practical and unambiguous instructions from the manufacturers are essential for the installation process and for operation without dis ruption or damage. If the so-called technical interven tion value is reached or exceeded in a sample, the public health authority must be informed and a haz ard analysis prepared. It must be noted in this context that the outcome can change significantly depending on the test method used, as well as on the time and place of sampling, and on the manner in which sam ples are taken. Technical rehabilitation can only suc ceed if the cause of the bacterial growth and the loca tion of the contamination are clearly identified.

Detailed planning is needed in the case of larger installations. In addition, precise measurement and control systems are essential for metering the chem ical disinfectant. Its concentration must be suffi ciently high to ensure that the bacteria are reliably killed off in all parts of the drinking water system. An excessively high concentration, on the other hand, can result in damage to the piping. Since the continual use of disinfectants is not advisable, simultaneous steps must be taken to rehabilitate the drinking water system. Conversion or disassembly work should be undertaken by specialist firms familiar with the installation in question and its materials. The possibility of thermal disinfection should also be considered before using chemicals. When pathogens in a pipe system are combatted by thermal or chem ical disinfection, the pipe material generally also comes under attack, leading to corrosion damage or decomposition of the polymer materials. Even when using thermal disinfection, it is essential that information on the system’s design and the com ponents and materials used are obtained from the manufacturer. Massive property damage shortly after disinfecting a system has so far occurred only rarely.

This does not necessarily mean installation of a com plete new drinking water system. In order to arrive at a long-term solution, the cause of the infection and bacterial growth, as well as the site of the contamin ation must be localised and eliminated by technical rehabilitation. For this reason, the cause must always be established before starting any disinfection.

On 24 February 1999, 233 people became ill with pneumonia caused by Legionella bacteria after visiting the flower show “West-Frise Flora” in West Frisia in the Netherlands. 23 visitors died.

30


Liability

Legionella bacteria Legionella bacteria are aerobic micro-organisms found throughout the world in small numbers in the microflora of rivers, lakes and groundwater. Through the water sys tem, they enter the drinking water pipes in buildings in concentrations which are not dangerous to humans. Above a certain concentration, how ever, they do become dangerous to humans when they are inhaled in the form of finely dispersed droplets (aerosols) and enter the lungs. Legionella bacteria cause a variety of illnesses. The spectrum ranges from infections without symptoms through flu-like infections (Pontiac fever) which normally recede without medical treatment after a few days, to such serious infections as Legion naires’ disease in extreme cases. For tunately, this atypical pneumonia occurs only rarely. Risk factors include a compromised immune sys tem, smoking and old age.

Legionellosis has been a notifiable disease since 2001. Although only 503 cases of Legionnaires’ disease were recorded in Germany in 2009, it is estimated that the actual figure could be between 30 and 60 times higher. At an assumed mortality rate of 7%, that would mean between 1,000 and 2,000 deaths per year. The pathogens flourish in a moist environment, growing vigorously in “calm conditions” at temperatures between approx. 20°C and 45°C. The nutrients required for growth are nor mally to be found in all drinking water systems. Just how the various growth factors interact is a complex subject which is still being investi gated. Nutrient concentrations and the concentration of both organic and inorganic matter in the piping, the interaction between pipe mater ials, the surface structure of the pip ing and the hydraulic conditions all play a decisive part here. Legionella bacteria can even survive tempera tures of more than 70°C inside amoe bae.

The Hotel Adlon in Berlin is one well-known case in which a Legionella infection occurred after a relatively short period of operation. The stainless steel drinking water pipes were corroded by the chlorine and chlor ine ions in the disinfectant, causing damage costing millions. Disinfectants have also been reported to have caused damage in the USA amounting to several million dollars. Potential accumulation of liability losses In Germany, mains water damage is covered by the building insurance. If bacterial infections in drinking water installations lead to business interruptions, for instance in hospitals, losses can be claimed within the framework of business closure insurance. Bodily injury is covered by liability insurance. Comparable insurance solutions can also be found in other coun tries, such as the UK or the USA.

