A reminder, make that a plea, to record the Uninsured Working Expenses where required on a business interruption schedule

At LMI we have had a real run of claims we are attempting to calculate where the policy, such as an ISR or one of many of the business packs out there which call for the Uninsured Working Expenses to be listed on the Schedule where none have been listed. This of course creates all sorts of issues, potentially the most damaging for the Insured, a penalty for under insurance.

Turning back to the question of whether the Uninsured Working Expenses need to be listed, in such cases I think the easiest way to explain the answer is by way of example.

Let us assume that the insured or their broker calculated the Declared Value for Business Interruption for a particular client as follows:

Sales                                                                                           $1,000,000

Opening Stock                                     $100,000

Plus Purchases                                    $500,000

Goods Available for Sale                        $600,000

Less Closing Stock                               $100,000

Cost of Goods Sold                               $500,000                           $500,000

Accounting Gross Profit                                                                 $500,000

Less Uninsured Working Expenses in addition to Purchases

Freight                                                 $100,000

Packaging                                            $100,000

Selling Expenses                                  $100,000

Total Uninsured Working Expenses

(excluding Purchases)                           $100,000                           $300,000

Insurable Gross Profit                                                                  $200,000

If the broker  failed to show the Uninsured Working Expenses on the Schedule the loss adjuster acting for the Insurer would turn to the definition of Gross Profit set out in the ISR Policy which defines insured Gross Profit as:

“GROSS PROFIT

the amount by which:

(a)      the sum of the Turnover and the amount of the Closing Stock and Work in Progress shall exceed

(b)      the sum of the amount of the Opening Stock and Work in Progress and the amount of the Uninsured Working Expenses as set out in the Schedule.

Note: The amounts of the Opening and Closing Stocks and Work in Progress shall be arrived at in accordance with the Insured’s normal accountancy methods, due provision being made for depreciation.”

[emphasis mine]

If there are no Uninsured Working Expenses set out on the Schedule as the definition requires then, the loss adjuster will typically only allow Purchases. In fact, there is one loss adjuster in Australia which is reluctant to even grant this expense as uninsured.

The loss adjuster would then calculate the insurable Gross Profit in accordance with the policy for the purpose of testing for under insurance as follows.

Sales                                                                                           $1,000,000

Opening Stock                                      $100,000

Plus Purchases                                     $500,000

Goods Available for Sale                  $600,000

Less Closing Stock                               $100,000

Cost of Goods Sold                              $500,000                           $500,000

Accounting Gross Profit                                                                    $500,000

Less Uninsured Working Expenses in addition to Purchases

None listed                                                                                              $0

Insurable Gross Profit                                                                $500,000

The test for Under-insurance/Average would in this case then be:

Declared Value

Value at Risk as calculated by the Policy     X       the Loss

This equals:

$200,000

$500,000            X        the Loss

The Insured would therefore only receive 2/5 of their loss or 40%. The cruel  irony is that if there were savings in the Uninsured Working Expenses of freight, packaging and selling expenses these would have been deducted from the loss adjusters calculation of Loss of Gross Profit before the test for Under Insurance/Average and so would have copped a double-whammy.

My strong recommendation is that the broker should list the Uninsured Working Expenses on the Placing Slip and that they should in turn be listed on the Policy Schedule. This is in the spirit of the important underlying principle of insurance, namely Utmost Good Faith, so that everyone knows the rules before the claim and no one is unfairly penalised.

So, brokers please always list the Uninsured Working Expenses on the Schedule. If at this time of the year you are reviewing the Schedules coming back for your 30 June renewals and you seen the Uninsured Working Expenses are not listed, please have them included by endorsement.

Underwriters, please do not accept a placing slip which has a declared value for Item 1 Gross Profit, using an ISR as an example, where there are no Uninsured Working Expenses. If there are to be none then, the ISR policy ought to have an endorsement moving the coverage to Gross Revenue.

If you would like to learn more about business interruption, a couple of free places to learn are www.bicalculator.com under the BI Explained tab or read the free ebook, Mannings Guide to Business Interruption.

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