The phantom menace

1. The phantom menace Claims in the modern supply chain CILA masterclass

2. Agenda • Introduction and tonight’s case study • The investigation - Jonathan Clark • The business interruption - Harry Roberts • Legal issues - Mike Wells (Kennedys)

3. The case study and investigation Jonathan Clark The phantom menace

4. Some issues for tonight • How complex is the supply chain ? • What are the interdependencies? • How is a manufacturing process owned and controlled? • What is “pull” or “push” production • What are the added risks of single manufacturing and distribution sources • Can we move from a supplier if they sustain a loss?

5. The case study • The policyholder - Kettleco • Long established manufacturers of electric goods including kettles • Used to have an integrated production line on one site • Now use outsource supply chain and are essentially assemblers of parts made by others • Hold comprehensive insurance programme including suppliers and customers extensions

6. Kettleco’s business • 80’s • “Push” business i.e. they sold to customers with their in-house production pre-planned • Purchased components from a wide range of suppliers for mouldings and build in-house • 90’s • “Pull” business i.e. now a business with a few major customers who request for production on demand • Assemblers of components from single source suppliers who manage a “virtual” production line

7. Kettleco’s contracts • Suppliers • Standard terms and conditions: • Specification of supply, price, payment • Usual array of small print • Customers • Major customers - their specific terms of purchase • Defines branded product • Other customers - Kettleco trading conditions • Specifies price and product description

8. The supply chain mapped QnB bigshed QnB highstreet Sellitall Wholesaler QnB retailer Kettleco Bits n pieces elec supplies Elemental hardware Plasticity moulders

9. Then one day It all changes for Kettleco and Plasticity

10. The supply chain remapped QnB bigshed QnB highstreet Sellitall Wholesaler QnB retailer Kettleco Bits n pieces elec supplies Elemental hardware Plasticity moulders Fire

11. After the fire - at Kettleco Kettleco’s insurers loss adjuster calls to investigate

12. The Sales director’s report • “Well I’ve been up to see the fire at Plasticity and I can report that the tooling for our kettles did not look in too bad shape. The factory is gutted and they won’t be trading for at least 10 months”

13. The managing director’s report • “I’ve had QnB on the phone chasing their Christmas order they sent through last week. This could not have come at a worse time for that contract. Still it’s not our fire so Plasticity had just better get it sorted, and we had better make sure we get that tooling to work.”

14. The production manager’s report • “It is our tooling, we have paid for the work on it. We pay by having part of the cost recovered from the jugs they send us. The tooling was made from our plans and designs. The QnB mod was designed by Plasticity but it is still our tooling.”

15. The material damage summarised • Plasticity’s plant has been gutted • The tooling for moulding kettle jugs can be reclaimed and made available for use within a week - this is four weeks quicker that to re-work • A stock of moulded jugs for delivery have been destroyed together with the packaging • Food grade plastic is specified by QnB • Rigorous QC and supplier approvals apply to the QnB contract

16. The business interruption Harry Roberts

17. The customer position • Evolving partnership - then and now • “You will pick up the tab” • Tally all the costs and even impose penalties? • “Fines and penalties” • Excluded or not? - read the policy • Can these payments be considered as ICW items? • What does the contract say? • Conundrum

18. Kettleco position • What is the supply contract with the customer? • Can “force majeure” be pleaded? • What if this plea is agreed but the customer withdraws their custom? • Is this a new or intervening cause? • What is reasonable - are we playing a new game? • Where does the supplier’s extension fit? • Who should fund the deductible and who gets the benefit of the policy?

19. The supply chain mapped QnB bigshed QnB highstreet Sellitall Wholesaler QnB retailer Kettleco Bits n pieces elec supplies Elemental hardware Plasticity moulders

20. Proximate cause considered • “But for the fire………” • The case in favour:- • Established texts - Riley • Current market practice - e.g. tenant • The policy wording - losses in consequence of damage

21. Proximate cause - some more • Any post insured event legal decisions? • But for - how far can we go? • Insured / uninsured intervening causes • What is “the insured cause” - equity and advocacy “The confidence of the customer is a critical element in mitigating the loss and the “but for” argument needs to be anticipated and pre-empted”

22. Adjusters’ summary Jonathan Clark

23. Getting your money back • Recovery is in name of policyholder - “nominus litus” • Not necessarily will the policy payments be recovered • Reinstatement not always readily available • No formula for business interruption • Different evidential requirements litigation v insurance policy • Economic losses are difficult to recover

24. The burning questions • A) Can we take our tooling away from Plasticity and use elsewhere? • B) Can we break our supply contract with Plasticity? • If (A) is not possible we will lose at least 6 weeks while we set up new tooling and test it • If (B) is not possible we must wait till Plasticity arrange alternative supply and manufacturing • What about the others in the supply chain?