Magnified view of the pathogen Legionella pneumophila bacteria.

If the loss occurs only a short time after disinfecting the system, this will be considered as a potential cause of the damage. If disinfection can be identified as the indisputable cause of the damage, claims must be filed with the liability insurer of the party respon sible. Cases of gradual destruction are more difficult. Under certain circumstances, the damage to stainless steel pipes, which are sensitive to a combination of chlorides and oxidising agents, may only come to light five years after the actual disinfection. Corrosion damage must be expected in galvanised steel piping following thermal disinfection. In the case of plastic piping, it must be assumed that the forecast service life of 50 years may decline sharply due to thermal or chemical exposure, resulting in mains water damage. Pipe connectors with plastic gaskets, which are also used in metal piping, are also at risk.


31

Liability

Different types of piping Each installation system has its own advantages and disadvantages which must be taken into account when planning a construction project. Experience has shown that builder-owners and contractors try to pinch pennies on pipe materials, while forking out hefty sums for sani tary installations, office lighting, flooring, etc. One commonly cited reason for this discrepancy is that the insurance will cover any losses due to the piping. But that is shortsighted, for the insurer may increase premiums or impose a deductible or even terminate the insurance con tract if claims accumulate. So paying more attention to the quality of the installation materials can prove worthwhile for all concerned. Plastic pipes Forecasts as to the service life of plastic pipes are based on constant pressure and temperature condi tions, yet the stresses encountered in practice are far more complex. Ser vice life can be reduced by intrinsic stresses in the material due to the production process and unavoidable stresses due to installation and oper ation. The same applies to internal and external exposure to different

substances. Flowing media and media constituting a burden (pos sibly in addition to other factors), as well as microbiological factors may speed up the degradation of stabil isers in the plastic material. This con sequently makes it impossible to pre dict the exact service life under all the different possible operating con ditions and when exposed to chem ical disinfectants. Service life may be reduced from 50 to 25 years, for example, with a drastic breakdown of stabilisers leading to embrittlement and the risk of crack formation. Stainless steel piping Different alloys are approved for stainless steel drinking water pipes. The steel’s susceptibility to pitting when exposed to chlorine and chlor ides increases as the molybdenum content decreases.

Resistance to disinfectants also depends on other constituent elem ents in the alloy. Even if the pipe material complies with the same standard requirements, it can still react differently. Individual influencing factors, such as inadequate rinsing after dis infection, elevated temperatures or extended periods of stagnation, also promote corrosion, especially when they overlap. Highly resistant piping must therefore be installed above all in buildings inhabited by high-risk groups in which particular attention is paid to hygienic drinking water standards, such as homes for the elderly, nursing homes and hos pitals. Sealing materials The service life of the connections between the individual pipe seg ments also varies, depending on their quality. Sealing materials also tend to be populated by micro-organisms to different extents. They can con tribute to contamination of the drink ing water system.

Fig. 1: Factors acting on polymer materials Temperature

Mechanical stresses – Static forces (tension, compres sion), dynamic forces (vibration, pressure surges, shear, torsion)

Biological media – Micro-organisms (bacteria, fungi)

Light – UV/VIS (including neon light)

? Chemical media/ ambient influences – Oil, surfactants, stickers – Pollutants – Water

Predicting the service life of plastic pipes depends on many factors. Source: Munich Re

32


Liability Burden for building insurance When the destruction occurs gradually, it is difficult to trace the damage back to the prior disinfection and identify a responsible party who can (still) be held liable. The majority of losses will then be settled through the building insurance. In addition to a grow ing number of claims, a higher average loss must therefore be expected in future in water damage insurance. The risk basically increases with the number of disin fections. In all cases, however, the damage should be documented and evidence collected. Certain types of damage can still be traced back to disinfection meas ures even years later. In the case of plastic pipes, this is done on the basis of comparative assessments in which the damaged part filed in evidence is compared with a neutral sample. Ideally, this neutral sample will stem from the same production lot but will never actually have been installed. If necessary, it may suf fice to compare a pipe section of the same diameter taken from a point in the system far removed from the scene of the damage.

