Key Issues Relating to Business Interruption

Airmic, in conjunction with Marsh, recently published a Guide to Key Issues in Business Interruption which seeks to identify the various hurdles policyholders face when dealing with business interruption claims and/or insurance.

The report makes for interesting reading. Much of what is commented upon filters down to the type of claims and litigation I deal with, i.e. those where insurance cover has been declined or reduced or there are difficulties quantifying losses after a major loss.

The four areas of difficulty highlighted by Airmic members are as follows:

1. Ensuring Efficient Claims Settlement

At least 18% of Airmic members report having experienced a disputed, reduced or delayed Business Interruption (BI) claim over the last five years. It has been recognised that a significant issue for policyholders is the difficulty they face providing insurers with the information they have requested which can cause unnecessary delays. Airmic encourage policyholders to be proactive ensuring that the relevant internal parties are educated in loss quantification methodologies and calculations. The use of forensic accountants at an early stage in the process can help to address key issues thereby resulting in swifter resolution of claims. Policyholders are encouraged to ensure that their policies cover the cost of an expert with the inclusion of an appropriate claims preparation clause.

Furthermore, those policyholders with an effective Business Continuity Plan (BCP) reported quicker resolution of claims. Such BCP’s should identify the appropriate personnel or external experts as referred to above.

Policyholders who are able to demonstrate the existence of a comprehensive BCP and who have educated insurers and internal teams on correct calculation of losses are likely to benefit from early and substantial interim payments.

2. Determining Values and Presentation of the Risk

The insurance definition of “gross profit” differs from an organisation’s accounting definition of gross profit. This is an issue which frequently arises in the matters I deal with. If the incorrect figures are utilised it can result in significant underinsurance in the event of a major business interruption loss and also a proportionate reduction in any other claims through the application of an average clause in the policy. If the difference between the value at risk and the actual sum insured is large, insurers may even have grounds to avoid the policy on the basis of material misrepresentation.

In the guide Marsh makes some useful suggestions about possible policy amendments such as the utilisation of declaration-linked wordings thus removing the reliance on average clauses and the removal of pre-specified variable expenses within the policy wording to allow for more flexible calculation of losses.

Worryingly over 60% of Airmic members have indicated that they do not intend to change their BI submissions in response to the new requirement of fair presentation which arises when the Insurance Act 2015 comes into force in August 2016.

However, the new duty to make a “fair presentation of the risk” means that policyholders will not only legally be required to disclose information within their knowledge but to also actively search for information that they ought to know. This coupled with a new duty to present the information in a reasonably clear and accessible manner means that policyholders need to consider what information they need to search for and disclose ensuring that they have a clear understanding of their responsibilities.

3. The Correct Maximum Indemnity Period

The period for which insurers will indemnify the insured for financial loss whilst the business results are affected by an insured event is known as the Maximum Indemnity Period (MIP) and choosing the correct period is essential if policyholders are to achieve adequate recovery for the business following a large loss. However, my experience indicates that many policyholders (and Airmic members are no exception) do not understand the type of information which should be considered when assessing and fixing the maximum indemnity period.

For example, when reinstating buildings the length of time it may take for planning permissions to be granted for a Grade II listed building may significantly extend the necessary MIP. Furthermore, consideration should be given to the lead time involved in replacing critical damaged assets such as plant and machinery and the time involved in recovery of the business to pre-loss levels.

Many businesses will however, find that if they undertake a review of the relevant factors affecting the choice of MIP in conjunction with their existing Business Continuity Plan, they will better understand the risks they face in order to accurately determine an appropriate MIP.

4. Supply Chains

Less than half of the Airmic membership surveyed purchase any relevant cover in relation to supply chains despite the potential serious consequences to a supply chain in the event of a major loss.

Traditionally supply chain cover offered by insurers was for perils solely in respect of physical loss or damage at the suppliers’ premises. However, this fails to address the consequences of losses elsewhere in the supply chain and does not address non-damage events.

Marsh advise that the market is now providing wider options to include supply chain extensions incorporating non-damage supply chain cover although it is acknowledged that such cover remains expensive and involves onerous information requirements.

Nevertheless, it is important for policyholders to at least consider the effect a large loss may have on a supply chain and policyholders, and their brokers, should understand how supply chain interruptions within the organisation can affect it.

Again this will become increasingly important with the introduction of the Insurance Act 2015 which will require a more detailed explanation of exposures such as supply chain risk.

Conclusion

The Airmic/Marsh paper provides a useful guide for policyholders when purchasing BI cover. Ultimately, a policyholder will rely on its insurance broker for advice and guidance in relation to these issues and it is essential that insurance brokers dealing with commercial business interruption cover are fully conversant with the issues such businesses may face and the effect of the forthcoming Insurance Act 2015.

For further information or advice on these issues, please contact Nicola Maher, Partner at Edwin Coe LLP.

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