Business Interruption Claims – will your insurance provide what you need and expect?

Business Interuption Insurance

Despite all your best endeavours on loss prevention and risk mitigation you may still have a serious incident which means you have to call on your business interruption insurance. Will it provide the money you need to get over the loss and ensure your organisation continues in business? The 2015 survey on this topic by AIRMIC the UK association for risk and insurance professionals provides some interesting statistics from members’ experience of business interruption claims summarised below.

This article was written by Brian Sullivan. Brain can be contacted via LinkedIn

Issue % of Respondents
Confident in declared values Only 50%
Confident in chosen indemnity period Only 50%
Difficulty in quantifying the total loss to the business 100%
Cover did not operate for parts of the claim which were expected to be covered 40%
Information required by insurers not available 100%
Insufficient limits or sub-limits 15%

If the professionals have problems getting this insurance cover right where does this leave organisations without a full time risk or insurance professional? These issues are also highlighted in separate reports by the Insurance Institute of London, Chartered institute of Loss Adjusters and the London Business Interruption Association. We shall look at the key issues in turn and the possible solutions. Cover After an incident there will be a reduction in revenue and increased costs. In basic terms what a Business Interruption policy seeks to do is protect the business for the loss of Gross Profit from this reduction in revenue and Increased Costs of Working whilst taking account of any savings that may arise in variable costs.

An ‘off the shelf’ policy is unlikely to work for Business Interruption as most businesses are unique and will have features that need tailored cover. For example many businesses are now assemblers or distributors and as such their business interruption risk is about their international supply chains rather than say their UK premises. Gross Profit Definition (declared value) Business interruption insurance policies have a specific definition of Gross Profit which does not necessarily mean the same as that typically used by a business or accountants. The policy definition is Turnover plus closing stock Less Variable costs plus opening stock

The key here is to clearly understand which costs are truly variable and can be deducted when arriving at the declared value for the policy. A recent survey by the Chartered institute of Loss Adjustors (CILA) suggests that 50% get their Gross Profit figure wrong and of these about half are out by 50%. Therefore it is essential to sit down with the business’s leaders to understand what would happen to revenue and profit in the event of a serious loss so as to arrive at a correct sum insured which also allows for future trends in the business.

Maximum Indemnity Period (MIP) This starts from the time of damage and will continue for the period chosen by you or until the results of the business are no longer affected whichever is earlier. All losses have two phases to consider – the repair phase and the getting the business back phase. An ‘off the shelf’ policy is likely to have a 12 month indemnity period and although 75% of policies in the UK are on this 12 month basis it is too short even for a small one site retailer. It is critical to review your risks and mitigation plans to get this indemnity period right.

Factors which can affect this include – Listed buildings – 3 years should be considered a minimum indemnity period if you occupy such buildings. Planning consents – apart from listed buildings local authorities can take considerable time deciding on planning applications. Tenanted properties – as you have no control over the speed of reinstatement of the damage this will probably take longer. Key equipment – key plant may take at least a year to replace. Site restrictions – is there space for temporary buildings or temporary power supplies? Site access – is there only one way in and out? Operational restrictions/licenses – may not allow night shifts or weekend working to help make up for lost production. Excessive demands on the management team – the competence of the team is often the key factor in speed of recovery. Major customer(s) – having a significant customer normally means it takes longer to recover. Major supplier(s) – they may depend on your orders to continue in business even if you do not need their supply whilst you are in the repair and recovery phases.

Wide Area Damage(WAD) Whilst the majority of losses are a result of damage at the insured’s own premises with natural catastrophes such as earthquake, storm and flood there is often wide area damage. This will often mean a general lack of access and damage to suppliers and customers affecting general business activity levels. Clearly this Wide Area Damage can make the loss worse in a number of ways.

However the typical UK policy only covers losses arising from damage at the Insured’s Premises. To address this potential shortfall in cover a business should arrange extensions for denial of access, customers, suppliers and utility providers. Sub-limits for Extensions For extensions such as customers and suppliers mentioned above these will normally be subject to a specific sublimit which will need to be negotiated with your insurer. Blanket cover may only be available for relatively low limits and should high limits be required for say a key supplier then you will need to provide specific risk information about your supplier to allow your insurer to price the risk and offer cover. Increased Cost of Working – Economic Limit The insurer does not have to accept liability for additional costs until it is clear that they were incurred economically (i.e. spend a £ to save a £) during the indemnity period. There have been instances of claims being rejected here where insurers were aware that costs were being incurred but subsequently these were found to be uneconomic. There is a solution to this which is an extension known as Additional Increase in Cost of Working. Advance Loss of Profits The standard policy only covers existing operations. This extension of cover protects the business from loss of anticipated earnings from a new installation, plant or business process. It is intended for new streams of business or new locations.

Payments on Account Cover is for loss of profit not cash flow and it will not take long for businesses when not trading to run out of cash. Whilst interim payments are often made the standard UK policy has no provision for this in the wording. Therefore a specific clause should be added to the policy.

Claims Preparation Costs The AIRMIC survey highlighted the difficulty of both obtaining necessary information and quantifying business interruption claims. The time and cost associated with this can be significant. Unless specifically added as an extension these costs are not typically covered under an ‘off the shelf’ policy in the UK. Conclusions There has been ongoing concern from policyholders, insurers and adjusters about the lack of clarity and understanding of certain aspects of Business Interruption policies. At best it can leave insureds feeling that they have not been treated fairly following a claim and at worst leave a business seriously out of pocket even perhaps threating its continued existence. It is therefore really important that insureds sit down with their professional risk and insurance advisers to conduct a rigorous analysis of their risks so that the business interruption policy is tailor- made for them. It is also recommended that during this process the business engage with their insurer to go through their loss scenarios so that in the event of a loss all parties are clear on expectations, what information will be needed etc. so the loss can be adjusted in a straightforward and timely manner. Brian Sullivan MA, ACII, Chartered Insurance Practitioner Altradas Limited. March 2017