Furthermore, they do not usually have circulation control valves and the pipes are often inadequately insulated. As a result, the cold water can heat up to more than 25°C and the hot water cool to less than 55°C, promoting the growth of bacteria. Buildings in which apartments remain vacant for extended periods of time are also at risk, because the water in the pipes can heat up. The same applies to buildings in which the drinking water installation is directly connected to the fire-fighting supply. Hot water tanks are sometimes over-dimensioned in new residential buildings, for example because they are to be connected to a solar installation at a later date. In single or two-family homes, sufficient water may no longer flow through the individual outlets once the children have moved out. Luxury suites can be a potential risk in hotels if they remain unoccupied for long periods. The same also applies to rarely used first-aid rooms in industrial or office buildings. S howers in school sports halls are a classic risk, as the water remains stagnant in the piping for six weeks during the summer break.

Mixture of materials difficult to assess Most drinking water installations contain a whole variety of materials. The pipes installed in basements and risers are frequently made of a different material from those on the individual floors. Various shut-off valves, filters and pressure reducers are also installed. The elastic synthetic sealants also react differently to the disinfectants used. All too often, manufacturers’ documentation fails to provide detailed information on the basic conditions to be noted when disinfecting the system. When manufacturers were asked how long the various pipe materials could be exposed to which concentrations of the respective disinfectants, the information was not always forthcoming. Even contacting the individual manufacturers did not help to clarify matters. For this reason, damage cannot be excluded even when the system is only disinfected for a limited period of time. Which types of building are at risk? The risk of contamination with Legionella bacteria is greater in older buildings, as they do not reflect the latest generally accepted technical rules and stand ards. Most of the pipes in these buildings are overdimensioned with a correspondingly low flow rate.

In school sports halls, water often remains stagnant in the piping for six weeks during the summer break, creating an environ ment in which Legionella can thrive.


33

Liability Fig. 2: Growth of Legionella bacteria

Owners of buildings must take action The new German Drinking Water Ordinance contains no fewer than 25 references to “generally accepted technical rules and standards”. This highlights the importance of technology in ensuring the availability of our most important resource. Homeowners and the operators of such installations are obliged to ensure a safe supply of water. The planning, construction, modification, operation and maintenance of such sys tems must be placed in the hands of specialist firms. Corresponding action must be taken at an early stage so that damage is prevented from the outset. Pipes and seals should be made of materials which are resistant to disinfectants and only fittings manufac tured under sterile conditions should be used. Degradation, ageing, fatigue, creep strength and other mechanical factors specified in European standards (DIN EN 806-2 “Specification for installa tions inside buildings conveying water for human consumption – Design”) must be taken into account by planning engineers and plumbers when selecting the materials used. Care must also be taken to ensure that the apparatus, plant parts and piping can be cleaned or disinfected during subsequent operation.

No. of Legionella (in thousands) 600 500 400 300 200 100 0

0

1.5

3

4.5

6

7.5

Time (in days) Under optimum laboratory conditions, the Legionella count doubles every two to four hours. In drinking water installations, it can be expected to double roughly every nine hours. The technical intervention value specified by the Drinking Water Ordinance equals 100 cfu/100 ml. (cfu = colony-forming unit) Source: Munich Re

Mains water damage in Germany More than a million water damage claims per year give rise to enormous costs in homeowners’ comprehen sive insurance. This insurance covers burglary, fire, broken glass and pos sibly losses due to natural hazards. Since 2002, homeowners’ compre hensive insurance has constantly reported an underwriting loss.

34


More than 60% of costs are spent on settling water damage claims which now total more than €2bn per year. The average amount claimed has increased continuously and is now around €1,700. There are several reasons for this development. New pipe materials and connection techniques which are not suitable for their intended pur pose appear on the market every year.

