Business Interruption coverage can be a minefield to decipher! It is designed to reimburse policyholders for the income lost or incremental increase of expenses faced during a loss period. Unfortunately however, claiming for it can be a complicated affair.
Because of the complexities surrounding this area, – mistakes are commonplace, and specialists suggest that around 40% of policies are estimated to be underinsured.
Uncertainty over terms like ‘insurable gross profit’, and arrangements such as whether or not to protect payroll, frequently end in ineffectual sum-setting.
However, fear not! In this article, we’ll break it down into something palatable, explaining the thought processes to consider and items covered under business interruption insurance.
Let’s start with reviewing what is and isn’t covered: and how coverage applies:
- The ‘Actual Loss Sustained’, or the overall permanent economic loss to the company.
- The time needed to replace or repair damaged property, providing repairs occurs in a commercially efficient way.
- Any expenses incurred in efforts to reduce the business interruption loss, PROVIDING the costs don’t exceed the amount of loss they block.
- Extra expenses incurred to operate ‘business as usual’ during the restoration period of the damaged property.
Items not covered
- Temporary delays in the transportation of product to customers.
- If another business group under this policy is dependent upon your business as a supplier or customer, that potential loss should become part of your exposure scenario.
- If a manufacturing business is operating at capacity while maintaining healthy levels of inventory and can’t make up for lost production.
Items possibly covered
- Consequential losses in sales and market shares for the period following the recommencement of normal operations.
Things to consider
Repairs to damaged property, production losses, and significant extra expenses are evident to everyone; It’s the hidden exposures that must be distinguished to attain maximum recovery.
Ask yourself the following; How does the loss influence supply functions? Will volume discounts and take-or-pay contracts be lost? Will the loss adversely affect other divisions?
Think outside the box; Have your repair engineers been made to delay other projects that are expected to save on operating costs significantly? Are your customers now being served by other insured locations at excess freight penalties and production costs?
Think ahead; Are you suffering profit-loss at downstream converting locations that you’re currently failing to supply? Have you lost vital customers? Were productivity advances delayed?
Your insurance won’t cover every area of potential loss, but it’s crucial to identify all known effects from the get-go. You can arrange policy responses later. Unusual loss exposures documentation will require its own specific tailoring.
All potential exposures must be identified as soon as possible after the loss – this aids the adjuster in making accurate and sustainable estimates.
When property damage is the subject, a file should be kept listing each major category of damage and a corresponding estimate of the loss. This file will need constant updating to facilitate quick response to information requests regarding repairs, production, and excess costs status.