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”.

This reads:

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.

 

Read Me View comments

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,

Many Thanks

[name withheld]

 

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.

Read Me View comments

Blog question – Additional Increase in Cost of Working under an ISR

I received this question which I felt was worth sharing.

Allan,

I have for many years referred to your most excellent publication for guidance relative to BI [Business Interruption] insurance.

The guide makes reference to the Industry Mark IV wording and it is in respect of the Mark IV wording that I have an enquiry, where I could not locate any reference to my particular enquiry within your guide. Many clients have multiple locations, some of which generate revenue others that do not, a loss could occur at a location where revenue is not generated however the insured may need to incur expenditure to resume or maintain normal business operations. From my understanding where a location does not have any BI declared values ( for there is no revenue generated at that location ) the insured would still nonetheless be entitled to make a claim under AICOW [Additional Increase in Cost of Working] subject to the scope of cover and sub-limit. Some insurers draw the assumption that as there are no declared values at the situation then there is no BI cover, there is however no provision under the operative clause to Section 2 that provides indemnity being restricted to those locations with BI declared values.

Would you support my assessment of the application of AICOW ?

Thanking you in anticipation of your prompt attention and reply.

Regards

Ric [surname and email provided]


I answered as follows:

Hi Ric

Thanks for your note.

Unlike the Material Damage section (Section 1) of the Industrial Special Risks Policy which is tested for average/co-insurance on a location by location basis, business interruption is declared across the entire organisation.

As such the way I would do this to achieve the result you are after is:

  1. I assume the locations that have no profits but have the potential for an Additional Increase in Cost of Working claim have property that is to be insured under the ISR policy. If this assumption is correct, clearly show them in the asset schedule.
  2. I would not split up the business interruption figures by location but rather show a total for all locations on a separate line for ease of the co-insurance/average test calculation.

If the insurer(s) requires a split for reinsurance purposes then it is fine as long as the Sub-Limits are set out as follows:

Sub-Limits of Liability

The liability of the Insurer shall be further limited in respect of any one loss or series of losses arising out of any one original source or cause at any one Situation as set out hereunder: [emphasis mine].

The Sub-limits of Liability apply in excess of any applicable Deductible.

Item 2 Claims Preparation                                               $x

Item 4 (Additional) Increase in Cost of Working         $x

Etc for any other sub-limits for section 2.

 

This should make it clear.

Regards

Allan

Read Me 4 Comments

The major risks facing business in 2018

Business Interruption, cyber attacks, and natural catastrophes are, not surprisingly to us in the industry, the leading business risks this year, according to more than 1,900 risk experts from 80 countries polled for the latest Allianz Risk Barometer.

The survey by Allianz Global Corporate and Specialty reveals that cyber attacks and business interruption remain the leading two risks in Australia. What remains disappointing is that both cyber and business interruption coverage is often not taken out by many small to medium enterprises, commonly at their peril.

I continue to urge all business owners and managers to discuss these and other risks with their insurance broker.

Changes to legislation/regulation and natural catastrophes are also high on the list.

To read the excellent full report please visit: http://www.agcs.allianz.com/insights/white-papers-and-case-studies/allianz-risk-barometer-2018/ 

I conclude with their very insightful infographic.

Read Me View comments

When does the Indemnity Period end?

At LMI Group, we have an issue which comes across, almost in waves, in regards to a number of claims which needs to be addressed before the next flavour of the month adjustment to reduce an Insured’s claim.

The one we have just overcome is where the adjuster has made a “notion” adjustment, without explaining the basis for it. Now, we have come across on a number of claims, particularly involving restaurants, clubs and hotels is for the indemnity period to be cut off by the loss adjuster and then the Insured being asked to prove that the loss extends beyond the period allowed by the adjuster and then also prove that the ongoing disruption is as a direct result of the damage or other insured event which gave rise to the initial claim.

One of the great frustrations for us is that often this judgment call is being made by a Forensic Accountant or an adjuster who has not been to the site, met the insured, or if they have, it has been only one short visit. Without understanding the insured’s business, their assumption that the business should have been back to normal may well be completely ill founded and at times appears to be linked to the fact that the initial reserve placed on the disruption by the adjuster or forensic accountant has proved to be inadequate. That means the claim is then being adjusted within the confines of that initial reserve.

