BUSINESS INTERRUPTION SPECIALIST INTEREST GROUP

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BUSINESS INTERRUPTION SPECIALIST INTEREST GROUP

• Business Interruption
• What is the problem?

Thursday 4 June 2009The Willis Building, City of
London
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BUSINESS INTERRUPTION SPECIALIST INTEREST GROUP
14.00 14.10 INTRODUCTION Damian Glynn
14.10 15.10 Harry Roberts Loss Adjuster
Graham Herridge Claims
Diane Jenkins Broker 15.10
15.30 TEA/COFFEE 15.30 16.30 Jonathan
Samuelson Loss Assessor
Martin Singleton Underwriter
Graham Eklund QC Barrister 16.30 17.00
NEXT STEPS
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BUSINESS INTERRUPTION SPECIALIST INTEREST GROUP

• Business Interruption
• What is the problem?

Harry Roberts FCA, FCILA, MAEDirector
Cunningham Lindsey
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Business Interruption What is the Problem?

• Depreciation as a Saving

• ICW Additional Expenditure

• Uninsured Standing Charges
• Clause

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The Business Interruption WordingCan The
Status Quo Survive In An Era Of Treating
Customers Fairly?

• Graham Herridge FCII
• Zurich Major Loss Team
• 4 June 2009

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An Approach To Handling Major Loss Claims Some
Minimum Requirements

• Conduct likely to engender goodwill trust
• Transparency clarity of understanding around
  policy wordings/how the policy will respond
• Certainty early admission of policy liability
• Hopefully collaborative
• Supportive of the insured business (but not
  interfering) eg release of
• interim payments
• Does the BI Wording fit the bill?

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Demonstrating The Problem 2 Examples

• Conflict between definitions of Gross Profit
• Depreciation as a Saving

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Could There Be A Win/Win Solution?

• An enhanced clarity of wording
• Allows insurers to occupy the moral high ground
  with a tangible demonstration of TCF
• Allows an insurer to offer wider cover for a
  premium (Depreciation as a saving)
• Provides brokers with an opportunity to
  demonstrate their ability to add value
• There is of course the alternative view.

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The Cynics View of Life

• It suits insurers purpose to have
  doubt/uncertainty given BI will invariably come
  down to a negotiated settlement.

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Diane JenkinsBrokerAon Limited
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Gross profit according to ABI web site
Business interruption insurance will compensate
for the short-fall in gross profit together with
paying any increased working costs and extra
accountants fees incurred.
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Example wording specified working expenses
Specified Working Expenses means (1) Purchases
and related discounts (2) Bad Debts unless
otherwise stated in the Schedule The Specified
Working Expenses have the meaning usually
attached to them in the Insureds accounts
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Example wording uninsured variable costs

• Uninsured Variable Costs
• Purchases and related discounts
• Bad debts
• unless otherwise stated in the Schedule
• The Uninsured Variable Costs have the meaning
  usually attached to them in the Insureds accounts

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Example of suppliers extension
Unspecified Suppliers or Storage Sites The
premises of any other of the Insured's suppliers
manufacturers or processors of components goods
or materials but excluding the premises of any
supply undertaking from which the Insured obtains
electricity gas water or telecommunications
services (including the provision of extranets or
access to or presence on the internet or access
to applications and related services over the
internet)
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Example of suppliers extension
Damage as insured to any suppliers or customers
premises within Great Britain Northern Ireland
the Channel Islands or the Isle of Man up to a
limit of 10 of the sum insured by this insurance
as stated in the Schedule or 1,000,000 whichever
is the less
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Example of suppliers extension
insured damage at the premises of one of your
suppliers operating and based in the European
Union, other than water, gas, electricity or
telecommunications services
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Standard Alteration Clause wording
Section 2 of this policy shall be avoided if
after the commencement of this insurance (i) the
Business be wound up or carried on by a
liquidator or receiver or permanently
discontinued or (ii) the interest of the Insured
ceases other than by death or (iii) any
alteration be made either in the business or in
the Premises or property therein whereby the risk
of loss, destruction or damage is increased
unless admitted by the Insurers in writing.
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Modern Alteration clause wording
Alteration in Risk or Interest This Policy shall
be avoided with effect from the date the event
occurs if after the commencement of this
Insurance. (iii) the Business does any of the
following (1) making a composition or arrangement
with creditors or (2) have a proposal for a
voluntary arrangement for a composition of debts
or scheme of arrangement approved in accordance
with the Insolvency Act 1986, or (3) have an
application made under the Insolvency Act 1986 to
the court for the appointment of an
administrator or (4) have a winding-up order
made or (except for the purposes of amalgamation
or reconstruction) a resolution for voluntary
winding up passed or have a provisional
liquidator, receiver or receiver and manager of
his business or undertaking duly appointed
or (5) have an administrative receiver, as
defined in the Insolvency Act 1986, appointed or
having possession taken by or on behalf of the
holders of any debentures secured by floating
charge or of any property comprised in or subject
to the floating charge. unless agreed by the
Insurers in writing.
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Jonathan Samuelson FCA

• Partner, Harris Balcombe LLP

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• Prior agreement for contentious ICOW expenditure

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• Customer Compensation Demands

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• Payments on Account

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CILA BI SIGBusiness Interruption What is
the problem?
Martin R Singleton FCII Technical Manager
(Property) Commercial Property Underwriting
Strategy Dept Aviva Insurance UK Limited
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What is the problem with.
Declaration Linked BI Covers?

