Fire Consequential Loss Insurance?
Do Business Enterprises Need
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 email@example.com
• Public Utilities supply network (e.g. electricity,
water and gas) • Suppliers’ premises • Customers’ premises • Neighbouring premises whereby freedom of
access is prevented