WITHOUT THE RIGHT LEVEL OF BUSINESS INTERRUPTION INSURANCE, YOU COULD BE LIGHTING A FUSE UNDER YOUR BUSINESS. TOGETHER, WE CAN STAMP OUT THE CHANCES OF DISASTER.

With the Chartered Institute of Loss Adjusters (CILA) & Financial Conduct Authority (FCA) warning of an alarming degree of underinsurance in this area, it’s vital that you are confident in both the levels of Business Interruption cover you have and in the indemnity period chosen (the maximum period over which a claim is paid) to give your business the best chance of continuing at pre-loss trading levels.

The Gross Profit figure that sits within ‘the accounts’ page is often on a different basis to the insurance definition of the same term, and also wouldn’t take into consideration growth potential over the full indemnity period (for example) which could lead to significant underinsurance. If a claim payment is delayed or even rejected because of underinsurance, the business’s survival is brought into question.

The indemnity period should not only cover the period it takes to rebuild a damaged building or replace stock, but should also take into consideration the time it takes to reach the same trading levels that existed prior to the loss. For example, the seasonality of the business, the planning permission for any rebuilding , together with the time taken to win back customers should be carefully considered when determining the level of indemnity period required.

Towergate Insurance Brokers can help you through this process and has a number of calculation tools to assist in this process.

By completing our True or False question sets it will not only help you understand your own knowledge on this subject but will give you a risk scoring based on the answers you give.

Check your understanding of Business Interruption Insurance.

Complete our True or False question set to help you understand your own knowledge on this subject and receive a risk scoring based on the answers you give.

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Its estimated that as many as 43% of Business Interruption Insurance policies could be under-insured.

True

False

Its estimated that as many as 43% of Business Interruption Insurance policies could be under-insured.

TRUE

In recent surveys undertaken by the Chartered Institute of Loss Adjusters (CILA), the average findings from the last three surveys have been: Proportion of Business Interruption (BI) policies that are written on a declaration-linked basis 62.5%, Proportion of declaration-linked policies that are under-declared 43%, Average level of inadequacy 53%

Average (reduction in claims payment due to underinsurance) does not apply to Business interruption insurance claims?

True

False

Average (reduction in claims payment due to underinsurance) does not apply to Business interruption insurance claims?

FALSE

In the event that Business Interruption Sum Insured is under-insured the amount of: the claim settlement will be proportionately reduced (similar to property damage claims). If you Declaration link your sums insured however you can obtain an ‘average free’ cover subject to ‘actuals’ being declared within a specific window at the period end (and any additional premium being paid where applicable).

The indemnity period should cover you up to the point that the physical property/assets are reinstated/replaced.

True

False

The indemnity period should cover you up to the point that the physical property/assets are reinstated/replaced.

FALSE

The BI policy is intended to have the effect of putting the insured Business back to the same financial position as had the loss not occurred.….so in theory your physical assets/property could be fully re-instated but it may take additional time before you fully recover your customer base & are operating at normal trading levels.

A business interruption claim would automatically be covered in the event of a Terrorism incident?

True

False

A business interruption claim would automatically be covered in the event of a Terrorism incident?

FALSE

Business Interruption cover in all but a few exceptions follows the perils covered by the material damage policy, it follows therefore that if you do not have Terrorism cover on the insured property the BI Cover would not fully operate in the event of a terrorism incident. Due to the changing face of terrorism over recent years there are now a number of standalone Terrorism policies that not only extend to cover the physical damage elements, but now also include non-damage incidents, including ‘Lone wolf’ attacks the like of which were witnesses in incidents like the Borough Market and Westminster bridge.

Gross Profit shown in the business accounts is the same as Gross Profit shown under the business interruption section of the insurance policy?

True

False

Gross Profit shown in the business accounts is the same as Gross Profit shown under the business interruption section of the insurance policy?

FALSE

An accountant’s gross profit calculation will subtract any cost that varies in proportion to production; but for insurance purposes they must vary in direct proportion. This is a key distinction and the source of much underinsurance. For example, a cheese maker, who regularly contracts with a local milk co-operative to take regular supplies at a fixed price over a period of time, will eliminate the risk of variable market prices of supply. However, should a loss occur and resultant turnover reduce, these costs will not be reduced, as they are fixed under contract. It might therefore be best to ensure the purchase costs for fixed price materials is not deducted from the gross profit sum insured.