The problem is compounded by the increasingly tight schedules for plan ning and installation, poorly qualified workers and the growing number of “do-it-yourself” installations. Con cealed pipe routing, new construc tion materials and techniques, as well as shoddy maintenance and servicing also send costs soaring. In addition, the installations have reached the end of their theoretical service life in many insured build ings.

Liability Working paper W542: 2009-8 of the German Tech nical and Scientific Association for Gas and Water (DVGW) “Composite piping in drinking water installa tions” states: “The materials used in drinking water systems must be sufficiently resistant to all the physical, chemical and corrosive effects, including possible disinfectants, to be expected during oper ation in conformity with the intended use.” This basically good requirement should urgently be specified in more detail by the issuer of the regula tion, for it is not entirely clear what exactly is meant by the words “sufficiently” and “resistant”. These words can be interpreted differently by the manufac turers. Yet particularly insurers, housing construction companies and property owners, planning engineers and plumbers must be able to reliably judge how long the drinking water installation will remain free from damage under the prevailing operating conditions after being disinfected once, twice or more often, with different concentrations, exposure times, tempera tures, etc. and how long it can continue to be operated without jeopardising safety and serviceability. For instance, if the pipe system has to be replaced after only 25 years, it will be very difficult to assert any claims against manufacturers, planning engineers and plumbers. Certificates issued by independent test agencies warranting serviceability for a certain period of time can offer a degree of safety here.

Conclusion Housing construction companies and other commer cial housing landlords should seek professional advice on the new regulations in the Drinking Water Ordinance and their consequences. To prevent Legionella bacteria from colonising a system, it is essential to ensure a constant flow of water in all pipes, as well as to maintain the required tempera tures and have the drinking water system serviced at regular intervals. If infection does occur, a specialist firm or experienced planning engineer can help to eliminate the infection and avoid unnecessary disin fection, particularly in the case of larger installations. Unoccupied properties should be identified in order to give insurance companies greater security in plan ning their portfolios. It is also advisable to clarify whether problems have already arisen in conjunction with drinking water hygiene and whether the system has already been disinfected. Such properties must be monitored with regard to mains water damage and the experience incorporated into future calculations.

In view of the insurance industry’s claims experience (see box on page 34), it is also advisable to install pip ing either so that it is visible or concealed behind detachable panelling. This makes it easier to repair leaks, causes less damage and the piping can be replaced without undue effort if further damage occurs or is to be expected.

Our expert Holger Tausendfreund is a specialist in damage to mains water systems and drinking water hygiene. He is a claims engineer at Munich Re. [email protected]


35

Property

Production stoppage at aluminium plant A power failure at a large smelting plant caused molten aluminium to solidify, causing large-scale disruption to production. The plant’s raw material suppliers were also seriously affected.

Michael Gibbons

In 2009, a severe ice storm hit parts of the mid-west United States, causing widespread power outages. A major aluminium processing facility was also left without electricity. When the temperature of the aluminium fell below its melting point during production, the metal solidified, resulting in significant damage to the smelting pots in which it was contained. In add ition to the major costs needed for repairs, two of the facility’s three production lines became disabled, with

daily production falling by up to 75%. Consequently, the aluminium plant no longer ordered the usual amount of raw materials from its suppliers. This had a particularly severe impact on one supplier of calcined petroleum coke, which suffered a serious contingent business interruption (CBI) loss as a result of the lack of orders emanating from its main customer, the aluminium plant.

Aluminium smelting Primary aluminium (unlike secondary aluminium extracted from recycled materials) is most often produced through a smelting process using the so-called Hall-Héroult Cell (named after its inventors) in smelting pots. The anode used in the cell is made from calcined petroleum coke, and the cathode generally from graphite. Aluminium smelting is a constant and power-intense process which cannot be easily stopped and restarted due to the fact that whilst the aluminium is created at temperatures of 900°C, it has a melting point of 660°C. Should an extended power outage allow the temperature to drop below the melting point, the only recourse is often to remove the resultant solidified metal and overhaul or rebuild the affected smelting pots.

