GAB Robins New Zealand

Business Interruption Claims : Special Interest Section

BI Special Interest

Financial Claims Expertise

Brett Fawcett

Financial Claims Team

Technical Notes

In "Technical Notes" we provide a series of training modules and articles of general interest on Business Interruption insurance and claims, as one of our contributions to the professionalism of the insurance industry in New Zealand. Most have been written by Brett Fawcett who has been adjusting BI claims, teaching and writing on the subject for more than 35 years. Brett is an Executive Adjuster with Cunningham Lindsey's Specialist Commercial Division.

Brett would be happy to reply to any questions and can be contacted at bfawcett@cl-nz.com

So, you want to make a claim, do you?

Training Programme: Introduction to BI

		BI insurance policies and claims are reputed to be complex but much of the mystique arises from a failure to address the basic principles before trying to grapple with more complex issues. This group of training modules presents several Key Facts, which will bring greater clarity to BI at all levels of experience or expertise.

		Module 1: The Basics of BI (July 2004) The basic principles of BI insurance and claims are simple. They are described here in a user-friendly manner by illustrating from an abbreviated financial statement, how an interruption affects the operating profit and how a BI policy provides an indemnity for the loss.

		Module 2: Which Interruptions are Insured? (July 2004) Not all business interruptions are insured. The contractual clauses of the policy are described here to explain the extent of cover and its limits with illustrations from several current policies of NZ insurers.

		Module 3: The Amount Payable (August 2004) The BI policy specifies how a claim is to be calculated. The basic coverage is provided by the Gross Profit Item, which is described in detail in this module.

		Module 4: Gross Profit as the Sum Insured (August 2004) Confusion has arisen from the use of the term "Gross Profit" to describe the basic BI policy item. This module describes how the item should be specified and how the sum insured should be calculated.

		Module 5: Increased Costs & Savings (September 2004) Increased costs are an automatic element of the Gross Profit Item but the coverage is very specific and quite limited. An insured is forced to commit to expenditure that is primarily to the benefit of the insurer but is then only reimbursed if it is successful in producing a net reduction in the claim.

Training Programme: General BI Subjects

		Module 6: Widening the Definition of Damage (January 2005) The most basic BI policy insures the loss resulting from Damage to buildings and other property used by the Insured at the Premises for the purpose of the Business. This narrow coverage can be extended to encompass Damage to other property and property elsewhere than at the Insured's Premises. Most current BI policies include various extensions and this module describes why and how they are incorporated into the specification of what BI losses are claimable.

		Module 7: The Adjustments Clause (July 2005) The Adjustments Clause gives huge flexibility in the calculation of a claim based on a reduction in turnover, revenue or rents receivable. This Module explains the theory and application of the clause in the context of a Gross Profit Item because it is the most important item in the majority of BI claims.

		Module 8: Output - The Alternative Index (October 2005) The Output Clause or Alternative Index Clause is a standard addition to BI policies for the purpose of providing further flexibility in the calculation of a claimant's financial loss. My opinion is that any assessment of financial loss must eventually relate to a reduction in sales. The long-term financial health of businesses is dependent on turnover. Output does not pay the costs nor generate the profit. That is achieved through sales. Why, then, do we ever use output in the assessment of a BI claim?

		Module 9: The Insurance of Wages (December 2005) No other expense receives as much attention in BI insurance as does Wages. The degree of cover required differs greatly from company to company, even within the same industry and because the expense has both fixed and variable components, the largest loss in respect of Wages is usually not the result of the worst interruptions.

		Module 10: Dual Wages Insurance (Modified March 2007) Dual Wages is a flexible means of insuring less than 100% of Wages. It was very common but its cost advantage has more recently been eroded by insurers discounting the Wages portion of a Gross Profit Item to recognise the greater potential for savings in Wages than in the other components of Gross Profit.

		Module 11: Additional Increased Costs (February 2007) All Business Interruption (“BI”) policies that include a Loss of Gross Profit item (or Revenue or Rents) have automatic cover for increased costs. But a BI Policy is still incomplete if it does not have another policy item for “Additional Increased Costs,” with its own sum insured. Why is the “Additional” item necessary?

		Module 12: Claims Preparation (February 2006) Business Interruption (BI) policies in New Zealand usually insure the cost of preparing both the BI and the property damage claims with a distinct policy Item and a separate sum insured or sub-limit. Some are wider than others in their coverage. Because I have dealt with claims and the cost of preparing them from both sides of the negotiating table, I am pleased to comment on the benefits that are provided by this policy Item.

Training Programme: Advanced BI Subjects

		Interest as an Additional Increased Cost (September 2005) Following a claimable business interruption, how do companies survive the immediate need to finance recovery of the business while they formulate property and BI claims and receive payment from insurers? They borrow! Is the increased interest expense claimable as an increase in cost of working?

