Roberto Revenga Penelas, CEO, Vantevo
Whilst, in general, it is important that any policy is adapted to the characteristics of the risk to be insured, this is fundamental in the field of consequential losses that arise after a material damage claim. No two companies are identical and here should not be two Business Interruption Policies that are the same: the policy should be “tailor made”.
The Business Interruption, Loss of Profits or Consequential Loss Policy, which can be called either of these three terms, provides cover in order that a claim does not affect the forecasted financial results of the company i.e., the insurance tries to put the company in the same financial position that it would have been if the claim had not occurred.
Obviously, a stoppage of a week in the production process, for the equivalent of only 2% of annual production, will not affect all companies in the same way. For example, it will depend on whether the company manufactures to order or by stock, whether their process is continuous, for example, aluminium manufacturers and oil refineries, or not, if there is stock available for days or weeks, if work is carried out 8 hours a day, 5 days a week or 24 hours for 7 days a week, if production capacity is greater than sales capacity or, vice versa, and if sales capacity is greater than that of production.
The three main parameters of a Business Interruption Policy, which can be very complex as it covers Loss of Profit due to Fire, Machinery Breakdown, Claims at suppliers or clients premises, for failure of supply, impossibility of Access, are:
- The sum Insured (Gross Margin)
- The maximum Indemnity Period
- The Deductible
It is not usually a problem to calculate the Gross Margin (Fixed Costs plus Net Profit). Whilst it is difficult to predict what the net profit Will be for the coming year in order to avoid under-insurance an automatic increase clause of between 20%-40% exists and enables the sum insured to be adjusted after the close of the financial year and once the annual accounts have been audited.
Since the UK Policy (Business Interruption) which is the form normally used in Europe, provides an indemnity period from the date of loss up to the time when sales levels return to normal (with the Gross Earnings form, it is only until production returns to normal), one should always consider the time for reconstructing buildings and replacing key machinery, plus 4 to 6 months necessary to removal of the debris of what has been destroyed, permits, licenses, projects, recovery of 100% production, replacement of back-up stock. Large claims with insufficient maximum indemnity periods are frequently encountered.
Lastly, another aspect to be established is the deductible. This will normally be a time deductible but it is often not properly defined and this causes problems in the 2 adjustment of claims. For example, for a 5-day deductible: Which 5 days are they? The first 5 calendar days? The first 5 production days? Are the 5 days proportional to the indemnity period?
In summary, to design a good and accurate policy is a job for specialists who help insureds and brokers, not only in claims, but also in the design of a policy adapted to the risk that you want to cover: a “tailor made” policy.