With this background, I thought that it was appropriate to review the typical Business Interruption cover and in particular, to look at the onus of proof issue.

There are differences in the market with business interruption policies and so, for the sake of this exercise, I will use the Industrial Special Risks (“ISR”) Mark IV Modified wording.

The trigger for a claim under Business Interruption under the Mark IV ISR reads:

In the event of any building or any other property or any part thereof used by the Insured at the Premises for the purpose of the Business being physically lost, destroyed or damaged by any cause or event not hereinafter excluded (loss, destruction or damage so caused being hereinafter termed “Damage”) and the Business carried out by the Insured being in consequence thereof interrupted or interfered with, the Insurer(s) will, subject to the provisions of this Policy including the limitation on the Insurer(s) liability, pay to the Insured the amount of loss resulting from such interruption or interference in accordance with the applicable Basis of Settlement.

Assuming that the loss falls within the triggering provision of the policy, it advises that the claim will be settled in accordance with the “applicable Basis of Settlement”. The Basis of Settlement reads:

The insurance under this item is limited to actual loss of Gross Profit due to: (a) Reduction in Turnover and (b) Increase in Cost of Working and the amount payable as indemnity thereunder shall be:

(a)   In respect of Reduction in Turnover:

the sum produced by applying the Rate of Gross Profit to the amount by which the Turnover during the Indemnity Period shall, in consequence of the Damage, fall short of the Standard Turnover.

(b)  In respect of Increase in Cost of Working:

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.

In both Section (a) and Section (b), the policy makes note that the Insured is to be indemnified during the Period of Indemnity. It is therefore important, that we look at the definition of Indemnity, which reads:

INDEMNITY PERIOD: The period beginning with the occurrence of the Damage and ending not later than the number of months specified in the Schedule thereafter during which the results of the Business shall be affected in consequence of the Damage.

In Summary, this definition states that the Policy starts on the date of the Damage, which may be before any disruption to the business starts and ends when the business is no longer effected in consequence of the Damage, or the number of months stated in the Schedule.

Often, it is a case of res ipsa loquitur which simply means, the facts speak for themselves.

Naturally, as part of the calculation and/or assessing process, the person preparing the claim and/or assessing the claim, would carry out tests to determine whether or not some other factor has arisen which has caused a downturn in the business, and for that matter, may have caused an upturn of the business, unrelated to the Damage which would have taken place had the Damage not occurred.

The reasoning behind this, is that at its heart, the traditional business interruption policy is a contract of indemnity. That is, of course, to put the Insured back to near as money will allow to the position they would have enjoyed but for the loss. I stress that this is the underlying principle of the majority of business interruption policies in the market, however, there are some policies which are in fact agreed value policies, where the Policy stipulates a formula which may well over or under indemnify the insured.

To ensure that the principle of indemnity is maintained, the policy contains what to me is arguably the most important clause in the contract of insurance and the one that creates the greatest conflict between the insured and the insurer.

This clause is the adjustments clause, which reads:

Adjustments shall be made to the Rate of Gross Profit, Annual Turnover, Standard Turnover and Rate of Pay-Roll as may be necessary to provide for the trend of the Business and for variations in or other circumstances affecting the Business either before or after the Damage or which would have affected the Business had the Damage not occurred, so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which, but for the Damage, would have been obtained during the relative period after the Damage.

While the Indemnity Period is not specifically mentioned in the clause, what is in effect occurring when the indemnity period is being cut short, is that the insurer or their agent is suggesting that the turnover that would have been achieved had the business not been affected by the Damage, would have been reduced for some other event, and as such, the period of disruption caused by the Damage is at an end.

Just as an insurer would take a dim view of an insured who came along with an unsubstantiated request to increase the standard turnover of the business, I’m of firm belief that if the insurer or their agent suggests that there is a special circumstance that reduces the standard turnover, then the onus of proof is on the insurer to prove this and not simply make an unsubstantiated claim that the business ought to have been back at that point.

I’m the first to admit that the adjustments clause is not an exact science and that no one can ever be 100% certain as to what the business would have achieved but for the loss, other than in the rarest of circumstances. There is always room for negotiation but both sides ought to provide some logical reason for any adjustment that they wish to make to the standard turnover. For the sake of completeness, I include the definition of standard turnover which reads:

STANDARD TURNOVER: The Turnover during that period in the 12 months immediately before the date of the Damage which corresponds with the Indemnity Period.

