Blog question – Additional Increase in Cost of Working under an ISR

I received this question which I felt was worth sharing.


I have for many years referred to your most excellent publication for guidance relative to BI [Business Interruption] insurance.

The guide makes reference to the Industry Mark IV wording and it is in respect of the Mark IV wording that I have an enquiry, where I could not locate any reference to my particular enquiry within your guide. Many clients have multiple locations, some of which generate revenue others that do not, a loss could occur at a location where revenue is not generated however the insured may need to incur expenditure to resume or maintain normal business operations. From my understanding where a location does not have any BI declared values ( for there is no revenue generated at that location ) the insured would still nonetheless be entitled to make a claim under AICOW [Additional Increase in Cost of Working] subject to the scope of cover and sub-limit. Some insurers draw the assumption that as there are no declared values at the situation then there is no BI cover, there is however no provision under the operative clause to Section 2 that provides indemnity being restricted to those locations with BI declared values.

Would you support my assessment of the application of AICOW ?

Thanking you in anticipation of your prompt attention and reply.


Ric [surname and email provided]

I answered as follows:

Hi Ric

Thanks for your note.

Unlike the Material Damage section (Section 1) of the Industrial Special Risks Policy which is tested for average/co-insurance on a location by location basis, business interruption is declared across the entire organisation.

As such the way I would do this to achieve the result you are after is:

  1. I assume the locations that have no profits but have the potential for an Additional Increase in Cost of Working claim have property that is to be insured under the ISR policy. If this assumption is correct, clearly show them in the asset schedule.
  2. I would not split up the business interruption figures by location but rather show a total for all locations on a separate line for ease of the co-insurance/average test calculation.

If the insurer(s) requires a split for reinsurance purposes then it is fine as long as the Sub-Limits are set out as follows:

Sub-Limits of Liability

The liability of the Insurer shall be further limited in respect of any one loss or series of losses arising out of any one original source or cause at any one Situation as set out hereunder: [emphasis mine].

The Sub-limits of Liability apply in excess of any applicable Deductible.

Item 2 Claims Preparation                                               $x

Item 4 (Additional) Increase in Cost of Working         $x

Etc for any other sub-limits for section 2.


This should make it clear.



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The major risks facing business in 2018

Business Interruption, cyber attacks, and natural catastrophes are, not surprisingly to us in the industry, the leading business risks this year, according to more than 1,900 risk experts from 80 countries polled for the latest Allianz Risk Barometer.

The survey by Allianz Global Corporate and Specialty reveals that cyber attacks and business interruption remain the leading two risks in Australia. What remains disappointing is that both cyber and business interruption coverage is often not taken out by many small to medium enterprises, commonly at their peril.

I continue to urge all business owners and managers to discuss these and other risks with their insurance broker.

Changes to legislation/regulation and natural catastrophes are also high on the list.

To read the excellent full report please visit: 

I conclude with their very insightful infographic.

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Profiting at other people’s expense

The Courier Mail reported on builders massively overcharging victims of Cyclone Debbie and the floods that followed further south. Click here for the article.

This sadly occurs after every natural disaster to some extent and while some as the Insurance Council of Australia state is due to demand surge, some clearly is a giant rip off.

Every trained loss adjuster and claims preparer will be carefully reviewing the scope of works and the costings to ensure they remain fair and reasonable to ensure that insurance remains sustainable in areas likely to be effected by natural disasters. This does take a bit of time but it is necessary for the good of the entire community.

Typically we find that the local builders who wish to remain in the area after the event treat their communities better than the fly by nighters who move in for a quick buck and leave with full wallets and often dodgy work.

The approach LMI is taking wherever we can is to use local builders known to the insured or the brokers. We are finding we are getting better service, better quality and better pricing.

All of us in the insurance industry have a roll to pay in this issue and weed out and black ball the crooks who are preying on people while in a vulnerable state. At the end of the day we will all be paying for it with higher premiums while those in high risk areas may find it difficult to get insurance at all. View full post…

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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 2 – Time Excesses – Part A

Following on from yesterday’s article on part insuring a standing charge, I move to time excesses for the rest of this week.

