Blog Question: How do you deal with Increased Cost of Working incurred during a Waiting Period (Time Excess)?
I received this question which comes up from time to time.
Hi Prof. Manning,
As we know, the increased cost of working (ICOW) of Business Interruption (BI) insurance, that certain expenses may be incurred following loss or damage to try and maintain business activity, such as renting alternative premises, hiring additional staff and additional advertising.
What happens if the interruption is shortened under deductible days as a result of ICOW being incurred?
How can I deal with ICOW incurred during a waiting period? which cost is payable?
How the average daily value deductible shall be deal ?
Looking forward to your reply,
In this situation, there are a few options. Under the principle of Utmost Good Faith, and typically to comply with a condition within the policy, the insured must take ALL reasonable steps to mitigate their loss. This means, incurring the increased cost of working costs as soon as practical to mitigate the loss, not only during the time of the waiting period, but in the balance of the indemnity period.
The second option is to wait until the time excess has expired, however as I say, this would be in breach of a policy condition and fly in the face of the principle of utmost good faith.
The way I have treated this is to try and be fair to all parties. I look at not when the cost was incurred, but to whose benefit the expenditure has meant. For example, during the Longford Gas Crisis in Victoria, Australia in 1998, the gas supply’s were cut to thousands of businesses in the state of Victoria. The expected period of disruption was not known and everyone was clambering to look for alternative ways of mitigating their loss. This included for some, changing out jets from natural gas to liquid petroleum gas (“LPG”), and installing LPG tanks. This was a significant cost to large manufacturing companies.
The loss occurred on a Friday afternoon and this installation work may have occurred over the weekend when the manufacturing site was not operating in any event. Therefore, while the expenditure was incurred during the waiting period, or time excess, the benefit was all to the insurer from Monday morning when the plant was able to return to normal, due to the expenditure incurred during the waiting period. In that case, I recommended and insurers accepted that the expenditure should be paid in full as the benefit from the expenditure was all to their benefit.
In other cases, say for a restaurant, the peak days for the restaurant were Friday night, Saturday lunch, Saturday evening, Sunday lunch and Sunday evening, as it was the grand final weekend for a major football league, many restaurants were closed on the Monday. As it turned out, the period of disruption was a total of 10 days. Again, here I apportioned the benefit received against the expenditure. Let’s assume that the expenditure was incurred on the Saturday morning which allowed the restaurant to operate Saturday lunch & dinner and Sunday lunch & dinner, closing for Monday in lieu of a day off on the weekend and was open for the next 6 days. In this instance, I would apportion the expenditure again based on the benefit to the Insured during the waiting period and the Insurer during the balance of the indemnity period. Here, I did not use days but rather the revenue generated on each of the days and portioned it for the benefit received by the Insured in the first 48 hours and then the Insurer for the balance of the indemnity period.
Every senior loss adjuster and claims preparer, who deals with business interruption claims, believes that time deductibles or waiting periods are more trouble than they are worth. In my book, Business Interruption Insurance and Claims, I have outlined just 4 of the major problems with time deductibles.
What would be fairer and easier, certainly from a quantification point of view, would be a straight monetary excess/deductible.