Does a Business Interruption Claim End When the Insured Re-opens?

Business Closed = Potential Lost Customer

Business Closed = Potential Lost Customer

I am still receiving complaints and requests for advice from business owners and brokers regarding businesses such as restaurant owners who are complaining about being penalised for doing the right thing after one of the natural disasters, such as in Brisbane after the flood, or Cyclones Yasi  or Carlos.

The complaint arises where an Insured works really hard to mitigate their loss, carries out repairs, often only temporary, and then find that the loss adjuster cuts off any claim from the time that the business re-opens. Their complaints that the business has not returned to normal are (quite wrongly) summarily dismissed. The only difference now is that it is not the broker at the time of the loss that is speaking with me, it is a new broker who has picked up the account as the Insured is not happy with either the quality of the cover afforded by the policy they had in place, the advice provided by the broker before or after the loss, or the lack of service and/or fairness in the claim settlement.

The Insured has every right to feel aggrieved. It is rare for any business to re-open to the same level of turnover as before a disruption. There are exceptions, of course. Where the Insured is a manufacturer of a product in high demand and the disruption is short, or where the Insured has sufficient accumulated stocks that are undamaged, orders may still flow in and once the cause of the disruption is remedied, the business returns to normal and makes up part or all of the lost production.

Restaurants, coffee shops and take-away businesses are not like this. Bad news travels faster than good news. People learn that the business, say a restaurant has suffered a disruption and is not open for business. They do not necessarily know when the business re-opens and may continue to go elsewhere until they hear that all is well. Of course, they may have found a new restaurant that is cheaper, more convenient or better in some other way and stay with the new restaurant, coffee shop or take-away business.

It is also possible that by opening too quick, the customers that do come in are put off by the experience or lack of ambience and fail to return.

Having,  in their mind, been under-indemnified by an insurer, many Insureds say that if it happens again they will stay closed till all the work is completed, and a massive advertising campaign is conducted to ensure that their business has a fighting chance of being back to normal. This, of course, is not a smart strategy for a number of reasons.

First the longer the doors are closed, the harder it is to win back customers. The business is not (or should not be) in the business of making insurance claims, but rather being a restaurant or whatever they are. My doctorate studies showed that the more you keep the cash register ringing over sales, the more chance the business has of a permanent recovery.

Secondly, an insured has, under the principle of utmost good faith, to mitigate the loss. Lord Haldane stated in British Westinghouse
Co Ltd v Underground Electric Railways
(1912) that “the duty of taking all reasonable steps to mitigate the loss debars the claimant from claiming any part of the loss which is due to his neglect to take such steps.” This common law principle is reinforced in most policy wordings. For example, in the Mark IV ISR Policy, the Policy states in Conditions Applicable to All Sections, under the misleading heading of ‘Notification of Claims’,

“Notification of Claims

“….

“The Insured shall use due diligence and do and concur in doing all things reasonably practicable to minimise any interruption of or interference with the Business to avoid or diminish the loss and shall also deliver to the Insurer(s) a statement in writing of any claim certified by the Insured’s auditor, with all particulars and details reasonably practicable of the loss and shall produce and furnish all books of accounts and other business books, invoices, vouchers and all other documents, proofs, information, explanations and other evidence and facilities as may reasonably be required for investigation and verification of the claim together with (if demanded) a statutory declaration of the truth of the claim and of any matters connected therewith.”

“No claim under this Policy shall be payable unless the Insured has complied with the terms of this condition.”

So does this mean that the business interruption policy is indeed defective as so many Insured’s now believe? Of course not! The underlying principle of most business interruption policies is to indemnify the Insured. This, as we know, or ought to know, is to put the Insured in the same position as money will allow to that which they would have enjoyed, but for the loss or disruption.

Again, I take the Mark IV ISR Policy as an example. The cover afforded by the Section 2 of the Policy, which covers consequential loss of profits states:

“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.”

