Fea­tures

MOST BUSI­NESSES RECOG­NISE BUSI­NESS IN­TER­RUP­TION (“BI”) IN­SUR­ANCE AS A CRU­CIAL RISK MAN­AGE­MENT MEA­SURE AND AP­PRE­CI­ATE THE IM­POR­TANCE OF BI COVER TO EN­SURE TRAD­ING PROFIT IS PRO­TECTED, SHOULD IN­SURED DAM­AGE BE SUS­TAINED.

Insurance - - FORSIDE - Text Jeff Wong | Mat­son Driscoll & Dam­ico Pte Ltd

Chal­lenges in Min­imis­ing Busi­ness In­ter­rup­tion Losses

When a loss oc­curs, it is in all par­ties’ in­ter­est to min­imise the in­ter­rup­tion and mit­i­gate the loss. In re­al­ity, how­ever, the process is of­ten not as ef­fi­cient as it could be, due to var­i­ous fac­tors. In this ar­ti­cle, we dis­cuss some of the chal­lenges faced when try­ing to min­imise busi­ness in­ter­rup­tion losses. In sim­ple terms, the con­cept of BI cov­er­age is to fill the “hole” in an in­sured’s fi­nan­cial per­for­mance as a re­sult of in­sured dam­age. There are two main con­sid­er­a­tions when tak­ing out cover – i) en­sur­ing cover is suited to the na­ture of the in­sured’s busi­ness and in­dus­try and ii) en­sur­ing there is suf­fi­cient cover. Any de­fi­cien­cies in ei­ther of th­ese aspects could mean the In­sured is not fully cov­ered for the risks it faces. The re­spon­si­bil­ity for th­ese con­sid­er­a­tions lies with the in­sured and its ad­vis­ers. Not hav­ing ap­pro­pri­ate or suf­fi­cient cover will ad­versely im­pact the abil­ity to mit­i­gate losses and is a com­mon cause of ad­just­ment across Asia, es­pe­cially in small to medium-sized risks. The in­ten­tions of both par­ties should be made clear from the out­set to avoid dis­putes in the event of claim. It is not al­ways the in­sured’s in­ten­tion to cover the full ex­tent of its po­ten­tial ex­po­sure but if this is the case, it should be clearly ev­i­dent in the pol­icy word­ing. Com­mon ar­eas of dis­pute in­clude:

In sim­ple terms, the con­cept

of BI cov­er­age is to fill the “hole” in an in­sured’s fi­nan­cial per­for­mance as a re­sult of in­sured dam­age.

i) the sched­ule and pol­icy word­ing in­di­cate dif­fer­ent bases of in­dem­nity; ii) the way in which a time de­ductible should be ap­plied; iii) ex­penses in­tended to be con­sid­ered as unin­sured work­ing ex­penses; iv) the treat­ment of in­creased sales at lo­ca­tions in­sured un­der other poli­cies; v) clauses that may al­low ad­just­ment of the sum in­sured or av­er­age re­lief; and vi) whether con­tract penal­ties were in­tended to be ex­cluded or not – this is preva­lent in power gen­er­a­tion, where an in­sured can achieve ‘neg­a­tive’ turnover dur­ing an in­ter­rup­tion (did the sum in­sured con­tem­plate this?). The un­der­ly­ing prin­ci­ple of cover is that BI loss is caused by phys­i­cal dam­age suf­fered. The longer it takes to re­in­state the dam­age, the larger the busi­ness in­ter­rup­tion loss will be. Hence, it is paramount to re­in­state dam­age as quickly as pos­si­ble. Nat­u­rally, there will be lim­i­ta­tions to how much time can be shaved off and some­times, the best course of ac­tion may not be the one that min­imises the busi­ness in­ter­rup­tion loss, if the cost to re­in­state the dam­age quickly is pro­hib­i­tively high. Some­times de­lays are caused by bu­reau­cratic process and govern­ment regulation. Th­ese de­lays can come in many forms e.g. re­lease of site by fire in­ves­ti­ga­tors, long waits for cer­ti­fi­ca­tion of re­pairs and premises, or ob­tain­ing the nec­es­sary li­censes to utilise land for the in­tended pur­pose, etc. Even in sit­u­a­tions with pro-ac­tive in­sureds and fast-act­ing ad­justers and in­sur­ers, there can be a limit to how much mit­i­ga­tion can be achieved. Lack of a Busi­ness Con­ti­nu­ity Plan (“BCP”) could re­sult in un­nec­es­sary de­lays that prove to be an ob­sta­cle to mit­i­gat­ing busi­ness in­ter­rup­tion losses. A busi­ness with a strong BCP may re­act quicker be­cause it has al­ready con­sid­ered what needs to be done in a par­tic­u­lar sit­u­a­tion, rather than fum­ble around in con­fu­sion e.g. ne­go­ti­ated terms with sub­sti­tute sup­pli­ers, iden­ti­fied va­cant premises, etc. De­pend­ing on the in­dus­try, even a short in­ter­rup­tion can be detri­men­tal for busi­ness af­ter dam­age has been re­in­stated. Cus­tomers may have moved to other com­peti­tors and win­ning them back may be dif­fi­cult. With such a risk, the in­sured may wish to con­sider out­sourc­ing pro­duc­tion to a third party (of­ten a com­peti­tor) to en­able it to con­tinue sup­ply­ing its cus­tomers. How­ever, this op­tion is of­ten not eco­nom­i­cal, mean­ing that the in­crease in cost ex­ceeds the loss of gross profit averted and the ex­cess cost would only be con­sid­ered by in­sur­ers if Ad­di­tional In­crease in Cost of Work­ing (“AICW”) cover has been pur­chased. An ap­proach of­ten used to min­imise the im­pact of a loss is to bring for­ward planned main­te­nance work into the loss pe­riod, es­pe­cially if the in­ter­rup­tion pe­riod due to in­sured dam­age is lengthy. Af­ter all, if the in­sured is un­able to op­er­ate any­way, it is an op­por­tune time to carry out main­te­nance sched­uled for later. How­ever, is­sues around the mo­bil­ity and avail­abil­ity of ser­vice per­son­nel, parts and equip­ment can be an ob­sta­cle to achiev­ing this and re­sult in a missed op­por­tu­nity. In busi­nesses with am­ple buf­fer of fin­ished stock, it is pos­si­ble to sig­nif­i­cantly mit­i­gate a sales loss even if pro­duc­tion is sig­nif­i­cantly im­paired, as­sum­ing that the in­sured is able to re­build its in­ven­tory lev­els af­ter pro­duc­tion re­sumes with­out the loss of fur­ther sales (i.e. it is ca­pa­ble of pro­duc­ing more than it can sell). For some busi­nesses, how­ever, it may not be prac­ti­cal to main­tain large quan­ti­ties of fin­ished stock due to fac­tors such as lack of stor­age space, per­ish­able stock or sim­ply hav­ing in­suf­fi­cient fi­nan­cial re­sources. Busi­ness in­ter­rup­tion losses are of­ten com­plex and are in­creas­ingly be­com­ing a big­ger pro­por­tion of to­tal in­sured losses. Ef­forts to mit­i­gate busi­ness in­ter­rup­tion losses are of­ten well re­warded, but can be fraught with chal­lenges. The is­sues dis­cussed in this ar­ti­cle are by no means ex­haus­tive but it is hoped that with a greater de­gree of aware­ness, the par­ties to a BI loss will be in a bet­ter po­si­tion to nav­i­gate them.

Busi­ness in­ter­rup­tion losses are of­ten com­plex and are in­creas­ingly be­com­ing a big­ger pro­por­tion of to­tal

in­sured losses.

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