Naming the Insured – Business Interruption policies
When it comes to business interruption insurance, which is the focus of today’s post, two things come to mind when it comes to ensuring that all the legal entities are listed as named insureds.
The first is that when it comes to a group of companies it is important that all the revenue and expenses of all the entities that are to be included are included and that the entities involved are then named on the schedule. Many times in claims I have seen a group say XYZ Group Pty Ltd as the named insured and the revenue of say three subsidiaries are included in the calculation of the Sum Insured / Declared Value but when I did my review I found that the group had many more revenue generating companies in the group.
Where it is a business pack those unnamed entities will, under many such policies, simply not be covered.
It is different under and Industrial Special Risks (“ISR”) policy where as I explained yesterday if any named insured has more than 50% of the voting rights in another entity then that subsidiary is automatically insured.
As co-insurance is tested across the group as a whole for business interruption. This is different to the property /material damage section of the ISR where the test is at the situation. As such to miss the insurable gross profit of even one subsidiary can cause a reduction in a valid claim due to under insurance.
The second issue centres around loss of rent where one member of the group owns the building(s) and another entity is an operating company and is a tenant.
As I have often explained in previous posts, it is important to insure rent as an Insured Standing Charge. If you have missed these articles and want more on this topic please visit BIcalculator.com under the heading: How should I Insured for Loss of Rent?
The point that I wish to reinforce here is that the operating company should have rent insured. This is done under the Difference Method used by most Business Packs and ISR policies by not showing rent as an Uninsured Working Expense.
The bit that is often missed is that in the event of damage that makes the building untentanable, the tenant operation moves out and uses their insurance and ongoing sales to fund paying an alternative landlord for fresh premises.
But where does this leave the entity that owns the building. They no longer are earning rent and may well have finance arrangements in place. As such loss of rent ought to be seperately insured under the group program for this entity as well. This in effect means that rent is insured twice. Once by the tenant entity and once by the landlord entity. This way all members of the Group are protected.
This is the same situation if the landlord and tenant are unrelated parties. Just because they are related does not change the situation when it comes to rent insurance.
With the landlord, remember to include the outgoings paid by the tenant to fully protect the landlord entity. Again this is the same whether the entities are related or not.
If you wish to learn more about business interruption please have a look at the free eBook Mannings Guide to Interruption Insurance.
That is it for today. I will come back tomorrow and look at liability /financial lines products and at the request of readers I will come back and look at trusts and innocent insured’s later in the week. Thanks to those that have written on this topic. Clearly the posts are timely.