Crumbling bricks spell risk management nightmare for respected German company

The diversified group faces an influx of claims from house owners because bricks used in the construction of houses have the unfortunate tendency to crumble to pieces once they come into contact with water or dampness, sometimes decades after the house has been built. To make matters worse for the company its insurers are unlikely to pay the huge sums required to compensate the victims because Haniel, at the time, only bought limited cover. The tale serves as a stark reminder to companies all over Europe that are currently desperately seeking to slash costs to survive the recession, not least in risk management and insurance spend.hideIn the 1980s and 1990s, Haniel Baustoffe used cheap chalk from desulphurisation plants instead of quick lime to produce sand-lime bricks. The results are disastrous. Millions of bricks with the defect were produced between 1987 and 1996 in three plants. Claims are mainly emerging in Duisburg and the Lower Rhine region. In December 2011 alone, hundreds of house owners reported claims caused by the disintegrating stones. So far, Haniel has reconstructed or bought 160 houses that have been affected which cost it €170,000 per house on average. The total number of known cases so far is 382. “We have continued to reconstruct damaged houses as a gesture of goodwill,” spokesman Dietmar Bochert said. Haniel rejected earlier calculations which suggest that around 40,000 houses are affected and that claims could cost billions. Every figure is speculative, Mr Bochert said. The main insurer, Hannover-based Talanx, did not comment on the case. Talanx-affiliate, HDI-Gerling, provided the product liability insurance during the production period. Insurance sources do not expect that claims will reach a three-digit million amount. “It is more likely that claims will remain in the lower double digit area,” one told Commercial Risk Europe. The insured loss is likely to be so low simply because Haniel did not expect losses from product liability. If claims reaching the higher end of the scale are made, Haniel will be stuck with the costs. If it turns out that Haniel ignored earlier reports about the defective building material, the insurance company could refuse payments altogether, although the insurer has contributed to settlements reached with house owners so far. Haniel did not want to give detailed information about the extent of claims. The former subsidiary was sold in 2008 to Goldman Sachs and PAI Partners and has since been renamed Xella. Xella spokesman, Ernst Arelmann, does not believe that claims will reach a dangerous dimension. Since the end of November, more than 500 worried house owners got in touch with the company after several media reports were published. “We analyse each request and send out experts who check possible requirements,” Mr Arelmann said. Many of the worried house owners were not affected because their property was not built in the 1990s or were made of red brick, he said. Moreover as part of the sale of the business the buyers insisted that all risks from defective material remain with Haniel. Xella is handling claims, but fears that the claims can damage its market position. “For us, this is a question of reputation,” Mr Arelmann said. In contrast to Xella and Haniel, Duisburg-based lawyer Stefan Kortenkamp expects the amount of the claims to increase substantially. He represents more than 30 claimants. “Our telephone hasn’t stopped ringing,” Mr Kortenkamp said. The first court case started on December 8 in Duisburg’s regional court with no concrete results so far.

Crumbling bricks spell risk management nightmare for respected German company

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