When I wrote the first edition of my book on Business Interruption, time excesses were relatively new, except for particularly large risks, especially in the mining industry.

The large number of business interruption claims that arose from the gas crisis in Victoria, Australia in September 1998 highlighted the inherent problems associated with time deductibles. Many of the issues have again been seen following the Western Australian gas crisis 10 years later, in June 2008 as well as natural catastrophe claims and the 2014 Sydney Hostage Crisis.

The purpose of the post today and the next few days is to highlight through case studies, some of the many problems that can arise with the interpretation of a time deductible. And second, equally important, the purpose is to offer suggestions for alternative forms of deductible that may assist each party to the insurance contract in understanding their respective position in the event of a loss.

Case Study 1: 3-Business Day Time Deductible

The first case example is in respect of a large manufacturer that has a Section 2 Deductible of “3 business days”.

The loss of 7 days’ production caused by the gas outage was made up by the Insured through working weekends and public holidays between the date when the gas supplies resumed and the end of the Indemnity Period. The loss was confined to the Increase in Costs of Working associated with making up the lost production.

The position that should be adopted with such a disruption being considered under a policy with a time deductible is that regardless of when the costs are incurred, they should be matched to the benefit that the increased costs have generated. For example, if within the first 3 days the Insured had incurred significant costs, say several million dollars, to convert their production facilities to run on LPG rather than natural gas, but the benefit of this expenditure was not realised until after the first 3 days and was therefore to the entire benefit of the insurer, then the insurer should, in equity, meet the entire cost of the Increase in Costs of Working. This is logical even though it was incurred during the first 3 days.

Conversely, any costs associated with making up lost production suffered during the first 3 days, for instance by way of overtime etc, should be at the expense of the Insured; the first 3 days being the period of time deductible.

This is in line with not only the generally accepted accounting principle of matching revenue with expenses, but also with the spirit of the underlying principle of indemnity which, as we have discussed elsewhere in the text, is to “put the Insured back, as near as money will allow, to the same position that they would have enjoyed but for the loss” [1].

In this case, an accountant acting for the Insured as a claims preparer, argued that there were no lost sales during the first 3 days and, as such, there was no loss suffered by the Insured. They went further to argue that as the Insured ‘stood down’ employees during this period, there were savings made. However, as these were made during the 3-day deductible, these costs should not be taken into consideration in adjustment of the claim. If this was to be accepted (and it was not), it would have converted the deductible into a positive benefit to the Insured. This is because the insurer was being asked to meet all the additional costs to make up the lost production, but was not being granted any benefit of the savings made during the period.

This is a nonsense argument that goes against the underlying principle of business interruption insurance as explained above. What this case study does, however, is highlight the problems that can arise in adjustment of a claim involving a time deductible.

The lesson to be learnt from this case is that the policy must clearly state how the deductible is to be applied.

To learn more please refer to Business Interruption & Claims, Chapter 18.

[1]     Castellain v Preston (1883) 11 QBD 380.

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LMI Mining attending claims due to Cyclone Debbie

There has been a good deal of news regarding the effect of Cyclone Debbie on the supply of coal to the world. We at LMI have been keeping a close eye on this and assisting many mining clients to calculate their business interruption losses as a result of the damage.

What many readers do not know, is that LMI have a specialist mining division that specialises in mining claims, risk assessment, policy and endorsement drafting and review.

Headed by Murray Rowley, with 50 years experience in mining losses, and backed by a team of on staff qualified mining engineers and accountants, the team are handling several losses arising from the closure of the rail lines in Queensland due to damage that occurred during Cyclone Debbie.

I myself, am proud to be part of this team, having handled mining losses since the mid 1980’s including some of the world’s largest claims. My MBA Thesis was on the Closure of the Bougainville Mine. My experience, however, is far outweighed by Murray’s.

