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.

 

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Cheapest is not always best – Lessons for procurement officers

I spend much of my time speaking at conferences for various industries, where I encourage the business owners not to purchase their business insurance on price, but to carefully consider how important their insurance program is and the protection that it offers.

Increasingly, over the last few years. I have been questioning the true value of a procurement officer, for regardless of what the tenders say, it seems to come solely down to price, without considering the true value that a good service provider to the insurer provides, nor the cost of what getting it wrong does to the average claims cost and potentially to the brand of the insurer and insurance in general.

I will give two examples to demonstrate what seems to be happening more and more.

The first involves a couple in their 70’s who have had their home destroyed during a bushfire over 4 years ago. Clearly, the builder that won the rebuild never expected to win the job and thought the matter would be cash settled. They were then horrified to find that they in fact had won the tender to rebuild. After 2 years, work had not started on the property and the Insured, naturally, complained. The builders found themselves busy at that time and engaged another building firm to do the work and it went along swimmingly until the first progress payment went in from the second builder to the first and they realised that they were going to lose more money in having someone else do the work than they themselves completing it. The first builder, original tender winner, dismissed the second builder and took the project on. Sadly, they did not start doing any work since the dismissal of the first builder, by which time I was then asked to get involved rather than the client go to the media.

I carried out an inspection of the property and then attempted to meet with the claims officer concerned to express some very valid concerns of the Insured and items that I had seen during my site visit. My first email was ignored, so I sent a follow up one setting out just some of the issues, three of which were:

  1. Between the second and first builder, the floor had been propped up in the centre of the home with nothing more than a piece of 19mm x 35mm pine framing. This may have been acceptable while the home was being built to floor level, but once the upper level was on it, the floor had bowed by at least 10mm and I was concerned that when the home was jacked up to be made level again, any works inside including plaster finishes, tiling etc may crack.
  2. The builder had held discussions with the Insured and it was agreed that the home would be rendered at the Insured’s expense. No credit however had been given for the fact that the builder would therefore be able to use seconds bricks rather than first quality as originally quoted/agreed.
  3. Because the home had been left without a roof covering for so long, there was mould clearly visible on the floor, framework and particularly between the floor plate and the floor.

I got a very disappointing reply back suggesting that to the untrained eye the timber prop may appear dangerous, but it wasn’t, and secondly that the bricks were not seconds but mixed, and thirdly they completely ignored the mould.

Ultimately, an engineer confirmed that not only was the timber ‘support’ dangerous as I predicted, but was so weak that it may have caused the entire home to collapse. The claim officer had also misunderstood the difference between seconds bricks, being that they were not first, and second hand bricks which means they came from another site. The day after they received my letter, the builder was advised and immediately sheared up all the framework, hiding the mould that I had pointed out, without treating it first. Because of the hype around mould at the time, coupled with the age of the Insured’s (I would remind you they are in their 70’s and the wife quite frail), I thought I would have it tested. I then received a note advising I had vandalised the home.

I took the entire issue to the national head of claims for that particular insurer and while someone with more experienced was appointed, it still took a full 15 months to get resolved with the insurer agreeing to cash settle the claim. The cost of the claim had blown out by several hundred thousand dollars, combined with the fact that they will be paying rent until they can get a new home built themselves.

Insurance should be there to help people in their time of need.

This was a completely innocent fire from the Insured’s perspective (it was clear it was from the bushfire) and they will have been without a home for coming up to their 4th Christmas. This is unacceptable in anyone’s language.

The second example, involves an insured who had water damage in their home. Rather than engaging a loss adjuster to oversee the claim, the insurer decided to save money and send out a restoration company. It took 8 days for the company to even attend site, and rather than take a detailed inventory, they simply packed everything up, put it into a shipping container and assured the Insured that it would be unpacked at their warehouse, separated between wet and dry and that the wet items would be cleaned carefully and sterilized.

6 months later, it was found that the items were still in the shipping container and a vast majority of the contents, even those that were not originally damaged by water, had become affected by moisture and mould etc. Some antique furniture which had been beautifully French polished had been stripped back and sprayed with a cheap lacquer. Here, the insurer is trying to distance themselves from their agents, which of course, is unconscionable. Here again, a claim has blown out dramatically due to poor service delivery.

These are just two claims that have come across my desk, and for every one that does, I question how many others are out there. In both of these cases, how many people have these insureds discussed and expressed their disappointment with the insurance industry and the particular brands involved. The first one I had to get LMI Legal involved to resolve, and it appears from the approach on the latest water damage case, I will have to do the same, for at this stage there still appears to be absolutely no empathy for the Insureds position whatsoever.

