Date: April 2011

Business Interruption

Our Business Interruption expert Jonathan Samuelson recently ran a workshop on BI policy wordings at a regional BIBA event. His presentation highlighted that BI cover has not fundamentally changed for many years. However, changes to the current business environment have highlighted specific issues likely to benefit from a review of the existing wording. Brokers, insurers, loss adjusters and loss assessors most commonly expressed

• Adequacy of Gross Profit declaration
• Adequacy of Maximum Indemnity Period
• Technical issues such as Depreciation and Savings

Jonathan explained that CILA were given a mandate to identify problem areas within existing wordings and make recommendations. A two stage approach was adopted:

• Quick wins – relatively straightforward changes that could be made quickly
• More complicated issues – requiring wider industry involvement and collaboration

The proposals are:

Quick Wins

Definitions & Terminology

Gross Profit – big differences were found between the way insurers defined Gross Profit and the way policyholders used this term. Gross Profit in accounts is usually calculated differently to Gross Profit as defined in a BI policy.

Outcome – the term Gross Profit is to be replaced with “Insurance Profit”.

Uninsured Working Expenses – there is often confusion over what expenses are included within Uninsured Working Expenses, and confusion as to what Purchases means.

Outcome – Purchases are to be defined as “Purchases of stock, raw materials and components (and/or consumables) and other third party sub-contracting costs”.

Uninsured Standing Charges – what is a “Standing Charge”.

Outcome – the term Standing Charges is to be abandoned as it is not in general use and has no generally accepted meaning.

Procedural Issues

Maximum Indemnity Period Lengths – when maximum periods of other than 12 months are used policyholders often make inadvertent errors in their declared amounts. This leaves many policyholders unexpectedly exposed to a shortfall.

Outcome – even when the maximum period is not 12 months policyholders should only be required to declare annual amounts. This would reduce the number of errors whilst still allowing insurers to work out the correct amount of cover and premium.

Points Of Clarification

Increased costs of working – stand alone ICW policies do not make provision for the deduction of Savings. This means that even if policyholders do make Savings they may claim they are still entitled to full reimbursement for their additional costs. In some circumstances claimants could profit from ICW cover.
Outcome – the wording is to be changed to “nett increased costs” or “incrementally increased costs” to clarify the issue.
Depreciation Savings – there has been a debate raging for decades about whether Depreciation Savings primarily relate to accounting nett profit or to cashflow.
Outcome – in future underwriters will have to specifically note within the wording whether Savings should or should not include Depreciation.
Alteration Condition – many policies currently allow for the cover to be terminated if a business enters into liquidation or receivership. However, insolvency can now take many forms and whether a business has technically become insolvent will depend upon the insolvency route it takes.
Outcome – the wording needs to be updated to recognise modern forms of corporate insolvency including Administrative Receivership.

Fundamental Changes

Only one fundamental change is being addressed in the initial report. Declaration Linked Policy Estimates – current surveys suggest that under declaration is a significant problem with more than 50% of declarations being too low. However, there is no under insurance clause in a declaration linked policy.

Outcome – the introduction of a declaration threshold will protect insurers’ interests in cases of gross under declaration. This would mean that if the declared amount were less than a certain percentage of what it should be, the policy would revert to a sum insured basis subject to under insurance averaging.