To further put this into perspective, the position I hold is that it is inappropriate for an insurer or their agent to simply say that the business should have been returned to normal, say a week after a restaurant reopens when the business had a track record of performing well prior to the event and has recovered to their pre-damaged position at a period longer than was expected by the insurer for the Indemnity Period to be cut off unilaterally and the Insured required to prove that the ongoing disruption beyond their stipulated cut off point is as a result of the Damage.

In fairness, how can this ever be proved?

It leaves the insured in a helpless position, starved of cash and with no logical way they can prove the ongoing loss, other than for the fact that their revenue has not returned to normal. Whether I am acting as a loss adjuster or claims preparer, my role would be to carry out an analysis and look at industry figures, the possibility of new competitors entering the market and all other factors to see whether the position I have adopted in my calculation of the claim is fair and reasonable to all parties concerned.

I have never attempted to cut off an Indemnity Period without any reasonable foundation for doing so. It appears that we will be taking at least one of our current claims to court to examine this whole issue of onus of proof and I look forward to the outcome which may resolve this, to me, inequitable position that many insureds are confronting.

 

Read Me 1

Learning from the past to protect against today’s hazards

During the very hot summer of 2008-2009, that included the Black Saturday bush fires, our Melbourne office was left without power due to both the fires and the inadequacy of an electrical sub-station across the road.

As it is imperative for us to provide our claims services during periods of natural catastrophe, so we are able to assist people in need we installed a backup generator in our building. Some within the business questioned the cost of installation and the ongoing maintenance, but I felt that as part of our risk management and business continuity management plan installing the generator was the way to go.

We have had reason to call on it only about 4 times until this year. Due to power outages, often associated with storms, it has meant that recently we have been able to maintain phone, email and web services at a time of high demand.

This week the generator has come into its own. With the apparent uncontrolled or at best inadequately proliferation of high rise developments in the area, now that Melbourne has had its first taste of summer, the infamous sub-station across the road caught fire and will not be replaced for at least a week from the time of failure. Whether the privatised carrier simply puts back the same size unit or upgrades it to cover the increased demand no one can advise us.

The apparent reason for the failure was that at after 5pm there was an electrical demand surge when everyone came home and turned on their air conditioners and the system could not cope.

In any event the ongoing outages of power to the area have not effected LMI due to our addressing the issue when it first arose nearly 9 years ago. The generator kicks in every time there is a black out or equally damaging brown out.

Of course, we are not the only business in Melbourne feeling the effect of the infrastructure not keeping pace with development. I heard on the radio this morning that homes and businesses in Blackburn and/or Box Hill have power outages. South Australia had their own issues recently.

Bearing in mind, this is only the start of summer, this issue is clearly not going to be an isolated case and all businesses are encouraged to revisit the business continuity plan and if they do not have one, consider creating one.

The issue of inadequate infrastructure is not just limited to electricity. Storm water and telecommunications are also proving inadequate and I will share examples of this issue in upcoming posts.

Read Me View comments

Blog Reader Question: Business Interruption Gross Profit Calculation

I received the following question from a reader and reproduce it and my answer below for you all:

Dear Mr Manning,
There is something I may be missing in the calculation of Gross Profit under the BI policy.

The policy states:
GROSS PROFIT
the amount by which:
(a)      the sum of the Turnover and the amount of the Closing Stock and Work in Progress shall exceed
(b)      the sum of the amount of the Opening Stock and Work in Progress and the amount of the Uninsured Working Expenses as set out in the Schedule.
Why does it start with the opening stock?
Closing stock less production plus opening stock will give as a result production available for sale. If the Gross Profit I need to know refers to products sold then I calculate, for example, the cost of raw materials used in the product sold as: Opening stock of raw materials plus raw materials purchased less Closing stocks opening stock.  The resulting amount less turnover will comprise all costs and expenses from which I deduct not insurable cost and expenses. I shall be obliged if can explain me the policy definition and if I am wrong or missing something.

Thank you very much for the attention you may give to this query-
Carlos [last name and email withheld]

 

I replied to Carlos as follows:

We add closing stock to the turnover to the business to get one figure.

