Where there is a business interruption (BI) portion of any claim, in our experience, it usually outweighs the property loss by multiples, and the costs are rising. In Allianz’s Risk Barometer 2024, which ranks the most important corporate concerns for the year ahead, BI moved up one place on the podium compared to last year to rank second after cyber incidents.1
Unless you have unfortunately experienced a major loss with significant BI, it can be difficult to comprehend just how long it takes to get a business back up and running.
Claims can escalate – an example
A retail client made a claim following a fire in its shop. At face value, the claim appeared to be a straightforward refit. However, when reinstating of the property, the builders found a medieval wall at the back of the shop. As a result, it took 14 months to complete the pre-planning, let alone start the work necessary to get the business trading again. The client's business was interrupted for over two years, twice its indemnity period, due to a seemingly simple claim.
The nature of claims
The catalyst for many claims – fire and flood – are not necessarily changing, but the time it takes to reinstate is, and claims are taking much longer to resolve. The issue with reinstatement times has been developing over the last few years, starting with the problems everyone faced sourcing supplies and materials as we emerged from the pandemic. While these pressures were starting to ease, the recent disruption in the Red Sea has increased costs and exacerbated supply problems, along with the continued difficulties firms are experiencing when sourcing skilled labour to complete the work.
One significant change we are seeing is in cyber losses. The BI element of a cyber policy may not be as closely examined as it is in a combined policy. It usually has a limit of no more than £1 million, which can be quickly exhausted, leaving clients without indemnification for losses exceeding this amount.
Understanding indemnity periods
Covered losses need to fall within the indemnity period, and this is why we generally recommend all clients take a three-year indemnity period. It is important to remember that the indemnity period should cover the amount of time it takes to return a business to a point where it would have been had the incident never happened.
Claims that are being closed now relate to incidents that occurred in late 2021 and early 2022 – when the UK was in the eye of the supply chain storm, and many businesses did not allow for an appropriate run-off period.
It is important to consider the impact of external factors that can delay the progress of a claim. However, it is equally vital to take into account the loss of revenue and growth potential that you may experience during the indemnity period. If a business has been pursuing a claim for two years, it not only needs to recover lost revenue but also the potential growth that could have been achieved during that timeframe. Unfortunately, this aspect is often overlooked when calculating the indemnity period and sums insured, which can result in the business not being adequately indemnified.
It used to be common to have a 12-month indemnity period, but in reality, it generally takes far longer than this to restore commercial premises, rebuild a client base, and regain profits to the level they would have been at if the incident had never occurred.
Where is the money coming from?
When you are making decisions regarding BI with your broker, you need to provide a clear picture of where your money comes from. The calculation for a standard policy is very straightforward and doesn’t take unconventional revenue methods or income into account. Therefore, any deviation from the “norm” may well require an amendment to the policy wording.
Contractual ramifications – an example
A company selling tinned tomatoes had a contract which stipulated that if they didn’t deliver the tomatoes on time, they not only had to pay for the replacement tomatoes, but also for any additional costs the customer may incur. As tomatoes are a commodity, if a party has to enter the market after initial prices have been agreed, they will likely pay a lot more. Therefore, if a warehouse full of tomatoes burns down, the cost of those tomatoes rises considerably.
This case highlights the necessity of building the exposures related to your specific revenue flow into your insurance programme. It may be covered under property or require additional cost building under BI, but unless you raise this with your broker, they are unable to accurately forecast future profits and build a clear picture of what cover you require.
Savings
You also need to also discuss any potential costs you will no longer bear in the event of a BI claim with your broker. We normally insure all staff wages under a BI policy. However, if a business such as a coffee shop has a majority of staff on zero-hour contracts, then they aren’t going to be paying those employees while the business isn’t trading. If a business is not paying staff during an interruption, this is regarded as a saving and is taken out of any settlement, and if the client hadn’t shared this information, then it would have overpaid on its insurance. Therefore, a payment structure like this, or any other anticipated saving, would require a policy wording adjustment at the outset.
Declaration basis
The UK market has been increasingly moving towards declaration-linked BI policies in a bid to address the problems associated with forecasting future profits. Without accurately forecasting future profits, it is impossible to set an adequate sum insured for BI cover.
With declaration-linked cover, at pre-renewal, you would submit an estimate of the anticipated gross profit for the financial year. The premium will be charged based on this assessment, and at the end of the policy year, the premium will often be returned if the estimate was too high, or an additional premium will be necessary if it was too low.
Most pertinently, it reduces the risk of an underinsurance average clause being applied to declaration-linked policies. With an average clause, the insurer can reduce the claims settlement by the same percentage the asset is underinsured.
Determining BI exposure is a complex process and should not be taken lightly. However, it is an essential element in restoring any business to profitability after a significant loss. To ensure adequate coverage for reinstatement, you should discuss the nature of your business in detail with your broker, carefully consider the appropriate indemnity period, and determine whether declaration-linked cover is the best option for you.
Please speak to your local representative if you would like to discuss any of the issues raised in this article in more detail.
