Longer Indemnity Periods Under Business Interruption

Time Word Cloud Concept In Black And WhiteEarlier this week I started a series on selecting the Indemnity Period under a Business Interruption policy.

To recap, I suggested that taking out an Indemnity Period of less than 12 months was, in most cases, false economy, as the loss of coverage was not worth the minuscule saving in premium.

Secondly, under most Business Interruption policies you need to insure for 12 months loss of insurable gross profit whether you insure for 3, 6, 9, or 12 months.

I stress that you need to read the policy wording to check that this is so. If in doubt, speak with your insurance broker.

Today I look at what happens when you take out a Business Interruption policy with an Indemnity Period longer than 12 months.

In most policies, sadly there is no industry rule, you need to pro rata the annual figure up. For example, 18 month Indemnity Period set the declared value or sum insured at 1.5 tines one year’s annual insurable Gross Profit. For 2 years you double the 12 month figure. In most policies you need to also factor in some growth allowance based on the expected growth in the level of insurable Gross Profit in the business.

For underwriters, please consider supporting your insured’s by offering a discount on the premium for the proportion of sum insured /declared value that is greater than 12 months. The reasons I ask this are:

Statistically, the vast majority of claims have a period of disruption of less than 12 months. As I stated in Monday’s post, I estimate 75% of all Business Interruption claims have a period of disruption of less than 3 months.

Besides the low frequency, if the business is effected for a period of more than 12 months, one of two things have occurred. Either the business has recovered somewhat and you will not be paying out the sum insured and/or there have been significant savings in expenses due to the long term drop in revenue.

While the frequency issue is true for loss of rent (gross rentals, rent payable or rent receivable) the argument regarding part trading is not always true for property owners.



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