Murder and suicide is an available extension to a business interruption policy?

True

False

Murder and suicide is an available extension to a business interruption policy?

TRUE

This is just one of a number available extensions. These are intended to extend the standard policy cover to pick up any shortfall in income as a result. Below… whilst not exhaustive… give a flavour of some typical extensions:

Suppliers – cover for insured damage at their premises
Customers – Insured damage at their premises
Third Party storage premises – insured damage at these premises
Utilities - failure of utility supply due to Insured damage
Research and development – cover for continued R&D work even though it has no impact on the short term loss of Gross Profit
Fines and damages - penalties incurred due to Insured loss
Denial of access - losses due to loss of access to your premises due to Insured loss at surrounding properties
Loss of attraction -the negative impact of Insured loss on visitors
Murder, suicide, and infectious disease – losses from the closure of premises due to these events

A standard business interruption insurance policy will pay for additional advertising post loss even if its uneconomical to do?

True

False

A standard business interruption insurance policy will pay for additional advertising post loss even if its uneconomical to do?

FALSE

It's normal for a BI insurance policy to cover reasonable additional costs to mitigate further loss where its economical to do so, (i.e. spend a £1 to save a £1), however you can extend your policy to pay for additional costs of working which would not be subject to an economical limit.

I don’t need to cover the costs of wages in the event of a total loss?

True

False

I don’t need to cover the costs of wages in the event of a total loss?

FALSE

In the majority of cases following a major loss, a business will still want to retain key staff. These wages will still be incurred and the business will rely on its business interruption policy to help meet these ongoing costs. Therefore, subtracting these from the gross profit calculation would result in underinsurance.

Having a Business Continuity plan as well as Business interruption insurance improves the likelihood of surviving a major loss?

True

False

Having a Business Continuity plan as well as Business interruption insurance improves the likelihood of surviving a major loss?

TRUE

It's an area of many myths and if you were to google you would find a number of claims on %’s of businesses failing post a major loss without a plan….however there is a common sense element to this in that if you have a tried and tested plan, have recorded & held offsite key suppliers, customers, stakeholders, IT Infrastructure details etc your ability to mitigate the risks & start trading as early as is possible are far greater than someone who has not prepared.

Q10

A 12 month indemnity Period would be sufficient in the majority of major fire losses?

True

False

Q10

A 12 month indemnity Period would be sufficient in the majority of major fire losses?

FALSE

Minimum Indemnity Periods must account for worst-case scenarios. This includes taking into account a vast range of circumstances that can add significant time to an organisation’s recovery, …so as mentioned before its not just the time it takes to rebuild a property, there are a whole range of other considerations that need to be taken into consideration…examples of which are:

Thinking and decision time
Making planning enquiries and applications
Dealing with residents’ objections to planning applications and demolition and site debris removal delays
Environmental issues
Meeting strict listed-building requirements
Delayed planning decisions, or additional requirements added
Sourcing adequate replacement stock and materials
Long lead times for replacing plant, machinery and other essential property
Discovery of hazardous materials, such as asbestos
Potential Health and Safety Executive (HSE) inquiries or proceedings
Recruiting and retraining staff
Seasonality – a loss may cause a business to miss important trading periods
Difficulty in winning back lost customers and opportunities
Returning to pre loss profit margins

Could this be you?

Below are a couple of case studies which help bring to life the issue of buildings underinsurance and how being underinsured can affect your business.

Assessing the interruption risk

A broker asked BIBA’s valuation provider to help value a boutique hotel. It was a listed building set on an island in a trout fishing lake. To assess the correct rebuilding cost and reinstatement time, the valuers had to think outside the usual considerations. They looked at the cost of potentially having to drain the lake to access the ground source heating pump buried beneath, and the need to add in the cost of hiring a materials ferry to enable reinstatement of the building, with the sole access being via an iron footbridge.

Supply chain failure leads to loss of business

The manufacturer of an essential specialist machinery suffers a major fire and goes into administration. As a result, its business customers find it very challenging to find compatible spare parts to make repairs or replace worn-out components, and ultimately some of their machinery becomes unusable. While either trying to source the parts or acquiring new machinery, they’re unable to produce to their usual capacity and fulfil orders. In this situation, having a Suppliers’ Extension to their Business Interruption policy may provide cover for losses arising directly from the suppliers’ fire.

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