BUSINESS INTERRUPTION SPECIALIST
INTEREST GROUP
“Business Interruption
– What is the problem?”
Thursday 4 June 2009
The Willis Building, City of London
BUSINESS INTERRUPTION SPECIALIST INTEREST GROUP
14.00 – 14.10 INTRODUCTION – Damian Glynn
14.10 – 15.10 Harry Roberts – Loss Adjuster
Graham Herridge – Claims
Diane Jenkins – Broker
15.10 – 15.30 TEA/COFFEE
15.30 – 16.30 Jonathan Samuelson – Loss Assessor
Martin Singleton – Underwriter
Graham Eklund QC – Barrister
16.30 – 17.00 NEXT STEPS
BUSINESS INTERRUPTION SPECIALIST
INTEREST GROUP
“Business Interruption
– What is the problem?”
Harry Roberts FCA, FCILA, MAE
Director – Cunningham Lindsey
Business Interruption –
What is the Problem?
• Depreciation as a Saving
• ICW – “Additional Expenditure”
• Uninsured Standing Charges
Clause
The Business Interruption Wording
Can The Status Quo Survive In An Era Of
Treating Customers Fairly?
Graham Herridge FCII
Zurich Major Loss Team
4 June 2009
An Approach To Handling Major Loss Claims –
Some Minimum Requirements
• Conduct likely to engender goodwill & trust
• Transparency – clarity of understanding around policy wordings/how
the policy will respond
• Certainty – early admission of policy liability
• Hopefully collaborative
• Supportive of the insured business (but not interfering) eg release of
interim payments
• Does the BI Wording fit the bill?
Demonstrating The Problem – 2 Examples
• Conflict between definitions of Gross Profit
• Depreciation as a Saving
Could There Be A Win/Win Solution?
• An enhanced clarity of wording
•
•
•
Allows insurers to occupy the “moral high ground” with a
tangible demonstration of TCF
Allows an insurer to offer wider cover for a premium
(Depreciation as a saving)
Provides brokers with an opportunity to demonstrate their ability
to “add value”
• There is of course the alternative view…….
The Cynic’s View of Life
• It suits insurers’ purpose to have doubt/uncertainty given BI will
invariably come down to a negotiated settlement.
Diane Jenkins
Broker
Aon Limited
Gross profit – according to ABI web site
“Business interruption insurance will compensate
for the short-fall in gross profit together with
paying any increased working costs and extra
accountants’ fees incurred.”
Example wording – specified working
expenses
Specified Working Expenses means;
(1) Purchases and related discounts
(2) Bad Debts
unless otherwise stated in the Schedule
The Specified Working Expenses have the meaning
usually attached to them in the Insured’s
accounts
Example wording – uninsured variable
costs
Uninsured Variable Costs
• Purchases and related discounts
• Bad debts
unless otherwise stated in the Schedule
The Uninsured Variable Costs have the meaning
usually attached to them in the Insured’s
accounts
Example of suppliers extension
Unspecified Suppliers or Storage Sites
The premises of any other of the Insured's
suppliers manufacturers or processors of
components goods or materials but excluding the
premises of any supply undertaking from which
the Insured obtains electricity gas water or
telecommunications services (including the
provision of extranets or access to or presence on
the internet or access to applications and related
services over the internet)
Example of suppliers extension
Damage as insured to any suppliers’ or customers’
premises within Great Britain Northern Ireland
the Channel Islands or the Isle of Man up to a
limit of 10% of the sum insured by this insurance
as stated in the Schedule or £1,000,000 whichever
is the less
Example of suppliers extension
…insured damage at the premises of one of your
suppliers operating and based in the European
Union, other than water, gas, electricity or
telecommunications services
Standard Alteration Clause wording
Section 2 of this policy shall be avoided if after the
commencement of this insurance
(i) the Business be wound up or carried on by a liquidator
or receiver or permanently discontinued or
(ii) the interest of the Insured ceases other than by death
or
(iii) any alteration be made either in the business or in
the Premises or property therein whereby the risk of
loss, destruction or damage is increased
unless admitted by the Insurers in writing.
Modern Alteration clause wording
Alteration in Risk or Interest
This Policy shall be avoided with effect from the date the event occurs if
after the commencement of this Insurance…….
(iii) the Business does any of the following
(1) making a composition or arrangement with creditors; or
(2) have a proposal for a voluntary arrangement for a composition of debts or
scheme of arrangement approved in accordance with the Insolvency Act 1986,
or
(3) have an application made under the Insolvency Act 1986 to the court for
the appointment of an administrator; or
(4) have a winding-up order made or (except for the purposes of
amalgamation or reconstruction) a resolution for voluntary winding up passed
or have a provisional liquidator, receiver or receiver and manager of his
business or undertaking duly appointed; or
(5) have an administrative receiver, as defined in the Insolvency Act 1986,
appointed or having possession taken by or on behalf of the holders of any
debentures secured by floating charge or of any property comprised in or
subject to the floating charge.
unless agreed by the Insurers in writing.
