Misinterpretation of the Adjustments Clause in Business Interruption Policies
This article is a follow up from Monday’s posting.
The basic premise of the majority of Business Interruption policies is to indemnify the Insured. This means, in simplest terms, to put the Insured back in the same financial position they would have enjoyed had the disruption not occurred.
The basis of settlement and a number of clauses such at the “Savings Clause”, are included to achieve this. Arguably, the most powerful clause in the policy to achieve this goal is known as the “Adjustments Clause”.
An example of the Adjustments Clause, which I have taken from the Australian Mark IV Industrial Special Risks Policy 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.” [emphasis mine]
Using the example of businesses located along the tram line that I referred to in Monday’s posting, what can and unfortunately does happen is as follows:
Let’s say these businesses had a reduction in turnover in the year before the loss of, say, 8%, due to the construction works associated with building the tramway. Once the tramway is completed, the business owners would, to their minds, expect that business will not only return to normal, but markedly improve due to the increase in customers that the tramway should bring to their area.
The problem arises where the loss adjuster, or increasingly the forensic accountant, particularly where they do not visit the site but rather only look at the Insured’s financials – often from a different city or even state, sees the 8% downward performance of the business and treats this as a trend in the business, instead of a one-off variation.
If the construction is treated as a trend, then the Standard Turnover for the same period in the prior year will be marked down by -8%. Whereas if you treat the construction as a one-off special circumstance, the -8% would be ignored and a more accurate analysis of what the business would have achieved with the construction work completed and the tramway fully functional can be attained, so that the Insured is fully indemnified in accordance with the underlying principle that I referred to at the start of this post.
Not getting this basic position correct from the start is one of the biggest causes of disagreement during the claim settlement process. It is why I support what I was taught as a trainee adjuster, that you must touch and feel the claim, visit the site, speak to the Insured, their staff, neighbours and not just look at the numbers. This is just one of the reasons that an experienced claims preparer is often required on business interruption losses to carefully look at this sort of issue and provide a detailed report setting out the Insured’s entitlement. Like the loss adjuster, he/she can only do this properly if they go to the site and take a reasonable time to examine all the facts, trends and special circumstances.