25. The burning questions considered Mike Wells Kennedys

26. The supply chain mapped QnB bigshed QnB highstreet Sellitall Wholesaler QnB retailer Kettleco Bits n pieces elec supplies Elemental hardware Plasticity moulders

27. Indemnity and insurance “[Plasticity] shall at all times fully indemnify [Kettleco] against any action, claim, demand, cost, charges, losses or expenses caused to Kettleco, or for which [Kettleco] may be liable to third parties, due to defects in the workmanship or quality of the Goods, together with any claims in respect of death or injury where such death or injury arises out of the performance of the Contract and also any consequential loss or damage sustained by Kettleco or for which Kettleco may be liable as a result of the failure of Plasticity to supply Goods in accordance with the Contract. Plasticity shall maintain policies of insurance in respect of its liability under the Contract and shall on reasonable notice produce copies of the policies to Kettleco or its authorised agents together with any other information regarding such insurances reasonably requested”.

28. Cancellation “[Kettleco] shall have the right by reasonable notice to [Plasticity] to change the nature of any goods or services covered by this contract … If the performance of work under this contact is cancelled in whole or in part by [Kettleco] by notice in writing to [Plasticity], [Kettleco] shall pay [Plasticity] for the performance of work carried out under this contract up to the time of such termination”.

29. Force majeure “The performance of all contracts is subject to variation or cancellation by [Kettleco] owing to any act of God, War, strikes, lockouts, fire, flood, drought, tempest, or any other cause beyond the control of [Kettleco] or owing to any inability by [Kettleco] to procure materials or articles required for the performance of the contract and [Kettleco] shall not be held responsible for any inability to deliver caused by any such contingency”.

30. Tooling - “DRAWINGS, PATTERNS, DYES, MATERIALS, ETC All patterns, dyes, moulds, tooling, drawings or materials supplied by Kettleco (or prepared or obtained by [Plasticity]) shall be and remain the sole property of Kettleco. [Plasticity] shall maintain all such materials in good order and condition and insure them against all risks whilst in its custody. On completion of the contract (or otherwise as directed by Kettleco), Plasticity shall return them to Kettleco in good order and condition, subject to fair wear and tear. Should Plasticity fail so to return them, Kettleco may either withhold payment until they are so returned or withhold such part of the payment due as may be required to replace them or to restore them to good order and condition, whichever may be the less expensive. Plasticity shall not copy or use such materials nor authorise nor knowingly permit them to be copied or used by anyone else for, or in connection with, any purpose other than the supply of goods to Kettleco”.

31. Proximate Cause – Cause of Loss 1. The event which leads inevitably(or put another way with reasonablecertainty to the loss).

32. Proximate Cause – The Extent of Loss 2.If the loss was the inevitable result of aperil then the full extent of that loss willbe recoverable and

33. Proximate Cause – Extension 3.In the absence of an applicable exception, in the event that the loss is not inevitable but was nonetheless not unlikely to result or put another way was the natural consequence itis likely to be covered.

34. Material damage proviso “Provided that at the time of the happening of the loss, destruction or damage there shall be in force an insurance covering the interest of the Insured in the property at the Premises against such loss, destruction or damage and that payment shall have been made or liability admitted therefore”.

35. Insurance “Plasticity shall maintain policies of insurance in respect of its liability under the Contract and shall upon reasonable notice produce copies of the policies to Kettleco or its authorised agents together with any other information regarding such insurances reasonably requested”.

36. Summary of tonight’s presentations Jonathan Clark CILA

37. What we have reviewed tonight • How complex is the supply chain ? • What are the interdependencies? • How is a manufacturing process owned and controlled? • What is “pull” or “push” production • What are the added risks of single manufacturing and distribution sources • Can we move from a supplier if they sustain a loss?