Answer to Question on BI
I received two questions this week
on the Ask Me a Question section of this blog. The first one reads:
Can I get an expert opinion from you on interpretation of Indemnity period under BI claims.The main issue – Is the actual interruption period is not equivalent to Indemnity period?While there is a BI claim for 7 weeks of interruption (spillover interruptions) out of an indemnity period of 9 months, the insurance surveyors contest that the final re-instatement of damaged machinery for a period of 18 days cannot be considered as the re-instatement took place beyond indemnity period of 9 months while we are maintaining the stand that since the total period of interruption itself is for total 7 weeks out of same incident, entire 7 weeks claim be considered.Facts of claim:
Following is the gist of breakdown of Generator Transformer claim pertain to a client ( Ferro alloys + power plant ):
Type of policy: Industrial All Risks Policy with MBLOP extension –indemnity period 9 months –Material Damage loss consists of 50 MW + 32 MW + 32 MW + 4 Furnace Ferro alloy units (only 2 units were running out of 4) affected units: 50 MW power plant + 2 furnaces.Details of power generation/production affected period :Total interruption period. Partial interruption period1)1-10-2010 to 8-10-2010 (initial shutdown) 9-10-2010 to 16-10-2010
2) 8-2-2011 to 9-2-2011 (replacement of new cables) 0
3) 0 3-3-2011 to 8-3-2011 (sitarampur sub-station failure)
4) 0 18-3-2011 to 21-3-2011 ( for replacement of cables in Furnace – 1 )
5) 0 6-5-2011 to 9-5-2011 ( failure of internal sub-station)
6) 0 10-5-2011 TO 14-5-2011 (FAILURE of internal sub-station)
7)3-7-2011 to 11-7-2011 (during final reinstatement of imported GT) 12-7-2011 to 20-7-2011
No of days: 19 No. of days :31Chronological order of events:
1) Breakdown of GT (Crompton make) on 1-10-2010
2) 50 MW power plant and 2 FAP units totally affected – total interruption
3) Insured came out with Alternate plan to revive the plant and successfully revived the plant in 2 weeks – so normal operations resumed – extra expenditure for Alternate arrangements were agreed by insurers
4) Had there been no Alternate Plan, the BI claim would have been for Total Gross profit.
5) GT shifted to Repairers from factory (around 300 KMs) for analysis
6) Analysis suggested for total replacement of GT but surveyor disputed and contested for repairs only
7) Prolonged discussion with surveyor/insurers
8 ) Ultimately, surveyor conceded to replacement in March 2011 – so, a delay of 5 months from surveyor to decide the MD claim
9) In March 2011, client placed order for new Chinese make GT
10) New GT reached factory site on 28-6-2011 and immediately they started making arrangements for re-instament. There was 3 weeks delay in clearance at Port
11) Plant was shutdown from 3-7-2011 to 12-7-2011 ( 9 days total interruption) – it took 1 or 2 days to re-instate the new GT but balance 7 days took to “undo/rectify” the Alternate arrangements
Now, the LOP surveyor disputes that he cannot consider final re-instatement period (3-7-2011 to 20-7-2011) as the same falls beyond indemnity period of 9 months. But the total actual claim is for 7 Weeks interruption for loss of power generation + loss of ferro alloys production. Policy is issued on alternate basis clause.
The claim is for 7 weeks interruption out of an indemnity period of 9 months but the surveyor disputes that the final re-insatement took place beyond 9 months period, hence he cannot consider. Except for total 7 weeks interruption, the business was normal.
It is general understanding that the interruption period must be considered subject to a maximum of indemnity period and in this case the claim is for 7 weeks interruption only but the surveyor do not want to allow final 3 weeks interruption.
Please give your expert opinion whether total 7 weeks interruption can be considered for claim taking 9 months indemnity period into account.
For information, Indemnity Period as defined in Para 215 of Riley’s book on Business Interruption and Consequential Loss Insurances and Claims by Author David Coughton.
