Is a 12 month Indemnity Period long enough? Far too often it is not.
As I explain under the heading: “How long should I Insure for?” on LMI BIcalculator (http://www.bicalculator.com/KC/kc1.aspx?id=39) there are a number of factors that need to be considered. (Remember brokers, you can copy and send a link to your clients from this website to assist in the education of your clients)
First of all, let me explain that the indemnity period is the period which the insurance policy will provide cover for disruption to your business. It not only covers the period which it takes to rebuild a damaged building or replace stock etcetera it is the period which you expect the business will take to be back exactly where it was at the time of the loss. This means getting back or replacing any lost customers and/or protection for any on-going increased costs of working to the business. A good example of this is that under many lease agreements the tenant is bound by the lease to maintain the lease if repairs are started within three months and completed within a time period sometimes 6 other times 9, 12, 18 or even 24 months. There is no use having a short indemnity period if a) you have to incur the costs of moving back into the finished building after the indemnity period has expired or b) you have to pay the lease out.
Other things to think about are:
Acceptance of the property claim
How long will it take the insurance company to accept your claim in respect of the loss of assets? In respect of a fire claim, this entails a thorough investigation into cause and in a major loss this process typically takes between 6 and 13 weeks.
Management of the claim
Getting the claim accepted is just part of the process. How proactive the loss adjuster, the consultants such as engineers, builders and the claims department themselves in getting things done, making all important progress payments etc. needs to be considered. Brokers and Insureds ought to give this much more consideration at the time they take out the insurance than they tend to do. Good quality insurers actively work to assist their clients. Others move the Insured from “customer” to “cost centre” the moment the claim happens. Having a longer indemnity period can act as a second form of insurance as, realising that delays are really going to hurt them, it can force otherwise slow insurers/loss adjusters to keep things moving.
Let us assume you cannot occupy the building you usually do. There has been a fire, or perhaps an outbreak of disease. What alternatively premises are available to you? We find in many areas, such as shopping centres, retail shopping strips, country towns that there is a shortage of alternative accommodation available. This is particularly relevant in cases where your business has particular needs. Health department approval for food handling, particular requirements for electricity, gas, lifting, delivery, and storage facilities are just a few examples.
The Connection of Services
The connection or reconnection of electricity, gas, and or telecommunications, can be a problem for the original premises or to the premises to which you may relocate, temporarily or permanently, particularly to newer areas.
Removal of Debris
How long will it take, allowing for the environmental protection authority and work safe rules and regulations to clear the damaged property ready for replacement?
Another point to consider is, in the case of a landlord, just how many of the tenants are insured adequately if at all. Under insurance or worse still no insurance can certainly delay the rebuild process, particularly if the tenants go bankrupt and abandon their debris to the landlord.
The time frame to obtain council permission to rebuild to current standards sometimes requiring a new planning permit can take several months. This is why most commercial leases now allow the landlord a minimum of three months before they have to start repairs otherwise the lease is at an end. Please check your own lease as part of your planning process.
This is certainly becoming an issue in more and more cases and should be carefully considered when setting the Indemnity Period.
There is the tender phase of obtaining quotations for the reinstatement of the building, machinery and plant etcetera. It takes time to prepare an adequate scope of works and then evaluate the tenders that are received.
From our experience, Insurers are less and less inclined to go down the “cost plus” methodology today which has proved to be so much quicker in the past. As all the costs are verified as part of the verification process with the overhead and profit margin is agreed in advance, the cost of reinstatement is traditionally lower and the reinstatement done faster. As such I cannot see why it is not used where appropriate. In any event, the tender phase does add considerable time to the process and needs to be factored in to the Indemnity Period.
Lead Times on Replacement Equipment
If your business relies on product or machinery that is imported from overseas or is otherwise not immediately available then you need to factor this into your calculations. The more complex the machinery: typically the longer the lead time.
Fit out, Testing, and Commissioning
It is one thing to rebuild a building but then it has to be fitted out. Partitions may have to be built, telephone cables laid, computer networks installed etcetera. For some risks this can be many weeks of work.
Similarly, any new equipment needs to be installed, tested and commissioned. What reasonable time is required here?
The Time to Relocate back into Your Premises
If your business has temporarily relocated after say a fire, you will need to return to your original premises. This can be a time consuming and disruptive period.
Winning back new customers
This is the major point that most or many people overlook. Even when all your property is reinstated you are entitled in many jurisdictions, United Kingdom, Australia, New Zealand and the like to continue to claim under an interruption policy until your turnover has returned to normal as has your expense rate. In the United States the policy typically limits this to a nominated period, independent of your indemnity period.
Add more for Catastrophe Situations
If the business is in an area where a catastrophe is possible such as a hail storm, flood, cyclone, earthquake then at minimum of 25% to 33% increase in the length of the Indemnity Period should be considered as the whole reestablishment process will take longer after a large catastrophe. Following the Victoria “Black Saturday” Bushfires and Christchurch earthquake a minimum of three (3) years was necessary for many SME businesses to be fully protected.
Regardless of the type of insurance, the time taken to win back your customers should be carefully considered when determining what level of indemnity period is required.
It is important that a 3 month cover, i.e. a 3 month indemnity period is not 25% the cost of 12 months. The reason for this is the frequency of short disruptions compared to longer ones. You will find that the cost difference is so small it is better for you to insure for at least 12 months as a minimum.
I strongly suggest you take a longer indemnity period if you feel that 12 months is even the slightest bit “skinny”. Twelve months may sound a long time, but from my experience, it goes far too fast and many a business is only just started rebuilding after a major event let alone fully recovered.