Blog Question on insuring outgoings # 2

http://www.dreamstime.com/-image14799454This is a follow on from yesterday’s post with a question on the same issue but with a difference. I end with a warning on the current, ‘computer says no!’ approach to underwriting.

Question 2

Hi Allan,

I just have a quick question in relation to Business Expenses necessary incurred. E.g. rates, water and sewerage rates, insurances, accountants fee etc. under the [insurer’s name withheld] Business Interruption section.

Our client has a [X] Business policy wherein he is Insuring his Gross Rentals.

Gross Rentals is defined as “The amount by which the gross rentals earned during the indemnity period fall short of the standard gross rentals”.

He is also looking to insure for lost Business Expenses incurred should a claim arise.

The [X] Business Policy indicates additional expenditure incurred to avoid or minimise a claim and deduction from payment of expenses and charges reduced as a consequent of the damage.

When I contacted [X] to ask the question, they responded by advising me ‘Why should we pay for clients ‘Outlays/ Additional Expenses’.

Thought there would be a freeform section to include can you let me know whether the intention of Gross Rentals is to e[n]compass not only Rental Income but also Expenses/ Outlays the insured is responsible for and why the policy reduces the payments at time of claim should those expenses reduce as a result of claim.

Eagerly await your earleist advises and should you have any queries, please do not hesitate to contact this office

Regards

Stuart[surname and email provided]

Answer 2

As with most forms of insurance, the business interruption policy is at its heart a policy of indemnity. That is, it is designed to put the insured back in the same position as they enjoyed, as near as money will allow, as if the loss or disruption did not occur.

The coverage is for Gross Rentals.

When a landlord rents out the premises they have 2 options. They can either collect the rent from the tenant and then pay all the outgoings such as rates, insurance etc. Here of course the landlord needs to charge a high enough rent to cover the rates insurance and other outgoings and perhaps a fee to manage all of this on top of the net rental return they seek to obtain from their property.

The other alternative is to collect the net rent and have the tenants pay the outgoings direct. That is pay the rates, insurance etc direct to the supplier.

In the event of damage to the building by an insured peril and the tenant exercises their right to rent abatement or they terminate the lease due to the said damage, not only is the landlord short of their net rental income but, where the tenant has been meeting the outgoings under the terms of their lease, they now also have to fund the outgoings.

To put them back in the same position they would have enjoyed they need to be able to insure the Gross Rental Income, that is net rentals plus outgoings paid by the tenant. This is completely within the principle of indemnity that I mention above.

In your case you are right and show professionalism in clarifying this with the insurer in advance and not after a loss/disruption has occurred.

In my view this is something that the insurer should ideally spell out in the policy and or the underwriter have a basic understanding on.

If not, then it is best to move the account to someone who does “get it” as it is there to fully protect their premium paying insureds.

I have been travelling for a month now speaking in 8 different countries in Asia and Europe. Speaking to brokers everywhere I go, they express the same sort of frustration that I sense in your email.

Yesterday I saw a very informative and well thought out promotional video for the new player Lemonade.

This presentation focused my mind to the fact that if we as an industry do not continue to provide solutions for clients genuine needs we do not have much of a future. In your case, it is not like you are asking for something for free, something new or something out of the box. You and your client are simply trying to protect a potential financial loss under a policy format that was designed to do just that.

If the sum insured includes the outgoings and the insurer is paid the premium for the risk that is being transferred to them I struggle to understand the issue other than it is a computer says no issue without sufficient training or basic understanding.

Perhaps I need more sleep but this sort of problem is keeping me up at night.

Good luck with it.

 

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