[emphasis mine]

The words that I have bolded direct us to the Basis of Settlement. The words contained in the Basis of Settlement are:

“Item 1 (Note in the Advisory Wording the Policy this clause has no heading other than ‘Item 1’. I would prefer it read. ‘Item 1 – Loss
of Insurable Gross Profit’).

“(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.”

[emphasis mine]

We now need to move to the Definitions Section of Section 2 – Consequential Loss of Profits, which defines the Indemnity Period as:

“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.

[emphasis mine]

The important words used are “as a consequence of the damage” not “while the damage is unrepaired” or “only while the business is unable to trade”.

Limited to the number of months specified in the Schedule, an Insured is able to submit and have a claim paid based on the difference between the turnover the business would have achieved but for the damage and the actual turnover achieved from the date of damage to insured property occurs until such time as the business returns to the level of turnover that they would have achieved, but for the damage.

If it takes few weeks, a month or even longer for the Insured to return to normal, then subject to the Indemnity Period being long enough, the Insured is entitled to claim.

So why are some loss adjusters limiting the cover to just the time the business’s doors are closed. Is it a lack of training or a deliberate strategy on their part to cut the claim off early and reduce the amount claimable? I think the latter, for the same loss adjusters are always keen to ensure that there has been no claw back of turnover after a business re-opens in cases where this is possible. Manufacturing, some retail and mining risks in particular.

These loss adjusters and their principles need to remember that the duty of utmost good faith applies equally to the both parties; that is, to the Insured and insurer (and their agents). As far back as 1766, 14 years before Cook discovered the east coast of Australia, Lord Mansfield stated in the landmark case of Carter v. Boehm (1766) [97 ER 1162]

“Good faith forbids either party, by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.”

[emphasis mine]

This has been reaffirmed in Section 13 of the Insurance Contracts Act (1984). This section states:

13.   A Contract of insurance is based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.”

[emphasis mine]

It has certainly been a bargain for some insurers to have their client short changed, but at what cost. The client knows they have been cheated but do not know why. They sack their insurance broker and the insurer and make it so much harder for the next broker to convince the insured to purchase business interruption cover moving forward. Business Interruption is, over time, a profitable class for insurers and yet one of the classes of insurance with the most appalling take-ups. It is this type of behaviour that explains part of the reason.

So what can be done to overcome the situation? First off, brokers must understand the basics of business interruption insurance and identify if the Insured is not being treated fairly. I will be running a series of classes throughout 2012 to assist here. If you would like details of when they will be run near you, please contact my PA, Julie, via email at Julie.Oppy@LMIGroup.com.

Secondly, the use of a claims preparer to prepare the claim in accordance with the policy formula is highly recommended on all business interruption losses. The policy is difficult for most Insureds to understand while the cost is insured under most good quality policies. To have one of the LMI Claims Services team assist with any claim, email claim@lmigroup.com.

Finally, claims officers need to ensure that their loss adjusters are treating their clients fairly and indemnifying them in accordance with the policy. I know most genuinely do not want to see their clients short-changed on a valid claim.

This is just one of many business interruption issues that have come to the fore over the past 12 months and I will address at least one of them each week in this blog. If you would like to know when they are posted, please either link to me on LinkedIn or follow me on Twitter.

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Disclaimer: This post has been prepared as a guide and is not intended to be exhaustive. While the utmost care has been taken in the preparation of the article, it should not be used or relied upon as a substitute for detailed advice or as a basis for making a business, financial or insurance decision.

2 responses to “Does a Business Interruption Claim End When the Insured Re-opens?”

  1. F Bath says:

    Does a Business Interruption Claim End When the Insured Re-opens? | Prof. Allan Manning’s Blog

  2. Allan says:

    It depends on the wording. Good quality policies provide protection until such time as the business has returned to the same trading position they would have enjoyed but for the incident giving rise to the business interruption. This is limited to the Indemnity Period shown in the policy schedule.

    It does depend on the policy though. Some policies in the US limit the coverage to a number of days after the property damage has been reinstated.

    Allan

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