Here It is clearly states that the Period of Indemnity “subject to this period not exceeding the insured maximum number of months …………… “
Enclosed are copies of the Text defining Indemnity period in Para 215 and also Para 469 wherein it is stated that:
“ It is particularly important in this connection to remember that the Indemnity Period is not necessarily the number of months shown in the definition of Maximum Indemnity Period. It is the Actual Period of Interruption within a Limit of the Number of Months stated in that definition.”
Both the above statements clearly show that the maximum period does not refer to the physical period after the date of loss, but to the actual period during which the business was affected and that this period should not exceed the Maximum Period of IndemnityAnd very sorry to bother you in this regard and look forward to your opinion, provided you do not have any objections to share your knowledge.
I am more than happy to assist with this and it is the reason I set up the blog in the first place.
This is a question that I get asked from time to time and I am aware of David Coughan’s version of one of the great books on BI, Riley although I do not have access to my library as I draft this reply.
The important part of the quote from this book I have highlighted below.
“It is particularly important in this connection to remember that the Indemnity Period is not necessarily the number of months shown in the definition of Maximum Indemnity Period. It is the Actual Period of Interruption within a Limit of the Number of Months stated in that definition.”
If I were writing this paragraph I would have said, “….within the limit of the Number of Months stated as the Indemnity Period in the Policy Schedule.”
What Mr Coughan is trying to say is that while the policy may provide cover for 6, 9, 12 or whatever period it may be, the Insured is only entitled to claim for the period the business is in fact disrupted and that this period is capped to the number of months within the Indemnity Period, starting with the date of the damage, giving rise to the disruption.
Regretably, the policy does not allow you to pick and chose what days or months you are able to say the business is disrupted. You are limited to starting from the date of the damage, giving rise and finishing, when the business is back to normal capped to the number of months stated in the Schedule. In your case, this is 9 months after the date of the damage.
I do not have the full Policy Wording that the claim you are referring to is being considered under but if it is based on an English or Australian wording it will have a definition of Indemnity Period which would read something like:
“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.”
It is too late in your case, but it is important for business owners and brokers to understand that the saving in premium for taking a 9-month Indemnity Period rather than a 12-month Indemnity Period is miniscule (between 5% and 10% typically) compared to the loss of protection that the shorter Indemnity Period creates. The same can be said for a 3 or 6-month Indemnity Period. The reason is that most claims have a disruption period of less than 3 months and so insurers need to be compensated by way of premium for this frequency exposure.
In one case I was involved in, the insured reduced cover from 18 months to 6 months on a diesel repair shop. During the fire, all the customers’ machines in the shop were damaged and the Insured got the contract to repair them all. Their revenue in fact went up during the Indemnity Period, but immediately they finished this work they found that their customer base had abandonded them. The reason being that the customers who had their machines damaged blamed the Insured for the damage to their machines and it took a lot longer to get them back than they thought when they dropped off the machines. Those that did not have machines in found the Insured could not do the work as they had a full shop and went elsewhere. It took a further 2 years to remedy the situation. Rather than reducing their Indemnity Period, they should have increased the Indemnity Period to 30 or 36 months.
The fact that the client mitigated their loss and saved the insurer a total loss payout is not a defence. Every Insured has a common law duty to mitigate their loss and this is typically reinforced by a condition in the Policy. Not only has the Insured’s mitigation action reduced the claim to the Insurer, it has also greatly reduced their uninsured losses, by the sounds of things, to only 18 days.
What I am not 100% sure of in your summary is if there were in fact more than 1 event. You speak of a failure of of a sub-station on 6 May 2011. If this is a new event and this failure is covered by the policy then a second claim may be possible (subject to a second deductible) but the Indemnity Period would start from this latest event).
I hope this all helps explain the position with your primary question about when the Indemnity Period starts and finishes.