• Severe underinsurance with no penalties.
• Insurers inability to collect declarations.
• Has become standard in the market - not for
  select few which it
• was originally aimed at.
• Much misunderstanding of the additional premium
  conditions.

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What is the problem with.. Adding
an average clause?

• We need to start with adding an Annual Turnover
  definition as per standard SI basis BI covers
• (b) Annual Turnover
• The Turnover during the 12 months immediately
  before the date of the Damage.
• Then we propose to include an average clause
  operating where the Estimated Amount is less than
  50 of the Annual Turnover
• If at the time of the Damage the Sum Insured on
  Estimated Gross Profit is less than 50 of the
  sum produced by applying the Rate of Gross Profit
  to the Annual Turnover (proportionately increased
  where the Maximum Indemnity Period exceeds twelve
  months), You will be Your own insurer for the
  difference and bear a rateable share of the loss
  and the maximum amount We will pay is the
  Estimated Gross Profit stated in the Schedule.

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What is the problem with. The additional
premium provisions?

• We amend the additional premium provisions to a
  maximum of 33.33
• (b) exceeds the Estimated Gross Profit, You will
  pay a pro rata additional premium of up to 33?
  of the premium paid.

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What is the problem with The meaning of
Vicinity?

• Lets end the debate and put a distance in
• Prevention of Access.
• Damage to Property within a radius of one mile of
  the boundary of The Premises which prevents or
  restricts access to or use of The Premises.

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Gross Profit Declarations Sprung v Royal
Insurance
Graham Eklund QC
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• A contract in speculation?
• Speculation in assessing gross profit
• Cf property cover SI based on valuations
• 100 or 133.33 foresight
• Clarity as to the declaration required for
  indemnity periods longer than 12 months

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• Updating declaration when?
• Whose responsibility to ensure it happens?
• No updating before a loss why should insurer
  benefit?
• Contra proferentem - if the insurer has not made
  clear what is required
• Complexity of the content of the declaration

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• Policy term adjusting rate of GP and Standard
  Turnover for Trends etc
• Why not take full account of all
  trends/variations etc in assessing losses
  recoverable as an indemnity, without limit of
  indemnity imposed by speculative assessment of
  future profit?

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• Update assessment of GP after a loss, for all
  purposes?
• Adjustment of premium if AoP would follow a
  fresh declaration, why not permit new adjustment
  of GP SI after loss particularly if declaration
  could not reasonably have been made
• Why limit to 133.33?

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• Sprung v Royal Insurance
• An insurer can not be liable for the
  consequential loss suffered by an insured if the
  insurer has delayed admitting liability or making
  a payment.
• Legal basis there is no cause of action for the
  late payment of damages
• A win/win for insurers

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• Facts malicious damage to machinery on 5/6
  April 1986.
• By 31 October 1986, no admission of liability and
  a very modest payment only. Little interest in
  investigation
• Proceedings settled by insurer paying 30,000
  plus interest and costs

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• Insured lost the opportunity of selling his
  business.
• Claimed 200,000, but valued by the Court at
  75,000
• Insured blameless except that he had not repaired
  his machinery CA that was his decision, even
  if he could not afford to do so
• Impecuniosity caused his loss!

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• Sprungs business did not survive unlikely the
  CAs decision will survive
• Clear moral and commercial distaste of CA that
  insurers could behave as they did without risk
  but not fully argued in CA
• CA - implied obligation to deal with matter
  within reasonable period of time
• But impecuniosity effectively a bar insurers
  conduct not the cause

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• Impecuniosity argument is false, because there
  could never be a claim
• If repairs are undertaken no loss
• If repairs not undertaken insureds fault
• HOL has recognised impecuniosity may not be a bar
  to a claim. Lagden v OConnor  2004 1 AC 1067

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• Breach of duty of utmost good faith
• Applies to insurers in post contract
  circumstances including after a loss. See The
  Star Sea 2001 1 Lloyds Rep. 1
• Causes of action probably available which not
  relied on in Sprung and not argued fully
• Law Commission considering
• No longer assume Sprung will survive it will
  probably go

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• Business Interruption
• What is the problem?

Next steps .