More on why businesses should not cancel their Business Interruption Insurance

I continue to receive many questions about how to convince an Insured not to reduce or cancel their Business Interruption insurance cover. As I have covered this topic several times, I thought it would be good to get another of the LMI Business Interruption claims experts to look at the issue, and see if he could come up with a chart, to show it a different way. The chart idea was from broker Maree [surname withheld]. Thank you, Maree.

I turned to Carl Greenhalgh and asked him to have a go. I share this thoughts in the hope that brokers and their clients do not have to find out the hard way why cancelling their insurance, particularly their Business Interruption insurance, is so wrong. Over to you Carl.

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As claims people, we see the devastation caused to businesses through minor losses, let alone major losses. All too often this is exacerbated, sometimes catastrophically, by under insurance.

As a direct result of this, LMI Group developed their first ever app, the Under-insurance Calculator.

To give you a working example, imagine if you will.

Today, your Hotel Client (let’s say they are a medium-sized café) calls you and, despite your best efforts, demands you to reduce their Business Interruption Sum Insured by 75%. Their analogy, is that they are only able to sell takeaway and as such they are only making 25% of their normal GP.

Accordingly, you immediately call the Underwriter and notify them of the amendment:

The business made some other changes and let their head chef take some unpaid leave, so the business owner decided to try their hand at cooking. Later that night, the business owner forgot to turn the gas hotplate off, resulting in a fire starting and causing extensive damage to the interior of the business.

Just as well, the Insured maintained their Property Insurance to the full replacement value, as they will be able to get everything replaced and their reduced Gross Profit insurance will cover them for the time being.

Three weeks later, the Insured has obtained a few quotes for repairs and the replacement of most equipment and submits everything to the loss adjuster. One week later, the Government announces that there has been a dramatic reduction in new COVID-19 cases and as such they are going to ease the closures of business with a staged relaxation of restrictions and cafés and restaurants being first permitted to reopen.

All the similar businesses surrounding the Insured business, are experiencing an upward trend nearing 50% on last years sales due to the public’s excitement at being able to get out of self isolation and socialise.

The Insured immediately calls you and asks you to return their Gross Profit Sum Insured to what is was, in order to ensure that they too don’t miss out on the spike in business.

Unfortunately, the claim has already occurred and, therefore, any test for adequacy will be based on the Annual Income as at the date of the damage. The Insured revised their Sum Insured to 25% of the Insurable Gross Profit amount and until this claim is finished, they will be penalised.

Following, is a graphical representation of the scenario showing Normal income in January, followed by the dramatic reduction at the beginning of the enforced partial COVID-19 closure in February, followed by the full FIRE closure in April through to resuming business after building repairs in July, and the end of the impact in August. The Gold line depicts how a Business Interruption policy would have responded with full insurance, noting that it cannot respond to the impacts of COVID-19.

Without full insurance, and due to reducing the Sum Insured to $125,000 the claim payout would be anywhere between 60%-75% less.

The difference between “would be” and “could be” in this example is $151,000, for a potential Premium refund of $1,000. This $150,000 otherwise insurable loss, would mean the end of most businesses of this size.

Can you imagine if this was the draw-card business for a community and it failed to open? Or if a number of businesses in a community took the approach to cancel their insurances and a major storm hit? Goodbye community.

Thanks Carl.

None of us have a crystal ball. At the time of writing, Australia is doing well in its fight against COVID-19. This does not mean any of us can be complacent and, certainly, not break the rules set by our governments to stop the spread of the virus.

If we do the right thing and collectively we bring this under control, of course the government is going to start to ask businesses put into hibernation to wake up and get back to life. I doubt this will be all in one go for all businesses all across Australia. It is likely to take longer to fully open up our borders to overseas travellers and students, until their country of origin has the virus under control. But that may not mean that we cannot open up some businesses for our own people.

None of us know how this will play out. If any of us had a genuine crystal ball that told the future, we would not need insurance, except when we knew it was going to happen and then that would create a non-disclosure issue, anyway.

That is why Carl, the entire claims team at LMI Group and I, urge you to retain your insurance and, particularly, your Business Interruption coverage, which is your financial safety net in case some insurable event strikes you or your business income earning assets.

What this country needs now in our business owners, is war time leaders. Even in the darkest hours of World War II, Churchill still kept part of the army back, to protect his country. Insurance is your reserve force in case an attack from another front hits your business.

Remember our adage. Hope for the best but plan and insure for the worst.

Stay safe everyone.