Exhaust to fume treatment plant

+ Fume hood + removable covers

Busbar to next cell

Steel cell Anode

-

Molten aluminium Cathode

Source: Munich Re


Anode

Molten cryolite

Busbar to previous cell

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Alumina feeder

Property CBI coverage Contingent business interruption (CBI) coverage will generally contain a property damage trigger requiring physical damage of the type insured against at the premises of direct (and sometimes certain types of indirect) suppliers or customers, which in turn causes a contingent financial loss to the insured. The property damage trigger in this case was argued to be the the solidification of the metal in the pot lines on a direct customer’s premises. The insured was able to prove a financial loss through its main direct customer’s subsequent inability to purchase the calcined petroleum coke. The CBI loss was indemnified under the primary policy. The reinsurance agreement contained a market standard Transmission and Distribution lines (T&D) exclusion to the effect that loss or damage to aboveor below-ground conductors is to be excepted from coverage, including any resulting time element or business interruption losses. The clause also contained a fairly standard limited buy-back for T&D lines within 300 metres of the insured premises. Once issues of proximate cause have been dealt with and it is confirmed that the loss falls outside of the scope of the buy-back, the result can be protection for reinsurers from a loss, or accumulation of losses, that are extremely difficult to assess in the process of analysing the individual risks within a cedant’s portfolio. One thing the clause did not specify, however, is whether the insured’s T&D lines, the subject of the buy-back, must be the sole cause of the loss for the buy-back to apply. In this case, this question did not have any implications due to the fact that the physical damage occurred only to the T&D lines caught by the main part of the exclusion.

For example, had the insured’s T&D lines also been damaged, one could have argued that the insured’s power loss was caused by the downing of its own lines, and it is irrelevant whether the grid was also down. This raises a host of complex issues, such as proximate cause and the interpretation of the clause’s objective intention, which can be avoided by the use of specific wording. Limiting incalculable exposures The purpose of a T&D exclusion from a reinsurance perspective is to limit the exposure from an incalcul able accumulation of losses caused by widespread power failures affecting several different risks within a cedants portfolio. Assessing the cedant’s portfolio allows us to identify the T&D lines and exposure to nat cat and CBI. These findings enable insurers and reinsurers to assess and model the risks accordingly and to include well-drafted T&D lines exclusions designed to protect them from unwanted exposures and costly surprises.

Conclusion It is important for insurers to limit incalculable losses. This is particularly relevant for insurance of energyintensive industries which are exposed to large phys ical and (contingent) business interruption losses should power supply be interrupted to their manufacturing hubs, or those of their customers and suppliers.

Our expert Michael Gibbons is a lawyer specialising in coverage analysis for large industrial property claims in Munich Re’s Global Clients Division. He has been with Munich Re since 2009. [email protected]


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Liability

Oil spill off Brindisi – A case for the environmental pool A broken pipe wreaks havoc: large amounts of fuel oil spilled into the sea from an Italian refinery, causing widespread contamination. It was the costliest claim ever settled by Italy’s environmental pool.

Leaking fuel oil is skimmed from the surface in the bay off Brindisi to prevent it spreading into the roadstead.

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Liability

Monica Carbonara and Giovanni Faglia

Around 7 p.m. on 3 December 2008 a pipeline burst in a tank farm for petroleum products belonging to a refinery. Fuel oil streamed into the trench running parallel to the road and from there into an underground storm drain. From there, the oil made its way via a stream into the bay in front of the policyholder’s tank farm. The policyholder was responsible for clearing up the damage within the insured area. The port authority ordered the first measures required outside of the insured area. Oil barriers were erected, but due to stormy weather they tipped over into the bay even before the emergency measures were complete. The oil floating on the surface contaminated the boats, platforms and machinery at a nearby offshore construction site of a consortium specialising in industrial and technical work. The fuel oil had to be contained as quickly as possible to stop it spreading further into the roadstead. The port authority also banned further use of the consortium’s oil-smeared equipment until the cleaning work was complete. The consortium suspended its operations from 4 December 2008 to 20 February 2009.

