Are Interest Costs claimable as an Increased or Additional Increased Cost of Working?
This is a question often put to me as some loss adjusters and insurers push back when it is claimed.
If I start with the actual wording from the Australian Industrial Special Risks policy which is found in many other policies, it reads:
“The Insurance under this Item is limited to Loss of Gross Profit due to: (a) Reduction in Turnover; and (b) Increase in Cost of Working, and the amount payable as indemnity there under shall be:…
…The additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in Turnover which, but for that expenditure, would have taken place during the Indemnity Period in consequence of the Damage, but not exceeding the sum produced by applying the Rate of Gross Profit to the amount of the reduction thereby avoided.”
If the Insured needs to pay a deposit on replacement stock or machinery or even make a fortnightly pay-roll and need to borrow funds to keep the business afloat, while the business has been disrupted due to an Insured Event, or because the Insurer has not made sufficient progress payments to allow them to fund this expenditure from insurance monies, then to me, in any interpretation of the Increased Cost of Working definition, the Insured is entitled to claim the additional interest that they have incurred in consequence of the damage.
I stress, the interest expenditure cannot be existing interest, for that should be included as an Insured standing charge in any event and be fully covered under the Item No. 1 (a). The two tests, being sole purpose test and economic limit test, obviously would both apply.
In view of the relatively low interest rates that are currently being charged around the world, I do not expect that the interest charges, unless the claim was protracted for an extended period of time and the amount borrowed was significant, would not pass the economic limit test. If it did not, or the Insured only had additional increased cost of working cover only, then the Insured would be able to make the claim under “Item No. 4 (Additional) Increased of Cost of Working”.
The insurance under this item is limited to increase in cost of working (not otherwise recoverable hereunder) necessarily and reasonably incurred during the Indemnity Period in consequence of the Damage for the purpose of avoiding or diminishing reduction in Turnover and/or resuming and/or maintaining normal business operations and/or services.
Here, the coverage goes further and states that the expenditure only has to be made to maintain normal business operations. Therefore, it goes without saying that if the insured had to borrow additional funds to maintain normal business operations and/or services then the interest paid to do so would be an additional increased cost of working.
Claims for this item are a relatively new phenomenon, typically brought about by the fact that some insurers are no longer willing to make reasonable progress payments to assist the insured during the initial phases of a loss. In fact, some insurers insist that the Insured incur the costs under Material Damage before they will reimburse them. In such cases, if their insurer has failed them and they have had to rely on the banking or other finance sector and incurred a cost to do so, then surely this is a legitimate Increased Cost of Working. To deny such a claim is a clear case of wanting the cake and eating it too.
To me, this is such an obvious increased cost of working, I cannot understand why it is being refused so often.
Perhaps, if it continues the only alternative will be to have it tested by the courts, but to me, it is a lay down misere.