Business Interruption Insurance James W. Errico, CPA, CFF, CGMA Director, Lead Consultant Aon Global Risk Consulting January 30, 2015
Goals of Today s Session Following Today s Session You Will Be Able To: Define Business Interruption Coverage Understand the General Calculation Methods Recognize Business Interruption Additional Coverages Identify Business Interruption Deductibles
Today s Agenda What is Business Interruption Insurance? Business Interruption Calculation Methods Business Interruption Additional Coverages and Challenges Business Interruption Deductibles Questions? Comments?
Business Interruption Definitions Business Interruption (BI): A form of commercial property insurance coverage that reimburses business income lost as a result of an event that interrupts the operations of the business, such as, fire or a natural disaster. Business interruption insurance is not sold as a separate policy, but is either added to a property/casualty policy or included in a comprehensive master package policy. Must be a necessary interruption Must result from an Actual Loss Sustained
Business Interruption Calculation Methods For non-manufacturing, retail, service industries, etc.: Top Down Method = Loss of Net Sales - Cost of Goods Sold - Non-Continuing (saved) Expenses Bottom Up Method = Loss of Net Profit + Fixed Continuing Expenses For manufacturing operations: = The Sales Value of Lost Production - The Cost of Materials and Supplies Consumed - Charges and Expenses (that do not necessarily continue during the period of indemnity) Period of indemnity begins at the date of damage and destruction and continues through the reasonable time period to complete repairs of the affected property Must consider experience before the date of loss and the probable experience thereafter had not loss occurred.
The BI Chain Rule - Basics In the event of: Physical Damage to property of the type insured under the property policy by a peril insured under that policy which directly results in a necessary interruption of the insured s operations. The policy will cover: The losses defined in the policy which are suffered by the insured party or parties, and which are incurred during the period of indemnity defined in the policy.
Claims Settlement Process During the claim preparation/settlement process, it is important to: Set appropriate expectations Understanding the options Compromise Appraisal Litigation Understand unique facts and circumstances surrounding the claim and the policy
Business Interruption Additional Coverages Ordinary Payroll Service Interruption Civil Authority Ingress/Egress Coverages Loss of Market Exclusion / Wide Area Impacts Contingent Business Interruption Extended Period of Indemnity Loss Adjustment Expenses Claim Preparation Fees
Ordinary Payroll What is it? Is Ordinary payroll defined in the policy? What is the time period? When is it appropriate to cover ordinary payroll? When contractually required Other? Match reported values with coverage Consider union obligations and international laws if operations are global
Service Interruption Type of utility power Transmission & distribution lines Distance requirement Deductibles/waiting period Sublimit Peril that caused the service interruption may not be covered by policy. Coverage to include all utility services (steam, water, air, and telecom)
Service Interruption Service interruption coverage applies to loss of utilities and other critical services due to an insured peril Service interruption disputes arising from a Storm : Damage to electrical equipment off-site vs. on-site Does off-site power failure have to be direct service provider s property Limitations as to waiting periods, deductibles expressed in number of days (does 72 hours mean 3 consecutive days) Is there extended period of restoration coverage on off-premises service interruption
Civil Authority - Ingress/Egress Coverages Civil Authority and evacuation orders may have inhibited access to insured locations however: Insurers are pushing back!! Evacuation orders must be in writing Policies may require physical damage within certain distance of insured s premises May require prohibition vs. impairment of access to insured s premises Ingress/Egress can extend BI coverage if nearby damage caused restricted access Disputes arise due to limitations in policy wording as to what constitutes ingress/egress impairment Shut-down of subway, buses, trains, tunnels, etc.
Widespread Damage of Storms: The Impact Widespread business income losses without attributing it to direct physical damage of insured: Off premises service interruption Evacuation and other government orders ( civil authority ) Supply chain and customer ordering/shipping disruptions ( CBI ) Spoilage Internet down
Loss of Market Exclusion / Area-Wide Impacts Insurers like to argue the area-wide impact of the storm caused the demand for insured s goods or services to decline and not direct property damage Because the point of reference is the time of the loss ( but for ); any post-storm reduction in demand should be covered and not considered loss of market Issues arising during Extended Period of Interruption claims where insurer s argue it is a loss of market and not due to insured s damage or operations
Contingent Business Interruption Increasingly relevant as supply chains become more complex and operate with reduced inventories and complicated to measure Important to identify different types of suppliers and applicable policy limitations Direct Tier 1 / Tier 2 customers or suppliers Scheduled customers/suppliers Territorial limitations During underwriting -- try to include ALL suppliers and customers Inform management / owners of the limitations
Challenges of Proving Contingent Business Interruption Loss Requires proof of damage to 3 rd party location, including period of closure and effect on insured Little guidance on how to prove loss of business due to covered peril affecting customers or suppliers Insurers are taking hard stances on Sandy BI loss claims Recent revisions to CBI clauses make coverage even more iffy and claim preparation even more difficult Requiring listing of suppliers or dependent property Limit to first tier suppliers / customers Low sublimits and high deductibles
Contingent Time Element Supplier Tiers Auto Manufacturer Tier 1 Car Starter Manufacturer Tier 2 Copper Wire Manufacturer Tier 3 - Raw Material Supplier Copper Mining Company
Extended Period of Indemnity (EPI) What is it? Often only applies to BI Should be extended to other time element coverages: Service interruption Extra expense Rents & royalties Consider special wording for FDA or other regulatory body to allow for recertification by regulator Make sure you have an appropriate extended period duration
Loss Adjustment Expense Claim Preparation Fees Claim Preparation Fees Provides coverage for the expenses that are incurred by policyholders for the preparation and presentation of an insurance claim Policy words may exclude Attorneys, Public Adjusters, Brokers or Other Consultants Reasonable fees may be subject to adjuster approval
Other Coverage Challenges Named storm vs. flood coverage (limits and deductible issues) Contingent Business Interruption Civil Authority Off premises service interruption include overhead transmission lines Ingress/Egress Extended period of indemnity Ordinary payroll coverage Inventory at selling price vs. cost Debris removal - trees Extra Expense Loss of market exclusion and areawide impacts National Flood Ins. Program Back-up of sewer and drains Claim preparation fee coverage
Business Interruption Deductibles Day Equivalent Avg. Daily Value Daily Value
DV or ADV or DE? Daily Value (DV) - a dollar amount that is equal to the daily value during the period of interruption at the premise(s) where the loss occurred. The daily value is the amount that would have been earned each working day had there been no occurrence. Average Daily Value (ADV)- the total 100% time element value for the period of interruption divided by the number of working days in such period. The total time element value shall be determined on the same basis that is used to determine the time element loss during the period of interruption. The 100% time element value shall be the total amount of the time element values exposed and is not the amount of the loss actually incurred. Day Equivalent (DE) an amount equivalent to the number of days stated times 100% daily Time Element value that would have been earned following the Occurrence at the Location where the physical damage occurred.
B.I. Deductibles Additional Issues Deductible $ Amount Time (Waiting Period) % Value Average Daily Value Daily Value Daily Equivalent Deductible period or true waiting period? Values at time of loss at location or reported values? % of PD, BI, Units? Per location or all affected locations? Are values calculated properly?
24 Questions? Comments?
Contact Information Jim Errico, CPA Director, Lead Consultant Aon Risk Solutions Global Risk Consulting Property Claims Preparation, Advocacy and Valuation 1927 85 th CT NW Bradenton, FL 34205 Tel: 941.794.9908 Cell: 941-538-2469 Jim.Errico@aon.com