From this new combined figure you deduct the sum on opening stock and the expenses, such as purchases you do not need to insure.

If I am reading your question right you are asking about opening and closing stock.

What the formula is doing is looking to include the difference in the opening and closing stock as this is another form of profit.

For example if a business was to increase its stock level from say $50,000 at purchase price at the start of the accounting period to $100,000 at the end. The value of the business if everything else stayed the same would be $50,000 more. ($100,000 closing stock -$50,000 opening stock)

This is profit to the company. One way to look at it, is, that the business chose to invest in more stock so they could provide a better service (faster or offer wider range than before). Whatever the reason this increase in stock is profit in the form of stock instead of cash but it is still valuable acne still profit reinvested in the form of stock.

I hope this helps.

Allan

Read Me View comments

Alarming Trends – Part 1: Indemnity Periods

Over the past month or so, I have been inundated with questions regarding moving from reinstatement and replacement conditions to indemnity, in reducing Sums Insured and reducing indemnity periods. Over the next couple of days, I will address each of these and I will start today with Indemnity Periods.

Back when I first wrote my blue book on Business Interruption insurance in 2001, I was often confronted with indemnity periods of 3 or 6 months and my aim with the book and training sessions, was to move to 12 months being the minimum. Since that time, it has become more and more apparent that 12 months is not sufficient even for many risks, particularly property owners and manufacturing risks. When I say property, this includes infrastructure such as airports and tourism resorts.

If you add to this the complexity of a natural disaster, where the resources of the insurance industry, along with builders, engineers, right down to town building and planning departments, this only exasperates an already crucial problem.

As such, over the last 5 – 10 years, I have really been pushing for indemnity periods, particularly on larger risks which are insured under an ISR, to have a minimum of 24 months or at least 18 month indemnity periods. Speaking to underwriters and brokers, it has been pleasing to see that this advice has been accepted by many insureds.

What is alarming me, is that with the rate increases which are filtering through of late, many clients and/or brokers are reducing the indemnity periods back to 12 months. Yes, there is a premium saving, however, at what risk?

Going beneath 12 months, I believe, is complete folly for the rating of business interruption insurance is not simply a pro rate based on the length of time set for the indemnity period.

Statistically, my research shows that about 75% of business interruption losses have a period of disruption of 3 months or less. As such, if a client was to insure for a 3 month indemnity period, no insurer in their right mind would charge 1/4 of the premium that 12 months cover would cost, for they are going to pick up 75% of the claims, and even with claims which extend beyond the 3 months, they are likely to pick up the biggest burden during that first 3 month period.

Typically, the difference in premium for a 6 month indemnity period and 12 month is less than 10% of the fire rate applied to the full 12 months Insurable Gross Profit figure.

When considering the indemnity period, I have set out under the heading “How long should I insure for?” in the BIExplained section of the LMI Business Interruption Calculator all the things that should be considered when setting an indemnity period. You will note, the cost of insurance is not one of the criteria.

Speaking to underwriters about the situation, one of the reasons they have had to increase the premium rate, is that they are not getting the growth in premiums that they require. This is because we are not increasing Sums Insured as we should each year. If we are going to reduce cover, this is only going to create more problems moving forward as insurers are forced to increase rates again to make up for the lost revenue of people reducing their coverage. I know in the property insurance for LMI Group, there is two things about the program, the first is that we tend to over insure for we see first hand what happens to businesses when they under insure and we would rather pay a little extra premium rather than risk not being fully indemnified in the event of a loss. Secondly, we review our insurances every year, this being the case, we have found our rate has been retained.

Next post, I will go into a bit of detail about the risk of moving from reinstatement and replacement to indemnity conditions.

Read Me View comments

NSW Government continue to bend the facts to hide their ineptitude.

Like all rate payers in New South Wales, I received this (image) flyer from the New South Wales Government on the emergency services levy.

I cannot accept that deferring the levy is going to help those that are currently bearing the cost of funding the fire and emergency services.

Fact 1: everyone in New South Wales benefits from having an efficient, well funded, well trained and equipped fire and emergency services.

Fact 2: the men and women that do this work deserve our full support for doing some of the most dangerous and stressful work in our society to protect all of us and our property.

Fact 3: it is completely unfair that only a percentage of the community bear the bulk of the cost and not everyone.

