A reminder on what not to do when selecting a short Indemnity Period under a traditional Business Interruption policy.
I was copied in on an email that one of my mentors, Murray Rowley, head of LMI Mining and runs our Gold Coast Office, wrote to one of his regular clients. Murray was one of the two Chartered Accountant, Chartered Loss Adjusters who thoroughly trained me in Business Interruption claims. The topic of his email is such an important issue that it was worth sharing with readers.
Shriley & I appreciate the claims work that you have been sending our way!
We note that quite regularly the sums insured arranged in respect of Gross Profit have been inadequate and this has led to the claim entitlement to be seriously reduced by the application of co-insurance.
When arranging cover for Business Interruption we strongly recommend that the Indemnity Period be at least 12 months as most serious fires involved a lengthy disruption.
However, if the Insured is adamant that the require cover for 6 months Indemnity Period, the sum insured for Gross Profit has to remain at the same figure as for 12 months. If the Indemnity Period is eg 18 momths the required sum insured has to 1.5 times the Annual Gross Profit amount.
It is totally inappropriate to cut the sum insured in half for six months as the formula requires the amount to be based on the annual figure and the premium rating takes care of the shorter indemnity period.
We recommend that your team urgently review all policies taken out for coverage for Gross Profit and ensure that the amount of cover is based on the 12 month figure. Otherwise all of your clients insured for 6 months Indemnity Period will only recover portion of their loss.
Shirley & I invite to you to call us to discuss this but I felt that it was important to alert you to this issue.
Kind regards
Murray Rowley | LMI Group
B.Com, FCA, FASA, FCILA, ANZIIF (Snr Assoc)
Chartered Accountant Chartered Adjuster
===================For my part, I cannot recall the last time I advised a client to take anything less than 12 months and in many cases, where the Insured owns the building or, when looking at what the worst case scenario is, when looking at a business continuity plan.
With supply chain issues, lack of building trades, delays in obtaining approvals and a raft of other reasons, I firmly believe that Indemnity Periods need to be reviewed annually and in many cases increased beyond 12 months.
If you would like to learn more about how long you or your client should insure for, I would refer you to https://biexplained.com/au/ and https://biexplained.com/au/how-long-do-i-need-to-insure-for/ in particular.