Blog Question: How best to insure business interruption for a packing house and the owner farmers
Here is quite an interesting question regarding a packing house and the farmers who own and use the facility.
Would you mind having a look at a case for me? Are we doing this correctly?
We have a company which runs a fruit & vegetable packing shed insured on a Cluster, XYZ, [Group and insurer name withheld] Business Package for property and business interruption.
The’X’number of directors of this company, also run their own farms (different entities) who send their produce to the above company to be packed and sent to market for sale.
The company receives the income from the sale of the produce, and then charge the farmers a fee to cover their costs, and the balance is paid to the farmer.
How do the farmers (also directors of the company) cover their loss if the packing shed was unable to trade due to an insured event and they are unable to send their produce to market?
Do the farmers have to have their own individual business interruption cover separately, or can the company insure their loss under their policy?
Hope I have explained this correctly.
Look forward to your thoughts.
Mark [surname and email provided]
As is often the case there is more ways than one to achieve the result. As so often happens as I set down in writing the options one appears better than the rest and that is what happened here.
There are a couple of ways of doing this.
The first would be have each farmer take out their own policy but with a specified supplier being noted, that is the packing shed, with the sub-limit being set based on the value of the proportion of their sales that go through that facility.
You could then also arrange Additional Increase in Cost of Working cover for them so that the farmers could use this to use a different packing house if one was available.
Another way would be to have a contract in place between the farmers and the packing company that in effect guarantees the farmers their proportion of the sales that they normally would achieve.
You would then need to insure this under the Contractual Fines and Penalties section. The issue here is that if the farmer were to find another packing house they would make a super profit. This goes against the spirit of indemnity under an insurance policy. That is to put the Insured back in the same position they would have enjoyed but for the loss.
Another version is to name all the entities on the one policy, declare the total gross profit that they all earn as one declared value. (I would probably record this separately on your own file so that you can demonstrate to any adjuster or forensic accountant that they are included).
Thinking about this as I type my reply, I think this last option is the best way forward. This way their stock of fruit is also covered whilst at the packing house. This is often overlooked.
To be belt and braces if you ever move this to an ISR, I would also include the following Interdependency Endorsement under an ISR. The code if you need it, is IDEPAXB4
INTERDEPENDENCY – AUSTRALIA
Loss as insured by Section 2 of the policy resulting from interruption of or interference with the Business in consequence of Damage to property not insured by Section 1 of the policy and situated at any other premises in Australia owned and/or occupied and/or used by the Insured for the purpose of the Business or any other business shall be deemed to be loss resulting from Damage to property used by the Insured at the Premises.
As I say it is belt and braces and unless I am missing something, it is not required under a business pack as the farmer would have an insurable interest in their stock at the packaging house.
What could happen though is that there is a fire or storm damage at the premises before the season starts, say during the set up stage, and there is no stock for one or several of the farmers at the packing house. This is when the adequacy of the sub-limit for customers and suppliers premises is so very important.
One of the other issues to consider is the prevention of access issue if the farmers cannot get their produce through to the packing shed or from the shed to market. This is where you need to check the coverage for prevention of access (typically excludes roads and bridges) or coverage for roads and rail lines that the stock of the insured passes over.
I hope this gives you some food for thought.