Business Interruption Insurance

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Business Interruption Insurance

• November 2009

Peter Carton
Disclaimer The Insurance Institute of Ireland
does not endorse or approve the content of any
third party.
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Business Interruption Insurance

• What is Business Interruption insurance
• Business Interruption insurance provides
  financial protection to a company in the
  aftermath of an insured incident

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Business Interruption Insurance

• Financial protection can be provided under two
  main headings
• Income Protectionand/or
• Additional Expenditure

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Business Interruption Insurance

• Before looking at Income Protection and
  Additional Expenditure in more detail there are a
  few important features of a Business Interruption
  policy that we need to look at.
• BI policies cove interruption of or interference
  with the Business carried on by the Insured at
  the Premises in consequence of Damage to property
  used by the insured during the Indemnity Period

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The Insured

• Full legal name same as accounts
• Associated Subsidiary Companies
• use of and/or
• business description/premises/sum insured
• Joint and Named Insured Interested Parties

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Business Description

• All activities of the business intended to be
  insured
• Usually, but not always, similar to PD
• Cater for all insured associated subsidiary
  companies
• Property Owners - rental income

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Premises Insured

• Usually, but not always, similar to PD
• Ideally this should refer to any premises covered
  under the corresponding Property policy
• Where a separate list is used it must be crossed
  referenced to PD policy (on an ongoing basis)
• Smaller locations often get overlooked

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Business Interruption Insurance

• Damage
• Fire Perils or more commonly All Risks
• Terrorism
• Usually, but not always, similar to PD

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Business Interruption Insurance

• Some slight differences with PD All Risks
• Boiler explosion
• Deliberate withholding of utilities
• Erasure of Information

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Business Interruption Insurance

• Material Damage Proviso
• Material Damage cover in force
• Not always the PD policy
• Only applies where Insd has direct insurable
  interest which they can be reasonably be
  expected to insure
• Reason
• Liability, warranties conditions
• Funds to reinstate in timely fashion

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Business Interruption Insurance

• Maximum Indemnity Period
• The Indemnity Period is the period beginning with
  the Damage and ending not later than the chosen
  Maximum Indemnity Period during which the results
  of the Business shall be affected in consequence
  thereof
• The Maximum Indemnity Period is selected by the
  Insured
• Should be based on worst case scenario

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The Indemnity Period

• Coming to terms with the loss
• Investigations (H S EPA etc)
• Site Clearance
• Reinstatement plans
• Planning permission
• EC or local authority requirements
• Tender process

• Construction period (incl delays)
• Lead time on replacement machinery
• Secondhand alternatives/spares
• Installation testing commissioning
• Pattern models moulds
• Issues replacing raw material etc

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The Indemnity Period

• Production Start-up
• Regaining turnover/ customers/ market share
• Achieving pre-loss trading levels profitability

• Other considerations
• Alternative premises
• Outsourcing
• Inter company assistance or capacity

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Business Interruption Insurance

• Income Protection
• Gross Profit
• Gross Revenue
• Rent Receivable
• Gross Fees

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Business Interruption Insurance

• Additional Expenditure
• Increase in Cost of Working as part of the Gross
  profit cover
• Additional Expenses (Increased Cost of Working)
  on its own
• Additional Increased Cost of Working

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Gross Profit

• The term Gross Profit can lead to confusion as it
  means one thing to an Accountant something else
  to an Insurer.
• To avoid confusion with terminology it is
  recommended than when reviewing Gross Profit
  cover, a Gross Profit Worksheet be utilised.
• Due to complex employment legislation, Wages
  Salaries are almost always treated as a Fixed
  Charge for the purpose of Business Interruption
  insurance

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Gross Profit

• Net profit Fixed Charges ( all Remuneration)
• Excludes Variable Charges (Specified Working
  Expenses)
• But some charges are semi-variable

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Specified Working Expenses

• These are charges which are excluded - typically
  Variable Charges
• Should be selected by Client (following review)
• Proportional charges can be used (e.g. 70 of
  Power light heat)
• Watch Depreciation - often requested but may not
  vary with T/O
• Insurers usually have a default list. This can be
  amended as required

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Specified Working Expenses

• Sample Specified Working Expenses
• Power Light Heat
• Consumable Stores
• Carriage Freight
• Packing Materials
• Repairs Maintenance
• Wages are usually insured in full therefore not
  listed
• Partial selection is permissible

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Additional Expenditure

• Gross Profit Policy covers
• Loss of Gross Profit
• Increased Cost of Working(subject to economic
  limit)
• Where there is concern regarding the economic
  limit the following optional cover is available
• Additional Increased Cost of working

• Separate Policy /Cover on
• Increased Cost of Working
• No revenue protection
• Suitable for certain trades (eg distribution
  companies, offices etc
• Beware of inner limits
• Selecting sum insured recommend use of ICOW
  worksheet

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Other Items

• Revenue
• Rent
• Fees
• Income
• Takings

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Calculating the Sum Insured

• Gross Profit
• The sum of
• Turnover
• Closing Stock ( work in progress)

• Less the sum of
• Opening Stock ( work in progress)
• Purchases (less discounts allowed)
• Discounts received
• Bad Debts
• Specified Working expenses

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Calculating the Sum Insured

• Increased Cost of Working
• Rent of alternative accommodation
• Cost to moving to back
• Hire of furniture etc
• Fit out
• Additional rates/taxes

• Additional operating costs (phones, stationatry
  advertising)
• Staff costs (travel/meal allowances, overtime
  etc)
• Additional overheads

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Calculating the Sum Insured

• Caclulating Sums Insured
• Indemnity Period
• 12 months - annual figures
• Over 12 months - proportionally increased
  multiple
• Less than 12 months annual figures

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Basis of Cover

• Conventional or Projection basis
• Declaration Linked Basis

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Projection Basis

• Sum insured is projected ahead
• insurance period
• maximum indemnity period
• Cover subject to Average
• Rebate clause

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Declaration Linked Basis

• Estimated Gross Profit
• Limit 33.3 of EGP
• No Average
• Avoids difficult projections
• Premium adjustable (RPs APs)

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Business Interruption Insurance

• Other Items/Covers
• Tax relief
• Wages
• Advance Profits
• Fines Damages
• Research Development
• Deterioration of undamaged stock

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Business Interruption Insurance

• Extensions
• Suppliers (specified unspecified)
• Customers (specified unspecified)
• Storage or Contract Sites
• Transits
• Exhibitions
• For overseas locations restricted cover may apply

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Business Interruption Insurance

• Extensions
• Public Utilities (Gas, Water, Electricity or
  Telecoms)
• Denial of Access
• Loss of Attraction
• Notifiable Disease
• Food poisoning
• Murder or suicide
• Vermin pests or defective sanitary arrangements

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Business Interruption Insurance

• BI Extensions
• Subject to underwriting information
• Limits ( or )
• Named dependencies
• Additional premium
• Extensions may affect the maximum indemnity
  period
• The dependency is the critical limit
• The wider the territorial limits the lesser the
  cover
• Insurers have accumulation/re-insurance
  restrictions

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Business Interruption Insurance

• Common Clauses
• Accumulated Stocks Clause
• Departmental Clause
• Payment on Accounts Clause
• Professional Fees Clause
• Salvage Sale Clause
• Alternative basis of settlement
• New Business Clause
• Intergroup extension