Rehabilitation efforts Emergency and loss avoidance measures included all attempts by the policyholder to contain the oil spill and prevent further damage. To this end, the oil was pumped off inside the site, protective guards, dams and barriers were erected, video inspection systems were installed at the storm drains and oil-absorbent barriers were moved into position on the sea. The policyholder’s rehabilitation measures included all actions undertaken to decontaminate and replace the insulation on the piping and the cost of disposing of the fuel oil pumped out of the refinery’s trenches and storm drains. Rehabilitation measures outside of the policyholder’s site included skimming the oil off the surface of the open sea and its disposal (including transferring the oil to tanker trucks and temporarily storing it in the waste storage area of the policyholder’s site).

The exact cause of the pipe burst is unknown. Inad equate maintenance probably resulted in corrosion of the pipe, ultimately causing it to rupture. The damage was further compounded by the maintenance team’s poor knowledge of the area and some of the fuel oil spilled directly into the sea.

Italy’s environmental pool The Italian environmental pool is an association of primary insurers and reinsurers who place environmental liability policies in a common ac count. The pool has 36 members, including five professional reinsurers and 31 primary insurance companies. Its tasks include risk assessment and claims management.

The Italian environmental pool has over 30 years of experience in covering environmental risks, as well as excellent know-how in the field of basic and advanced training, in the updating of standards and regulations, and in the development of new products.


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Liability Liability loss Neighbouring companies affected by the spill claimed around €6.5m. In addition, they also claimed unspecified sums for loss of reputation and loss of potential business. These claims were rejected for lack of evidence. Property claims amounting to roughly €600,000 and lost income (business interruption) in the amount of around €2.5m were recognised, however. All in all, the neighbouring firms received roughly €3m in indemnity. Own loss Within the insured area, rehabilitation costs were incurred in the amount of roughly €800,000 but a limit of €250,000 was specified in the policy. The rehabilitation work concentrated primarily on various machines and plants owned by the policyholder. Emergency measures to prevent the oil spreading gave rise to costs of roughly €1.5m, as well as to rehabilitation costs beyond the site in the amount of almost €400,000. Costs of more than €2m were incurred altogether. €4.6m was paid in settlement of the claim, minus the deductible.

Conclusion In many countries, environmental third-party claims are covered by public liability insurance according to the principle of sudden and accidental loss. The risk of gradual pollution is normally excluded, however. As the Brindisi case shows, extending standard public liability to include environmental claims based on the principle of sudden and accidental loss can easily result in a higher exposure than is often assumed at first. High losses are not confined to the realm of gradual pollution. Insurance companies should not lose sight of the risk exposure which can result from a sudden and accidental environmental loss.

OUR EXPERTS Monica Carbonara is a claims lawyer in the Europe/Latin America unit and a member of the Environmental Liability Topic Network team. [email protected]

Dr. Giovanni Faglia is an expert in environmental risks and specialises in legal and technical matters. He works as a senior underwriter and claims manager at Munich Re. [email protected]

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COLUMN

Economics from a risk perspective

Infrastructure – Pillar for growth and wealth Dr. Michael Menhart, Head of Economic Research at Munich Re [email protected]

According to the latest report by the World Economic Forum, a country’s infrastructure is one of the twelve most important pillars underpinning its economic competitiveness. The quality and scope of its infrastructure significantly influence its economic growth.

There is therefore an urgent need for infrastructure investments. Yet it would be wrong to focus purely on short-term economic stimuli; attention should instead focus on sustainable growth. Infrastructure investments are an ideal means to this end.

