When does the Indemnity Period end?
At LMI Group, we have an issue which comes across, almost in waves, in regards to a number of claims which needs to be addressed before the next flavour of the month adjustment to reduce an Insured’s claim.
The one we have just overcome is where the adjuster has made a “notion” adjustment, without explaining the basis for it. Now, we have come across on a number of claims, particularly involving restaurants, clubs and hotels is for the indemnity period to be cut off by the loss adjuster and then the Insured being asked to prove that the loss extends beyond the period allowed by the adjuster and then also prove that the ongoing disruption is as a direct result of the damage or other insured event which gave rise to the initial claim.
One of the great frustrations for us is that often this judgment call is being made by a Forensic Accountant or an adjuster who has not been to the site, met the insured, or if they have, it has been only one short visit. Without understanding the insured’s business, their assumption that the business should have been back to normal may well be completely ill founded and at times appears to be linked to the fact that the initial reserve placed on the disruption by the adjuster or forensic accountant has proved to be inadequate. That means the claim is then being adjusted within the confines of that initial reserve.
With this background, I thought that it was appropriate to review the typical Business Interruption cover and in particular, to look at the onus of proof issue.
There are differences in the market with business interruption policies and so, for the sake of this exercise, I will use the Industrial Special Risks (“ISR”) Mark IV Modified wording.
The trigger for a claim under Business Interruption under the Mark IV ISR reads:
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.
Assuming that the loss falls within the triggering provision of the policy, it advises that the claim will be settled in accordance with the “applicable Basis of Settlement”. The Basis of Settlement reads:
The insurance under this item is limited to actual loss of Gross Profit due to: (a) Reduction in Turnover and (b) Increase in Cost of Working and the amount payable as indemnity thereunder shall be:
(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.
(b) In respect of Increase in Cost of Working:
the additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in Turnover which, but for that expenditure, would have taken place during the Indemnity Period in consequence of the Damage, but not exceeding the sum produced by applying the Rate of Gross Profit to the amount of the reduction thereby avoided.
In both Section (a) and Section (b), the policy makes note that the Insured is to be indemnified during the Period of Indemnity. It is therefore important, that we look at the definition of Indemnity, which reads:
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.
In Summary, this definition states that the Policy starts on the date of the Damage, which may be before any disruption to the business starts and ends when the business is no longer effected in consequence of the Damage, or the number of months stated in the Schedule.
Often, it is a case of res ipsa loquitur which simply means, the facts speak for themselves.
Naturally, as part of the calculation and/or assessing process, the person preparing the claim and/or assessing the claim, would carry out tests to determine whether or not some other factor has arisen which has caused a downturn in the business, and for that matter, may have caused an upturn of the business, unrelated to the Damage which would have taken place had the Damage not occurred.
The reasoning behind this, is that at its heart, the traditional business interruption policy is a contract of indemnity. That is, of course, to put the Insured back to near as money will allow to the position they would have enjoyed but for the loss. I stress that this is the underlying principle of the majority of business interruption policies in the market, however, there are some policies which are in fact agreed value policies, where the Policy stipulates a formula which may well over or under indemnify the insured.
To ensure that the principle of indemnity is maintained, the policy contains what to me is arguably the most important clause in the contract of insurance and the one that creates the greatest conflict between the insured and the insurer.
This clause is the adjustments clause, which 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.
While the Indemnity Period is not specifically mentioned in the clause, what is in effect occurring when the indemnity period is being cut short, is that the insurer or their agent is suggesting that the turnover that would have been achieved had the business not been affected by the Damage, would have been reduced for some other event, and as such, the period of disruption caused by the Damage is at an end.
Just as an insurer would take a dim view of an insured who came along with an unsubstantiated request to increase the standard turnover of the business, I’m of firm belief that if the insurer or their agent suggests that there is a special circumstance that reduces the standard turnover, then the onus of proof is on the insurer to prove this and not simply make an unsubstantiated claim that the business ought to have been back at that point.
I’m the first to admit that the adjustments clause is not an exact science and that no one can ever be 100% certain as to what the business would have achieved but for the loss, other than in the rarest of circumstances. There is always room for negotiation but both sides ought to provide some logical reason for any adjustment that they wish to make to the standard turnover. For the sake of completeness, I include the definition of standard turnover which reads:
STANDARD TURNOVER: The Turnover during that period in the 12 months immediately before the date of the Damage which corresponds with the Indemnity Period.
To further put this into perspective, the position I hold is that it is inappropriate for an insurer or their agent to simply say that the business should have been returned to normal, say a week after a restaurant reopens when the business had a track record of performing well prior to the event and has recovered to their pre-damaged position at a period longer than was expected by the insurer for the Indemnity Period to be cut off unilaterally and the Insured required to prove that the ongoing disruption beyond their stipulated cut off point is as a result of the Damage.
In fairness, how can this ever be proved?
It leaves the insured in a helpless position, starved of cash and with no logical way they can prove the ongoing loss, other than for the fact that their revenue has not returned to normal. Whether I am acting as a loss adjuster or claims preparer, my role would be to carry out an analysis and look at industry figures, the possibility of new competitors entering the market and all other factors to see whether the position I have adopted in my calculation of the claim is fair and reasonable to all parties concerned.
I have never attempted to cut off an Indemnity Period without any reasonable foundation for doing so. It appears that we will be taking at least one of our current claims to court to examine this whole issue of onus of proof and I look forward to the outcome which may resolve this, to me, inequitable position that many insureds are confronting.