Business Interruption Insurance is Going
to Save Your Company
Presented by:
Christopher Chiero, ARM, CFPS
Arthur J Gallagher
Risk Management Services, Inc.
Today we will look at…
• The Importance of Business
Interruption Insurance.
• A policy and talk about how coverage applies.
• How to accurately determine your limit.
• What to watch for… Common Pitfalls
• Mitigating the exposure.
• Negotiating terms.
• Take you through a loss scenario (case study).
© 2012 ARTHUR J. GALLAGHER & CO.
A Wise Man Once Said…
“When it comes to Business Interruption, 50% of
the policyholders out there are under-insured
and the other 50% are over-insured. So you
either do not have enough coverage or you are
paying too much money for your policy.”
Why is that?
© 2012 ARTHUR J. GALLAGHER & CO.
What is the intent of Business Interruption
Insurance?
• Business Interruption is a first party coverage that is
part of your property policy. The purpose of “B.I.” is
to indemnify the policyholder for their financial loss
due to the incident triggering coverage.
• Simply put, it is there to make a property loss as
seamless to your income statement as possible.
© 2012 ARTHUR J. GALLAGHER & CO.
Why is Business Interruption Insurance so
important?
Protects your company from…
• Lost Income
• Loss of Market Share
• Lost Strategic Alliances or Partnerships
• Lost Time of Key Employees… or worse
• Loss of Key Employees
© 2012 ARTHUR J. GALLAGHER & CO.
Protecting Net Income
The Recommended Approach
•Purchase Business Interruption Insurance
•Have a plan for what to do immediately after a
loss.
•Consider who you want on your claim team.
© 2012 ARTHUR J. GALLAGHER & CO.
Getting Started with
the Policy
© 2012 ARTHUR J. GALLAGHER & CO.
Getting Started
© 2012 ARTHUR J. GALLAGHER & CO.
What is being covered?
The Basics
• Net Income
(Net Profit or Net Loss)
• Necessary Continuing Expenses
Common Optional
BI Coverages
•
•
•
•
Extra Expense
Extended Period of Indemnity
Supply Chain
Contingent BI
(Dependent Property)
• Ordinary Payroll
(Key Employees)
There are several other options to this coverage type. Talk to your
broker or agent for details.
© 2012 ARTHUR J. GALLAGHER & CO.
Some Examples of “Necessary Continuing
Expenses”
• Mortgage Payments
• Rent
• Property Taxes
• Salaries
• Equipment Leases
• Insurance Premiums
• Service Contracts (if no “out” clause)
• Ordinary Payroll (optional)
• Any expense that you cannot get out of despite the loss
incident.
© 2012 ARTHUR J. GALLAGHER & CO.
Not Examples of “Necessary Continuing
Expenses”
•Utilities Used in Production
•Raw Materials
•Advertising
•Repairs & Maintenance
•Supplies
•Housekeeping/Janitorial
© 2012 ARTHUR J. GALLAGHER & CO.
So just how is coverage triggered?
•You must start with a “Covered
Cause of Loss.”
•At an insured location.
•For an incident that occurred
during the policy period.
© 2012 ARTHUR J. GALLAGHER & CO.
So just how is coverage triggered?
What is a “Covered Cause of Loss?”
• Fire
• Flood
• Wind/Hail
• Earth Movement
• Civil Authority
• Ingress-Egress
• Terrorism/TRIPRA
• Vandalism
• Sprinkler Leakage
• And Others…
© 2012 ARTHUR J. GALLAGHER & CO.
So just how is coverage triggered?
What is a “Covered Location?”
• Listed on the Policy
• Could include locations not directly
operated by your company.
• May include other dependent
properties as well.
We will go over how you develop your coverage including
some alternate locations as noted above.
© 2012 ARTHUR J. GALLAGHER & CO.
A Few Key Terms
Period of Restoration
© 2012 ARTHUR J. GALLAGHER & CO.
A Few Key Terms
Extended Period of
Indemnity
© 2012 ARTHUR J. GALLAGHER & CO.
Chronology of a Claim
Income
Period of Restoration
Extended Period
of Indemnity
Time of Loss
© 2012 ARTHUR J. GALLAGHER & CO.
Common Pitfalls
What we just
covered…
• Did not purchase the proper
Cause of Loss
• Did not Purchase a sufficient
Extended Period of Indemnity
Now we should
have a look
at…
• Did not identify and purchase
the appropriate limit.
• Did not Pre-Plan the Loss
Scenario which extended the
loss beyond the coverage period
© 2012 ARTHUR J. GALLAGHER & CO.
What should the limit be?
Remember:
» Limit too High = You paid too much premium
» Limit too Low = You are underinsured and could be
susceptible to a financial disaster
© 2012 ARTHUR J. GALLAGHER & CO.
Proper Limits
•The proper limit is different for each client
and it will change every year. Your profit,
your expenses, your projected revenues, etc.
•One year of exposure is the benchmark. This
includes every location, every subsidiary. That
is how it is underwritten no matter what you put
down as your limit.
© 2012 ARTHUR J. GALLAGHER & CO.
How do you establish your limits?
•BI Worksheet?
•BI Analysis/Study?
•Raw Income?
•Lost Rent?
•Estimated as a Percentage of
Projected Income?
© 2012 ARTHUR J. GALLAGHER & CO.
How do you establish your limits?
Many Companies simply apply a percentage of
projected income?
» This is not very effective and doesn’t give you any
insight as to whether you have enough coverage.
