Business Interruption Issues Series – Part 1 – Insuring a Business Expense/Standard Charge
Last week LMI’s Max Salveson and I had the rare privileage of meeting a some of the best underwriters and technicians in Australia when it comes to the Industrial Special Risks (“ISR”) Policy.
As I continually say, we are all students of insurance and despite all I have read, and written on the policy not to mention the 1,000 plus claims I have calculated under this policy I still learned many things and changed my view on a couple. While many improvements to the policy that Max and I proposed were accepted, some of the changes that I asked to be included I did a complete 360 on. This is despite the fact they have already been rightly adopted in quality Business Packs. The reason is that business packs are designed to cover small to small/medium businesses where as the ISR is for larger often more complex risks.
In many ways the ISR remains a world class product offering great protection to business when it comes to property damage and business interruption. As with any general insurance product, it just needs to be set up correctly from the start.
The fact that the vast majority of the people who attended the meeting had a genuine desire to protect their clients and our communites was fanstastic and reminded me of the original commmitte that drafted the Mark IV way back in 1987.
It was also great that so many experienced experts from different insurers were willing to share their experience and knowledge for the common good and listen and like me walk away with a different view on some points.
With this background, I thought I would share with readers some of the issues that we discussed in the business interruption space that was discussed.
I start with the problem that can arise where an insured (or their broker) decides to insure only a percentage of an expense rather than the full amount.
For example, let us say an insured elects to insure 10% of electricity. This means that 90% of the expense is automatically deducted when it comes to determining the insured’s claim when you multiply the insured rate of Gross Profit by the shortfall in Turnover.
What can happen when an inexperienced adjuster or forensic accountant is involved is that they deduct all the savings from the claim not appreciating that 90% has already been excluded from the claim.
This in effect means that the insured is paid 10% of 10% of their claim for wages which of course is totally wrong.
Gordon Southern in his book “Consequential Loss and Risk Insurance” addressed the issue very well. I attach an extract of his book which addresses the issue in detail.
To overcome this inequity, I attach an endorsement that Max and I drafted that does not change the ISR wording but simply sets out the formula that should be used when calculating an insured loss where there is a percentage of an Uninsured Working Expense is in fact insured. Endorsement
Tomorrow I will continue to the series moving to one of my pet hates, I appreciate that is a harsh word, Time Excesses.