Jonathan Samuelson FCA
Partner, Harris Balcombe LLP
1.Prior agreement for contentious
ICOW expenditure
2.Customer Compensation Demands
3.Payments on Account
CILA – BI SIG
Business Interruption –
What is the problem?
Martin R Singleton FCII
Technical Manager (Property)
Commercial Property Underwriting Strategy Dept
Aviva Insurance UK Limited
What is the problem with….……
Declaration Linked BI Covers?
• Severe underinsurance with no penalties.
• Insurers inability to collect declarations.
• Has become standard in the market - not for select few which it
was originally aimed at.
• Much misunderstanding of the additional premium conditions.
What is the problem with……..
Adding an average clause?
• We need to start with adding an Annual Turnover definition as
per standard SI basis BI covers:
“(b)
Annual Turnover
The Turnover during the 12 months immediately before the date
of the Damage.”
• Then we propose to include an average clause operating where
the Estimated Amount is less than 50% of the Annual Turnover:
“If at the time of the Damage the Sum Insured on Estimated Gross Profit
is less than 50% of the sum produced by applying the Rate of Gross
Profit to the Annual Turnover (proportionately increased where the
Maximum Indemnity Period exceeds twelve months), You will be Your
own insurer for the difference and bear a rateable share of the loss and
the maximum amount We will pay is the Estimated Gross Profit stated in
the Schedule.”
What is the problem with……….
The additional premium provisions?
• We amend the additional premium provisions to a maximum of
33.33%:
(b)
exceeds the Estimated Gross Profit, You will pay a pro rata
additional premium of up to 33⅓% of the premium paid.
What is the problem with…………
The meaning of Vicinity?
• Lets end the debate and put a distance in:
Prevention of Access.
Damage to Property within a radius of one mile of the boundary of The
Premises which prevents or restricts access to or use of The Premises.
Gross Profit Declarations
Sprung v Royal Insurance
Graham Eklund QC
FOUR
NEW
SQUARE
LINCOLN’S INN
•
•
•
•
•
A contract in speculation?
Speculation in assessing gross profit
Cf property cover – SI based on valuations
100% or 133.33% foresight
Clarity as to the declaration required for
indemnity periods longer than 12 months
• Updating declaration – when?
• Whose responsibility to ensure it happens?
• No updating before a loss – why should
insurer benefit?
• Contra proferentem - if the insurer has not
made clear what is required
• Complexity of the content of the declaration
• Policy term adjusting rate of GP and Standard
Turnover for Trends etc
• Why not take full account of all
trends/variations etc in assessing losses
recoverable as an indemnity, without limit of
indemnity imposed by speculative
assessment of future profit?
• Update assessment of GP after a loss, for all
purposes?
• Adjustment of premium – if AoP would follow
a fresh declaration, why not permit new
adjustment of GP SI after loss – particularly if
declaration could not reasonably have been
made
• Why limit to 133.33%?
Sprung v Royal Insurance
• An insurer can not be liable for the
consequential loss suffered by an insured if
the insurer has delayed admitting liability or
making a payment.
• Legal basis – there is no cause of action for
the late payment of damages
• A “win/win” for insurers
• Facts – malicious damage to machinery on
5/6 April 1986.
• By 31 October 1986, no admission of liability
and a very modest payment only. Little
interest in investigation
• Proceedings settled by insurer paying
£30,000 plus interest and costs
• Insured lost the opportunity of selling his
business.
• Claimed £200,000, but valued by the Court at
£75,000
• Insured blameless except that he had not
repaired his machinery – CA – that was his
decision, even if he could not afford to do so
• Impecuniosity caused his loss!
• Sprung’s business did not survive – unlikely
the CA’s decision will survive
• Clear moral and commercial distaste of CA
that insurers could behave as they did without
risk – but not fully argued in CA
• CA - implied obligation to deal with matter
within reasonable period of time
• But impecuniosity effectively a bar – insurer’s
conduct not the cause
• Impecuniosity argument is false, because
there could never be a claim
• If repairs are undertaken – no loss
• If repairs not undertaken – insured’s fault
• HOL has recognised impecuniosity may not
be a bar to a claim. Lagden v
O’Connor [2004] 1 AC 1067
• Breach of duty of utmost good faith
• Applies to insurers in post contract
circumstances – including after a loss. See
The Star Sea [2001] 1 Lloyd’s Rep. 1
• Causes of action probably available which not
relied on in Sprung and not argued fully
• Law Commission considering
• No longer assume “Sprung” will survive – it
will probably go
“Business Interruption
– What is the problem?”
Next steps ………………….