Why is that so? Good road and rail networks, for instance, reduce transport costs, make the country’s industry more competitive and benefit foreign trade relations. A fault-free power grid ensures that production can proceed smoothly, while an efficient telecommunications system permits free access to all relevant information. Intact water supply systems reduce the risk of illness, while lower costs for the healthcare system boost productivity.

According to one study, a 10% increase in infrastructure capital stock can boost per capita economic performance by 0.7% to 1% in the long term.

While emerging markets have a great deal of catching up to do – i.e. they will need to invest in infrastructure development – the industrialised countries face a completely different problem: their existing infrastructure is out of date, as necessary but expensive modernisation projects have been neglected for many years due to shortages of public funds. Economic performance is being curbed by dilapidated roads and bridges, by ageing power grids and water mains, as well as the sluggish expansion of broadband communication networks; what is more, they give rise to additional costs, either by causing congestion or quite simply through their vulnerability.

However, this can only be achieved if the right investment projects are selected. China, for instance, has boosted its volume of trade throughout its eastern region by no less than 40% as a result of efficiently expanding its transport system; the social return on the invested capital – i.e. the advantages gained for the population through better quality and lower costs – amounts to 30% per year. In the USA, investments in infrastructure projects totalling US$ 1bn are expected to create 18,000 new jobs, 40% directly in the construction sector and 60% long term in sectors such as manufacturing, education, transportation and energy.

However, there are two sides to every coin: the investment costs required are immense. According to OECD estimates, between now and 2030, up to US$ 71tn will have to be invested in the development and modernisation of infrastructure worldwide. In the past, these costs were often exclusively funded by the state. But today’s tight budgets make it unlikely for such sums to be expended in the short to medium term. The dilemma could be solved by alternative financing concepts, such as public-private partnerships, infrastructure investment funds or projects which are self-financing through customs and fees. The insurance industry has also recognised that ageing infrastructure is an urgent problem. It not only carries high loss potential, but also slows down a country’s economic development. Munich Re therefore also lends active support in this domain – providing insurance solutions for major infrastructure projects, without which such projects could never be realised, and participating in infrastructure investments. Here too, however, it is imperative that the projects concerned are sustainable and offer growth potential.


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© 2012 Münchener Rückversicherungs-Gesellschaft Königinstrasse 107 80802 München Germany Tel.: +49 89 38 91-0 Fax: +49 89 39 90 56 www.munichre.com Responsible for content Claims Management & Consulting: Nicholas Roenneberg, Prof. Dr. Ina Ebert Geo Risks Research/Corporate Climate Centre: Prof. Dr. Peter Höppe Marine: Olaf Köberl Aerospace: Dr. Achim Enzian Claims: Dr. Paolo Bussolera, Dr. Stefan Klein, Arno Studener, Dr. Eberhard Witthoff Editor responsible Corinna Moormann, Group Communications (address as above) Tel.: +49 89 38 91-47 29 Fax: +49 89 38 91-7 47 29 [email protected] ISSN 0941-0805

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Picture credits Cover, pp. 2, 6: Maritime New Zealand pp. 3 left, 14: livejournal/Roman Vlasov pp. 3 right, 20: Boscom International pp. 4 left, 13: Shutterstock p. 4 right: Dirk Reinhard, Munich Re Foundation p. 5: Munich Re pp. 10, 24, 30, 33: picture-alliance pp. 16, 17: Klaus Wenselowski p. 26: Allianz Seguros p. 27: Munich Re Madrid pp. 28, 31: ddp images p. 38: Pool per l‘Assicurazione RC da Inquinamento pp. 12, 18, 23, 35, 37, 40 top: Foto Meinen, Munich p. 40 bottom: Giovanni Faglia p. 41: Kevin Sprouls Printed by Druckerei Fritz Kriechbaumer Wettersteinstrasse 12 82024 Taufkirchen/München Germany Additonal copies are available at a nominal fee of €8. Please send your order to [email protected]. All rights reserved.

© 2012 Münchener Rückversicherungs-Gesellschaft Königinstrasse 107, 80802 München, Germany Order number 302-07432

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