Mining, perhaps more than any 0ther industry, requires a great deal of knowledge and experience. There is often a great deal of money at stake and it is certainly not an area for the generalist or amateur. While Murray and his team are based in Queensland, he and his team have and continue to handle losses all around the world due to their extensive expertise in this industry.

LMI Mining is just one of the specialist divisions we have at LMI that provide expertise for specific industries such as tourism, packaging, manufacturing, energy risks, motor trade, crop, retail, and property management.

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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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Beware the sharks looking to make a quick buck following Debbie

Source: Queensland Fire and Emergency Services / Twitter

One issue we face after every catastrophe event is the number of get rich quick merchants that jump in and often exasperate the hardship being experienced by insureds.

In the past this has been mainly builders but as we saw in New Zealand after their earthquake, this is changing to public adjusters.

Over the next few days Queensland and Northern New South Wales will see the arrival of at least one team of ambulance chasing public adjusters seeking to sign up people who have suffered damage from Cyclone Debbie and the subsequent flooding to handle their claim. They typically work on a percentage of the amount recovered.

Insurers and Loss Adjusters have tried bringing in US based Loss Adjusters following Cyclones Larry and Yasi and it was a complete failure. Virtually every claim had to be reassessed.

In the main these adjusters were great people but the issue is US policies are significantly different to those in Australia. US based claims people, even if experienced and well trained in interpreting policies  are not trained on the Australian Insurance Contracts Act nor the Insurance Council’s Code of Practice.

Many home and business owners do need real help after a loss but it must be meaningful help from someone who knows our Australian policies, our law -and practice and who is a good builder, restoration company etc and who is not.

These guys talk a good talk but speak with a local broker or loss adjuster from North Queensland who had to pick up the pieces after Yasi to confirm what I am saying.

Remember the last lot were Loss Adjusters under the guidance of Australian insurers and Adjusting houses.

Who is going to watch and guide public adjusters coming in on a tourist visa to make a quick buck. Hopefully our Border Patrol officers will sort them out now President Trump has torn up the Free Trade Agreement.

Having said all of this, just because someone has a North American accent or any other accent does not mean the devil. Loss Adjusters and Claims Preparers, brokers originally from Canada, the United States or anywhere else who are employed by Australian firms, have lived here for a while and have been trained in the areas I discussed such as our Insurance a Contracts Act are fine. Some are great.

It is the fly by nighters that I am worried about. It is stressful enough going through a Cyclone I do not want the claim process to add to the stress.

Of course we have some home grown sharks as well. Already we are hearing advertisements on the radio about public adjusters. Having worked in claims in Queesland for over 40 years and have never heard their name let alone seen their work I worry.

Again, I am not saying anyone is dishonest or in experienced. Handling claims, particualrly business interruption claims requires training, and experience, and I urge everyone to please check their insurance qualifications, their experience in handling insurance claims, ask for testimonials and ring previous customers. Do not just fall for the retoric of what President Trump would call “Fake Experts”

Reality check: geneuine experts and trades v the sharks

What I will say is that as a business interruption specialist, I have been called in to help set the sum insured and or calculate losses for some of Australia’s leading accounting firms. I am Fellow of the CPA professoinal accounting body but I do not attempt to do my own tax or superannuation. I leave this to the experts and do not want to be training someone at my expense. The same goes for business interrutpion claims. They can be extremely complex and business owners and those inexperienced in the product do not know what they do not know resulting in either claims payments being delayed unnecesarily and or valid items being missed.

The same warning goes for builders, restorers, and other trades. Make sure that they are registered to work in Queensland, have the right insurances. experience and intergrity.

The majority of full time professionals in the insurance industry want Insured’s to get a fair deal and good advice when you or your clients need it most.

For some time I have been pushing to have anyone handling claims in this country needs to be licensed after adequate training. Those that advise at the time insurance is sold are required to have an Australian Financial Services Licence. Why not those giving advice at claims time?

For claims preparation, a good place to start is the International Institute of Claims Preparers website where all members have been trained on general insurance law and practice and the 6 principles, most importantly the principle of utmost good faith, have been tested, approved and commit to continuing professional development and ethical behaviour.

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