Fire Con­se­quen­tial Loss In­surance?

Do Busi­ness En­ter­prises Need

Insurance - - FEATURE -

Most, if not all, busi­ness own­ers have

pur­chased at least a Fire In­surance Pol­icy to

cover their busi­ness as­sets. Their de­ci­sion to do so is based per­haps on sound busi­ness pru­dence, on the in­sis­tence of their

fi­nanciers or both.

In any case, with a Fire In­surance Pol­icy in place the own­ers will be in­dem­ni­fied for costs in­curred to re­pair or re­place busi­ness as­sets that are dam­aged or lost caused by fire & light­ning. By paying ad­di­tional pre­mium the busi­ness owner may ex­tend the scope of cover to in­clude ex­tra­ne­ous per­ils (e.g. ex­plo­sion, flood, im­pact etc.) as well.

Busi­ness own­ers with a Fire In­surance Pol­icy are also el­i­gi­ble to pur­chase a Fire Con­se­quen­tial Loss (FCL) In­surance. The ques­tion how­ever is: Does the Busi­ness need this in­surance? Strangely, the banks that pro­vide busi­ness loans in Malaysia are not in­sis­tent that this in­surance be taken-up. As such, it re­mains as a com­mer­cial de­ci­sion on the part of the busi­ness owner as to whether or not this in­surance is re­quired. What are the fac­tors that can con­trib­ute to the de­ci­sion process? Be­fore that, how­ever, it is nec­es­sary to un­der­stand the scope of cover of FCL In­surance.

The cover af­forded un­der FCL In­surance is es­sen­tially to in­dem­nify the busi­ness own­ers should they in­cur:

i) In­crease in Costs of Work­ing and/or

ii) Loss of Profit

dur­ing the pe­riod of in­ter­rup­tion to the busi­ness fol­low­ing dam­age or loss to the busi­ness as­sets caused by the per­ils in­sured un­der the Fire In­surance Pol­icy.

The busi­ness owner should an­tic­i­pate if the busi­ness as­sets are de­stroyed or se­verely dam­aged by, say fire, ren­der­ing them un­work­able whether the busi­ness would be af­fected while wait­ing for re­pairs or re­place­ment. It would be un­re­al­is­tic to an­tic­i­pate that the busi­ness would not be in­ter­rupted at all so it re­mains for the busi­ness owner to forecast how long it would take for the busi­ness to re­turn to nor­mal. For sim­plic­ity let us as­sume the pe­riod of in­ter­rup­tion to be 12 months and it fol­lows there­fore the busi­ness owner can po­ten­tially lose 12 months’ fore­casted Profit. If the busi­ness owner has FCL In­surance the in­sur­ers will in­dem­nify the busi­ness owner for such a loss.

Dur­ing the pe­riod of in­ter­rup­tion the busi­ness owner could take steps to mit­i­gate the drop in level of busi­ness (e.g. by rent­ing tem­po­rary premises, hir­ing ma­chine & equip­ment, paying over­time wages etc.) and the ex­penses in­curred are re­ferred to as In­crease in Costs of Work­ing. Again, if the busi­ness owner has FCL In­surance the in­sur­ers will in­dem­nify the busi­ness owner for th­ese costs as long as the to­tal amount claimed does not ex­ceed the fore­casted Profit that could have been lost had the mit­i­gat­ing steps not been taken.

It is im­por­tant to note that claims submitted un­der FCL In­surance are usu­ally scru­ti­nised by in­de­pen­dent loss ad­justers and, like in all in­surance claims, the onus is on the claimant to sub­stan­ti­ate the loss suf­fered and the amount in­dem­nifi­able shall be cal­cu­lated ac­cord­ingly. Once it is es­tab­lished that the busi­ness did in­cur In­crease in Costs of Work­ing and/or Loss of Profit the ap­pointed loss ad­justers will rec­om­mend a set­tle­ment amount in ac­cor­dance with the pol­icy con­di­tions.

Sub­ject to the ad­e­quacy of cov­er­age and value in­sured, the monies re­ceived from the Fire and FCL poli­cies will trans­form the fi­nan­cial sta­tus of the busi­ness back to its pre-fire po­si­tion. The FCL pol­icy there­fore com­ple­ments the Fire pol­icy in pro­vid­ing a com­pre­hen­sive in­dem­ni­fi­ca­tion plan for the busi­ness owner. Are th­ese com­pelling rea­sons for the busi­ness owner to pur­chase FCL In­surance? In more ad­vanced coun­tries, it is con­sid­ered a se­ri­ous mis­man­age­ment if a busi­ness en­ter­prise does not have FCL In­surance in place.

As men­tioned ear­lier, most banks in Malaysia are not in­sis­tent that bor­row­ers of busi­ness loans takeup an FCL pol­icy. Th­ese banks are more con­cerned that the col­lat­eral (usu­ally build­ings, plant & ma­chin­ery etc.) pledged by the bor­row­ers are in­sured against loss or dam­age and that the in­sured val­ues are not less than the loan amount. This stems from the be­lief that if the items pledged as col­lat­eral were de­stroyed the in­surance monies re­ceived would re­pay the loan amount and the busi­ness would be dis­con­tin­ued. More of­ten, how­ever, the de­struc­tion suf­fered is not to­tal and that the busi­ness can con­tinue pro­vided ad­di­tional funds are made avail­able to meet the In­crease in Cost of Work­ing (through the ex­am­ples given ear­lier).

With­out an FCL In­surance, the bank will have to se­ri­ously con­sider pro­vid­ing ad­di­tional loans (most likely un­se­cured) or to leave the busi­ness owner to seek fi­nan­cial fa­cil­i­ties else­where. In all prob­a­bil­ity the busi­ness will stall and the orig­i­nal loan will be in de­fault.

In con­clu­sion, it can be said that it is com­mer­cially pru­dent for busi­ness en­ter­prises to have FCL In­surance es­pe­cially if con­ti­nu­ity of the busi­ness is to be as­sured. Equally im­por­tant is ar­rang­ing the in­surance cor­rectly. For pro­fes­sional and im­par­tial ad­vice the busi­ness owner should re­fer to In­surance Bro­kers and Con­sul­tants who are best equipped to study the needs and con­cerns of the busi­ness owner and the fi­nanciers. i

Note: A Fire Con­se­quen­tial Loss In­surance Pol­icy may be ex­tended to cover busi­ness in­ter­rup­tion caused by loss or dam­age to: Ah­mad Ramly is the Tech­ni­cal Di­rec­tor and Chief Tech­ni­cal Of­fi­cer for AAO Global In­surance Bro­kers Sdn Bhd. He is an As­so­ciate mem­ber of the Char­tered In­surance In­sti­tute, Lon­don. His last po­si­tion held was Ex­ec­u­tive Di­rec­tor/CEO of an in­surance broking firm. Ah­mad also served as Pres­i­dent of the Malaysian As­so­ci­a­tion of Risk and In­surance Man­agers (MARIM) in 1993 and 1994. The au­thor can be con­tacted at

• Pub­lic Util­i­ties sup­ply net­work (e.g. elec­tric­ity,

water and gas) • Sup­pli­ers’ premises • Cus­tomers’ premises • Neigh­bour­ing premises whereby free­dom of

ac­cess is pre­vented

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