		Stock & BI Claims: Analysing the Overlap (September 2005) If a reduction in turnover results from damage to manufactured stock there is a potential for duplication between the BI and stock claims, both of which reimburse manufacturing overheads. If the stock could be insured at a value that included profit would this avoid the need to make a BI claim? This article explains how the overlap arises, provides a case study and comments on practical resolution of claims.

		The Overlap between Business Interruption and Manufacturers' Stock Claims If wages are insured by a Business Interruption policy but also paid in a Material Damage claim (for staff cleaning up debris, handling a salvage sale, repairing plant) there is a potential double-recovery. If we assume that this should be avoided, what is the correct mechanism for doing so?

		The Overlap Between Business Interruption and Retailers' Stock (Salvage) Claims A Business Interruption claim can be modified according to how the proceeds of a “fire sale” are treated in the stock claim. As a result the practice has developed, of deducting the total value of the salvage from the stock claim. This is not a problem for an insured that has a BI policy but it is not an equitable treatment for one that does not insure BI.

		Policy of Indemnty or Valued Contract: The Coalex Case (March 2007) In 1999 my student text, “The Insurance of Profits” was being modified for Australian law and practice by a friend and colleague, Tony Morgan. He was keen to add a chapter on the principles that were stated by the Supreme Court of NSW in the 1986 “Coalex” case, which deals, against the background of the "Output Option", with the debated question of whether a BI policy is one of indemnity or a valued contract. At the time I thought Tony was over-emphasising Coalex’s importance but I have recently re-read the chapter and was surprised at how interesting it was. I am delighted to pay tribute to Tony's expertise by re-producing it here.

		Time Deductibles in BI Claims Business Interruption policies usually state the length of a time deductible but make no further reference to it in the specification of “the amount payable”. This can create problems in the adjustment of claims or provide flexibility depending on one’s perspective.

More BI Articles

		BI CLaims Following the February 2004 Storm (October 2004) Your property insurance policy probably insures your assets against the damage caused by a storm. Why does your BI policy not insure you against a loss resulting from an interruption to your business caused by a storm? Is the insurers' promise to pay, only a myth?

		The Tyranny of the Trend Adjustment (August 2005) This article was written for CoverNote, the publication of IBANZ. It explains why the mechanical reliance on pre-damage sales trends, so loved by adjusters, can result in inappropriate BI claims assessments.

		BI Claims and Hurricane Katrina, New Orleans (September 2005) How will BI policies, even those that insure flood damage as well as wind damage, respond to the huge economic disruption that Katrina caused? I suspect that most will prove to be quite inadequate because they were simply not designed to insure the simultaneous interruption to multiple businesses on such a massive scale. (Also written for CoverNote)

Case Studies

		Property Used or to be Used at the Premises (October 2004) Following damage at the premises, to property being used for the business, insurers tried to deny liability for a portion of the loss, which arose from delay in completing a new business extension.

		The BI Impact of the Repair or Replace Decision (October 2004) The insured wanted a replacement machine (3½ weeks). The insurers wanted to decontaminate it (eventually took 6 months). The manufacturer said that it could be repaired if it was returned its European factory (8 months). How did this impact the BI claim?

		Case Study: Interest as an Increased Cost (December 2004) Following a claimable business interruption, how does the insured survive while waiting for property and BI claims to be paid by insurers? It borrows temporary funds! Is the increased interest expense on additional borrowings a claimable increase in cost of working?

		Reduced Margin on Maintained Turnover (January 2005) BI policies that follow the UK market form, characterised by the Gross Profit Item, primarily reimburse the loss resulting from a reduction in turnover (and increased costs). They are not structured to include a loss caused by a reduction in Gross Profit margin on maintained turnover and additional clauses must be included if the claim is to produce an indemnity for such a loss.

		Advance Profits, also known as Delay in Start-up Insurance (January 2005) A specialised form of insurance policy is required for financial losses which result from a delay in the commencement of new business operations as distinct from interruption to an existing business. This case study deals with how to select the Indemnity Period and set the sum insured for the Gross Profit item of such a policy.

		The Use & Abuse of Trends (July 2005) The key to most BI claims is an assessment of the level of sales that would have been achieved but for the fire, flood or machinery breakdown. The simplest and most common method is to assume that pre-fire "trends" would have continued but for the damage. Is it fair?

		Lessons from the Auckland Power Cut of 12 June 2006 (September 2006) If you muck about with the conventional policy words do it with care! Several apparently “cover all” Business Interruption policies proved to have serious gaps when claims were submitted for losses resulting from the power cut.

		In the Context of a BI Interruption, what is Property? (November 2006) The contractual clauses of BI policies set out the commitment of insurers to pay a loss resulting from interruption caused by Damage to property used by the insured, at the premises, and for the purpose of the business. Various memoranda extend the coverage to include the results of damage to property at the premises of customers, suppliers, or providers of utilities, as if it were damage to property the insured used at its premises. I have two case studies dealing with the question “What is PROPERTY?”