Fact 4: by deferring the changes, it means that those that insure go back to bearing the brunt of funding the fire and emergency services.

Fact 5: this, in turn, means that to avoid paying the levy people do not insure or do not insure fully. Putting an even greater burden on the prudent and risk averse who insure fully.

Fact 6: Currently, the Fire and Emergency Services means that many insurance policies are 40% higher in New South Wales than say Victoria. If you add the triple taxation of Goods and Services Tax being imposed on the Fire and Emergency Services and then the State Government Stamp Duty on insurance premiums, Fire and Emergency Services Fees, and the GST component any fool can see the inequity of having the levy on any product or service.

Fact 7: Every single study on Fire and Emergency Services shows that the fairest way for the community to fund the service is to have as broad a tax base as possible. This is property rates where everyone pays, whether you are a tenant or an owner occupier.

Fact 8: In 2012, the New South Wales Government issued a White Paper and called for input from the community on moving the levy away from insurance, rightly pointing out that it was inequitable in the current form. This means the NSW government have had 5 years to get this right as well as the benefit of consulting with all the other mainland states who successfully made the transition from insurance to property rates.

Armed with these facts, I am sure that you will agree with me that this is a monumental and inexcusable balls up by the New South Wales government.

I am pleased to see the issue is getting some time in the Sydney Morning Herald  which sheds more facts on the waste involved here and how the new levy was so wrongly calculated. For a home owner who fully insures it should logically have gone down with the broader tax base.

We cannot put the toothpaste back in the tube but what we need is some honesty on the part of the Government that they and only they got it wrong and secondly an honest time line as to when the reforms will be implemented.

My guess is that it is in the too hard basket for this government, that is, it is beyond their ability and that we may be stuck with it for another generation.

Of course, this is not the only issue this government has failed us on. The water issue from the Murray Darling is a complete story of failure in itself.

We all deserve better!

 

Read Me 1

Business Interruption Issues Series – Part 5 – Time Excesses – Part D – Possible Solutions

After addressing 3 common problems in time excesses last week, I return to the topic with some possible solutions.

What is the Answer?

I would suggest there are several answers to the problems of time deductibles, and would like to explore three with you.

The first is to replace the excess/deductible with a franchise. If the insured business is disrupted due to an event for a period less than the franchise of say 1, 2 or 3 days, then the loss will be at the full expense of the Insured. If it extends beyond the period of the franchise, then the entire amount would be met by the insurer. This would mean that the Insured would carry the risk for minor periods of disruption, but beyond that they would have the comfort of having full insurance subject to adequacy of insurance etc.

I appreciate the insurance industry need not be there to protect short term, what we call working losses. The cost of doing so in just calculating such losses often proving they are not real losses in any event but just delayed sales would increase the cost of business interruption insurance prohibitively. However, the cost of working out a time excess can be significant and cause the Insured to feel cheated. I know that is how I feel every time I put in a health insurance claim when I consider the premium I pay each year.

I would rather see the client get the amount rather than it go to loss adjusters and claims prepares trying to agree an equitable allowance.

Some underwriters are worried that an insured can manipulate the stop time and so get a claim paid. I think in disruption such as in failure of public utilities, or closure by public authority, the Insured has no chance to influence when the issue is resolved. As such, I do not see this as an issue. It has certainly not come up in the claims I have handled under business packs where time franchises are more common under high quality wordings.

The second solution is to apply a monetary deductible, which both the Insured and insurer know and understand in advance. I would suspect that this would be easier for the underwriter to underwrite and the Insured would be in a much clearer position as to the effect of the deductible in the event of a claim. It would also reduce the stress and claims handling costs following a loss.

The third alternative is simply a combination of the first two. The monetary deductible would apply after the franchise period had lapsed or it could be the “greater of”.

1.2                 Summary of Chapter

Space limitations have only allowed three case studies to be provided. Underwriters, claims staff and Insureds who lodged a claim following any business interruption claim with a time deductible can provide similar examples of complications arising from their experiences of the interpretation of time deductibles.

At the very least, time deductibles need to be reviewed to incorporate clear details in the policy as to how they should operate. Alternatively, they should be replaced with a franchise, a set monetary deductible, or a combination of both. Food for thought to improve what, in the main, is a very good product.

Read Me View comments