Blog Question: Insuring only ITEM 4 Additional Increase Cost of Working only Under an ISR Policy
If you only insure Item 4 will the Policy respond to cover afforded under the MEMORANDA TO SECTION 2 i.e
- Public utilities extension
- Premises in the vicinity (prevention of access)
And also to other Endorsements i.e.
- Wide Area Damage (General Area) Damage
I am asking this this question as I have been advised that these extensions cover “loss as Insured by the Policy” and if you do not have Section 2 Item 1 Insured then there is no “loss”claimable under ITEM 4….
To me “Item 4” only stipulates the “Basis of Settlement” not your entitlement to “Indemnity”??
Am I missing something??
|Carl [Surname and email provided]|
My answer: Carl you are perfectly correct. The trigger in the first instance for a business interruption claim under Section 2 – Consequential Loss of Profits of an Industrial Special Risks (“ISR”) Policy, whether it be the Advisory or Modified version, 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.” [Emphasis mine]
There is no link or limitation in this Indemnity clause to Item 1, which we in the industry know as Loss of [insurable] Gross Profit
Further into the Policy, still under Section 2, there is the Basis of Settlement Section. Here 4 optional basis of settlement, numbered 1 through 4 are available to be taken by the Insured/broker. Regrettably, these 4 items are not given names or headings in the original wording and so I list them with the names that I have given them in policies that I tailor for my broker clients:
Item 1 – Loss of insurable Gross Profit
Item 2 – Professional Fees
Item 3 – Pay-Roll
Item 4 – (Additional) Increase in Cost of Wording.
I have explained the coverage afforded by Item 4 (Additional) Increase in Cost of Working in earlier postings and I do not propose spelling all this out here. You can use the search function in the blog to locate the earlier articles if need be.
Turning now to the Memorandum to Section 2 and to the endorsements that are designed to extend the coverage afforded by the base wording, they are either triggered by the Indemnity clause outlined earlier or they have their own in built trigger.
I chose the Prevention of Access Memorandum to explain how the trigger works. As an aside, I would explain that the Public Utilities Memorandum adds no value to the policy coverage at all and in my opinion should be either removed or replaced with a clause that provides genuine protection as in its current form it only provides false assurance to the Insured that they have cover.
Turning to the “Premises in the Vicinity- Prevention of Access” clause, the memorandum reads in both the Advisory and Modified version of the ISR as follows:
“PREMISES IN THE VICINITY (PREVENTION OF ACCESS)
Loss as insured by this Policy resulting from interruption of or interference with the Business in consequence of damage to property in the vicinity of the Premises caused by a peril, damage as a result of which is insured hereunder, which shall prevent or hinder the use thereof or access thereto, whether the Premises or property of the Insured therein shall be damaged or not, shall be deemed to be loss resulting from Damage to property used by the Insured at the Premises.” [Emphasis Mine].
Here the memorandum, imports damage to property that would be insured under an ISR policy, that is, it is not excluded property, caused by a circumstance that is not excluded, into the Insured premises and treats that damage as “Damage to property used by the Insured at the Premises”
Having been triggered, the Insured is entitled to claim under any or all of the Items listed in the Basis of Settlement section and this includes Item 4, (Additional) Increase in Cost of Working.
While Item 4 is itself a Sub-Limit and not a Declared Value, the claim pay-out could be further sub-limited to any amount shown in the Policy Schedule as a Section 2 Sub-Limit for that particular circumstance. For example, if the Insured had a Sub-Limit for $1,000,000 for “Additional Increase in Cost of Working”, and a further Sub-Limit of $250,000 for “Premises in the Vicinity- Prevention of Access”, and the disruption to the Insured business was as result of a Prevention of Access issue, the client would be limited to a claim of $250,000.
As an aside, it is an interesting debate as to whether Item 2, Professional Fees / Claims Preparation Sub-Limit is claimable in excess of the Sub-Limit for Prevention of Access. It really depends on the wording of the particular ISR policy.
It is common practice to allow both Sub-Limits and it is certainly industry practice when it is a base trigger for the interruption claim and the client has both Item 2 Professional Fees (Claims Preparation costs) and an Item 4 (Additional) Increase in Cost of Working claim.
In summary, you are entitled to claim for financial losses that fall within the scope of the coverage afforded by Item 4, (Additional Increase in Cost of Working, where the trigger is only Prevention of Access, subject, of course to the terms and conditions of the policy.
Carl, I hope this adequately explains the situation.