While I am annoyed with the claim process, I think it all starts at the procurement stage. Buying services is not like buying washing machines. If you have a highly competent professional who has studied, has years of experience, then of course their hourly rate is going to be slightly higher if they are honest and only charge the hours they work. The existing procurement process, appears to favour the shortcut takers, or those who cheat the hours. Either way, the insurer misses out on engaging the right person for the job.

What disappoints me, and I feel should be called out more is that despite this being a huge dispute, the Insured has not been given any advice of the internal complaints procedure, their rights with the Financial Ombudsmen Service (FOS) etc. This confirms one of the many examples I have that some insurers are able to obtain a better rating with FOS.

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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

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Alarming Trends – Part 2: Reinstatement and Replacement Conditions vs Indemnity Conditions

Previously, we have addressed the topic of indemnity periods and I expressed my concern on the number of questions I have had come through from Insurance Brokers and Underwriters where the indemnity period for a client was being reduced in this time of increasing rates.

Another issue which has resurfaced as a result of these rate increases is the move to reduce the cover from reinstatement replacement conditions, to indemnity conditions.

Up until the late 1960’s and early 1970’s, the vast majority of insurance policies were settled on indemnity conditions. One of the great innovations and improvements in insurance was to move to reinstatement and replacement conditions, also known as ‘new for old’. This proved, and continues to prove, to be an enormous benefit to an Insured who in the event of a partial or total loss, does not have to find the funds to make up the difference between the, let’s call it market value for the sake of convenience, than the actual cost of replacement.

Subsequently, the insurance industry went one step further by introducing extra costs of reinstatement, which meant not only did we bring the asset back to a condition as new, but also brought it up to date where required to meet any statutory or regulatory requirements.

Not only is there a significant financial benefit to the Insured in the event of a loss, there is also a significant saving in time for there is no need to have the haggle to agree indemnity value which in most cases is based on the replacement value, less an allowance for its age and condition (again, I stress that this is not universally across).

I find that in my discussions with Insureds that wish to consider this option, that they are thinking of a total loss situation and they are factoring in what I call the “it will never happen to me” syndrome. Most losses are partial, and the most common type of loss, say to a building, is not a fire but rather storm damage.

So, let’s say that an insured owns a commercial property and there is a hail storm and the roof requires replacement. If the Insured is reluctant to pay the premium on insurance, how will they feel when they have to meet the cost differential between the cost of a brand new roof, particular if it requires upgrading to meet requirements, and the depreciated replacement value based on the age and condition of the old roof.

If the building is only a few years old and there is going to be no depreciation anywhere, there is no benefit in insuring for indemnity conditions for the value between the replacement value and the depreciated replacement value will be negligible in any event. It is only when the building is older that there is any benefit in premium, but then the question is, at what cost to protection?

Another scenario that crops up is that an Insured, particularly in the manufacturing sector, makes the claim that if there was a total loss and they lost 46 production machines, they would move their operation to China and therefore there is no benefit in having reinstatement and replacement conditions. I again point out that most losses are partial. What happens if fire or water damage makes only 1 or 2 machines irreparable? Would the Insured move their operation overseas having only lost a small portion of the equipment in Australia? Invariably, the answer is no.

In my discussions with insureds where we have a meaningful discussion about the additional risk that is being accepted by the insured by moving from reinstatement and replacement to indemnity conditions that in the vast majority of cases when the Insured considers all the facts, they elect to remain with reinstatement and replacement conditions.

I can not recall a single claim that I have handled in my 45 year career where the Insured has been insured for indemnity conditions and where it is proved to be a good outcome for the business or the principal stakeholders.

 

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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.

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Interesting Blog Question on relying on a home policy for liability borne out of a contract.

I received the following question from one of the brokers I admire most when it comes to technical knowledge and commitment to the insurance industry and his clients. It is one of the few occasions I can recall taking a different view. Here is the issue:

There is a clause that is an exclusion in a Householder’s policy Liability section, which I think is being misinterpreted. It is “Any agreement or contract you enter into”, however we will cover your liability if you would have been liable without the agreement or contract.

As a result, I am getting lots of requests to quote Event Liability Insurance for things like birthday parties in a local hall or park. The Council or Hall Hirer demands they have at least $10,000,000 cover. Insurer sees that as an agreement. I point to the second part and say they would still have a common law duty of care anyway so that part should be covered, not if there was a hold harmless requirement though.

As a consequence, they cannot get certificates of currency off the insurer to provide as evidence to the property owner.

The weird thing is some policies exclude leases being part of this exclusion, others make no mention of this.

To me the intent is not to place more of the normal PL [public liability] risk on the insurers than otherwise would be, in any contract that is signed.

