Observations from a Business Interruption Review
I was speaking as part of a Generation Z Forum in Coffs Harbour last week and a broker asked me to run my eye over his calculation for the Declared Value on his largest client.
While I prefer to understand the individual risk first, I did make the following observations on two areas that I thought I would share with you.
1. Repairs and Maintenance: The amount deducted was significant and I suggested that the broker make certain that the amount did not have any fixed component. If the Insured has fixed contracts for any part of this that part does need to be insured.
2. Rent was deducted with the note beside it that the lease had a rent abatement clause.
With rent, an insured can sustain a loss of revenue and still be up for the rent. This can be through two main ways.
The first is where there is no damage to the building which would trigger the rent abatement but the business still sustains a disruption. This is about 30% of all Business Interruption claims.
Possible triggers are:
- prevention of access,
- public utilities outage,
- murder or suicide,
- an insured loss arising from say a fire at customer’s or supplier’s premises,
The second way is where the client relocates and starts paying a new landlord, but their revenue has not returned to full pre-loss levels.
I also pointed out that a lot of modern leases do not allow the Insured to break the lease if the landlord commences repairs within a certain period, say 3 months and completes the repairs within say 12 or 18 months, or even longer. This means your client could be paying double rent if they were to relocate temporarily, take out a 2 or 3 year lease on the temporary premises and the work at the old premises is fixed in 9 months.
I have written before on where the Insured owns the building in a different legal entity and the need to insure the rent both as part of insurable Gross Profit and as Loss of Rent. The simple reason for this is that both insured’s could sustain a loss at the same time from the one event.
For any /all these reasons I would typically insure loss of rent.