Underground Mining Risks

18 August 2016

Underground mining has always been associated with high risk and seen by both the public as well as insurance markets as ‘deep, dark and dangerous.’ In this blog by Stuart Evans, JLT Mining’s Practice Leader for South Africa, we question whether this perception is justified from a property insurance perspective. Just what are the risks of underground losses versus surface losses, and what is their impact on a business’ revenues and damage to property?

Underground mining has been taking place for thousands of years, from the early Egyptian gold mines estimated at 4,000 years old, to the underground mining conducted by the Roman, Greek and Persian empires, with mines reaching depths of around 200m by 650AD. In fact, the early civilisation methods for mining can be credited with developing the support structures not dissimilar to those still used by the industry today.

Firstly, it is apparent that there are a number of risks associated with different types of underground mining. These extend from gaseous build up, to mining at extreme depths, where both natural and mine-induced seismic activity presents the highest likelihood of severe events occurring.

Mining is, quite rightly, a heavily regulated industry and there is considerable focus on safety; both within the industry and from government regulators. Sadly, whilst mining companies still experience fatalities on an annual basis, these numbers have reduced significantly (especially in environments like South Africa, Brazil and Australia) and this has been aided by the introduction of mechanised mining techniques, alongside an ever increasing awareness and commitment to safety issues at senior executive level.

Brett Eaton, Senior Manager at global accounting and consulting firm RSM, spends much of his time assisting large corporates calculate their business interruption claims and notes that, ‘Insurance would be a key mitigation step. The regulatory environment around mining places a strong emphasis on prevention. But when the preventative measures fail, the insurance policy is the final mitigation tool (and safety net) to a major financial loss.’

From the JLT Mining team’s long experience with the industry, we have found that the majority of losses occur on surface and account for in excess of 60% of claims paid on an annual basis. The surface-based assets of mining businesses, ranging from equipment to processing operations, are clearly more exposed from a natural catastrophe exposure perspective and significant damage can result from flood, windstorm, earthquake and the like. 

For those underground miners operating in regions with seismic activity, earthquake exposure is a major concern. Yet for the majority of underground miners, it is the risk of a major event underground that typically constitutes one of their Maximum Foreseeable Loss (MFL) scenarios. This is generally associated with an event that results in limited access to their ore body. This raises an important point around the insurance protection generally afforded to miners for underground events. 

As an example we will use an underground fire event (let us assume that the fire began due to an explosion following a build-up of gasses in a previously worked out area). 

Firstly, all unmined ore is excluded from the definition of insured property.

Secondly, policies typically exclude the following (although bearing in mind a broker worth his salt will always seek to secure coverage enhancements):

  • Development drives or headings, production stopes, longwall panels and/or gateroads;
  • Shafts, tunnels, adits, portals, inclines and/or declines in worked out and/or abandoned areas;
  • That portion of any shaft, tunnel, adit, portal, incline and/or decline that is situated less than 100 metres horizontally and/or less than 50 metres vertically outbye any development drive or heading, production stope, longwall panel and/or gateroad or point of pillar removal;
  • Consumable property (such as bolts, supports etc).

The key issue arising from these Physical Damage exclusions is that the resultant Business Interruption loss may well be excluded. Reg Naidoo, Vice President Finance for Sibanye Gold, says that his biggest concern is, ‘the business disruption which will lead to production loss.’

It is of the utmost importance that miners hold discussions with experienced mining brokers in order to determine how to establish MFLs and how coverage ought to be designed to guarantee the most effective policy response in the event of a loss. 

Your broker can guide you in what values must be declared as well as which markets are the most appropriate partners for the operations in question. Since every mining risk is unique, selecting the right insurers is paramount. 

Besides the type of loss described above, the other key causes of underground mining losses and insurance claims include:

  • Conveyor Systems – especially due to friction;
  • Crushing equipment and Machinery Breakdown;
  • Fires in underground workshops where there tends to be a large accumulation of equipment/machinery;
  • Substations (fire) and pumping equipment (breakdown resulting in flooding).

All of these risks can result in significant interruption events and as they are all insurable, and should be essential points for discussions with your broker.

As summed up so succinctly by Andre Pienaar, Chief Underwriting Officer of PLUM, ‘major issues and disappointments will be avoided if clients and brokers have detailed pre-cover discussions - it is too late once the event occurs!’

For further information, please contact Stuart Evans, Mining Practice Leader, JLT South Africa on +27 11 361 0038 or email stuart_evans@jltgroup.com

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contact Stuart Evans
Mining Practice Leader, JLT South Africa stuart_evans@jltgroup.com