Of course none of these issues are picked up or interpreted in your policy comparison.  So how do you think this clause should be interpreted?

Regards

Robert [surname and email attached]

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I replied as follows:

Hi Robert,

A lot of the council and community halls require very broad protection against them, through the terms of the hire agreement/contract to the detriment of the party holder.

Let us say someone gets electrocuted or a wall collapses, someone trips over a rough edge on a step or pathway. The holder of the party would not normally be held responsible, but the contract may put the onus back on them for the duration they are there. If the contract has an indemnity clause or requires the owner of the property to be named as an insured then there can be a very real problem.

Their home owner or home contents policy would not indemnify them, or in most cases provide legal expense cover, as this liability arises solely out of the contract.

It is unreasonable in my mind that the contracts have such clauses but it is a simple case of the landlord or operator of the venue wishing to transfer the risk away from themselves to the, often unsuspecting, party holder.

There have been a couple of really big cases along this line and the party holder did not have insurance and in one major case I am aware of they sued the broker.

With some home owner and home contents policies there are blanket exclusions on any loss arising out of the consumption of alcohol and drugs. This is not illegal drugs but any drug. Either exclusion may well make the policy of no value to the Insured when hosting a party at their home or at another venue.

Another issue is that we have had a lot of problems with gate crashes who hear about the event on social media and this creates another whole problem in itself, although this seems not to have been in the news here as much as in the past or perhaps my children are now out of that teenage period (Thank goodness).

I think events liability insurance is the way to go and keep the householders policy completely out of it, the householders policy has not been designed as I see it for this type of one off risk.

Regards

Allan

PS: the whole issue of contract risk is so serious it prompted me to write my first eBook on the subject. This can be downloaded free here or you can purchase a hard copy from the publications area of the LMI Group website.

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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.

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Business Interruption Issues Series – Part 4 – Time Excesses – Part C

 

Insurance should not be a game of Russian Roulette

This is the third post in this series on time excesses and the fourth on common business interruption issues that started on Monday 10th April 2017.

 

I continue the examination of time excesses using another case study.

Case Study 3: The Policy will not Cover Losses within the First 48 Hours

The third case involves a wording that states the policy will not cover losses within the first 48 hours. In many cases of smaller commercial and industrial premises, the Insured was not advised to shut down their gas until after 5.00pm on Friday, 25 September 1998. 

If they had no planned production within the next 48 hours, they suffered no losses and, as such, the time deductible did not apply. Had the shutdown occurred at the same time on Sunday, Monday, Tuesday, Wednesday or Thursday, then the same time deductible would have applied, but this time with a financial penalty being borne by the insured business.

On the other hand, taking restaurants for an example, Friday and Saturday evenings are often their busiest nights. They, therefore, were penalised by pure chance due to the fact that the disruption caused by the Longford Gas Explosion occurred on a Friday. For them, if it had occurred on a Sunday or Monday, the reduction in the claim due to the application of the deductible would have been much less.

Rather than know their respective positions when a loss occurs, it could be said that the insurers and operators of businesses that do not operate 7 days per week are both playing Russian Roulette with a revolver holding 5 bullets in a 7-chamber gun. That is, 5 working days in a 7-day week.


Tomorrow is Good Friday and as it is a religious holiday for many, coupled with the fact that many in the industry have been working their tails off with the cyclone claims, I, while not wishing to follow the approach of a TV soap opera, will hold off till next Tuesday to provide some alternative solutions.

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Business Interruption Issues Series – Part 3 – Time Excesses – Part B

Today, we continue our discussion on time deductibles. As I did yesterday, I draw on a case study to explain an issue.

Case Study 2: 24 Hours after Cessation of Supply

This case study involves another large manufacturer. In this case, the wordings for the time deductible is contained within the Public Utility clause provided that cover does not commence until “24 hours after cessation of supply”.

To avoid major damage to the insured plant at a large production facility, the gas supplier allowed the Insured to implement a staged shutdown of the gas supply over the site, which took 11 hours. In other words, it took 11 hours from when gas supply was cut to the first machine, until it was cut to the last machine. Does this mean that the Insured in fact suffers a 35-hour time deductible? That is, 24 hours from the cessation of supply, plus the 11 hours of disruption they suffered during the phased shutdown. The wording of the deductible did not match the intention of either the insurer or the Insured.

In this case, using the Departmental Clause, it was possible to identify the loss by machine, and the claim was settled by applying the 24-hour time deductible on a machine-by-machine basis. A much more difficult adjustment and negotiation would have been required to achieve the agreed intention of the time deductible had the method of claim calculation used not been possible.

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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.

Uninsured Working Expenses part 1

Uninsured Working Expenses part 2

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.

 

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