» Remember, the insurance company is not replacing
your Gross Income. They are maintaining your Net
Income.
© 2012 ARTHUR J. GALLAGHER & CO.
How do you establish your limits?
BI Worksheet
» Good Ballpark
Estimate
» Accepted By Underwriters
» Not necessarily
tailored for your
business
» Has limitations
if your business
is growing consistently.
© 2012 ARTHUR J. GALLAGHER & CO.
How do you establish your limits?
• Complete a BI study with your broker or agent.
OR
• Hire a professional firm to evaluate it by considering
the big picture.
» This will give you the most accurate picture of your exposure
and protect you from the extremes of being over-insured (pay
too much premium) or being under-insured (which is
potentially fatal for your business).
© 2012 ARTHUR J. GALLAGHER & CO.
A few other items to keep in mind when
developing your BI exposure
• Interdependency between plants
• Key Suppliers
• Key Clients
• Supply Chain Issues
• Timeliness of Restoration (i.e. imported foods or hard
to replace machinery)
• I.T. Considerations (unique software applications that
help maintain the flow of revenue)
© 2012 ARTHUR J. GALLAGHER & CO.
Covered Locations
•Includes all the locations where you do business
(and should be scheduled in some way on your
policy).
•Can also include:
» Your Suppliers’ locations
» Your Key Clients’ locations
» Magnet Property locations
» Any location that you can establish a legitimate
connection to your Net Income.
© 2012 ARTHUR J. GALLAGHER & CO.
BIG & Little…
Here are a few other items you would like to have
a look at.
• BIG: A High Limit for Claim Data Prep Expense and/or
Professional Fees (Note: This does NOT include attorney’s fees)
» This is your defense against, “Well, their guy says…”
• Little: A Waiting Period as short as possible.
» Waiting Period is the amount of time you have to be down
before coverage is triggered.
» Often times there is a straight up deductible as well.
© 2012 ARTHUR J. GALLAGHER & CO.
Coverage Review
•Purchase “All-Risk” Coverage Triggers
•Negotiate the Longest Extended Period of
Indemnity you can justify
•Make sure your Limits of coverage are sufficient.
•Cover the key Locations whether they are yours
or not.
•Big Claim Data Prep Expense Limit
•Short Waiting Period
© 2012 ARTHUR J. GALLAGHER & CO.
Risk Management
•A word about business continuity planning
•How to ensure that your coverage is not too
short in duration or limit.
© 2012 ARTHUR J. GALLAGHER & CO.
Business Continuity Planning
•NFPA 1600 – Disaster Management & Business
Continuity
•FEMA - Emergency Management Guide for
Business and Industry
http://www.fema.gov/pdf/library/bizindst.pdf
© 2012 ARTHUR J. GALLAGHER & CO.
Pre-Planning
•How to get the most bang for the buck when
negotiating your policy…
» Show that you have put some thought
into the limit. This gives an underwriter
confidence that they are getting
adequate premium for the exposure.
» Demonstrate that you have some
game plan for when a loss occurs.
© 2012 ARTHUR J. GALLAGHER & CO.
What to do if you have a claim?
Who is on your team and what do they bring to the
table?
Internally
• Those who bought the policy and
established the coverage limit.
• Risk Manager
• Finance Management
• Operations Management
Externally
•
•
•
•
The Insurance Broker or Agent
A Forensic Accountant
Coverage Attorney/Counsel
Professional Expertise such as
Engineer or Contractor
© 2012 ARTHUR J. GALLAGHER & CO.
A Case Study
© 2012 ARTHUR J. GALLAGHER & CO.
Case Study
• Manufacturer in the Midwest
• Fire in Main Production Plant
• In addition to the damage to the building, two, similar
production machines are damaged beyond repair. Machine #1
produces about 50% of the capacity of Machine #2.
• Building Repairs take one month.
• Production Machine #1 is up and running in 8 weeks (from date
of loss).
• Production Machine #2 is up and running in 12 weeks (from date
of loss).
© 2012 ARTHUR J. GALLAGHER & CO.
Recall from an earlier slide…
Income
Period of Restoration
Extended Period
of Indemnity
Time of Loss
© 2012 ARTHUR J. GALLAGHER & CO.
Case Study
• The Period of Restoration can be partially
offset by initial repairs.
• In fact, it is right in your policy. You have
a responsibility to do whatever is
reasonably possible to minimize the
severity (dollar amount) of the claim.
• The point of this case study is just to show
you that the claim will have a lot of grey
area!
• This is another reason why you want the
maximum number of days in the extended
period of indemnity.
© 2012 ARTHUR J. GALLAGHER & CO.
Case Study
•By using overtime, Machine #1 carried most
(but not all) of the production that would be
done by Machine #2. So this minimized the
overall dollar amount of the claim.
•In the end, the Extended Period of Indemnity
began when Machine #2 was
back up and running at potentially
full capacity.
© 2012 ARTHUR J. GALLAGHER & CO.
Case Study
• The claim settlement
» In this case, a two-year trail of Net
Income was used to establish a fair
benchmark.
» It was determined that the insured was back to full capacity
and market share within 15 weeks total.
» The client was issued payments for all lost profit and for the
applicable expenses.
» Important to note: By using Machine #1 to make up for lost
production on Machine #2, the total dollar amount was
reduced by an estimated 8% in the end.
© 2012 ARTHUR J. GALLAGHER & CO.
MARCH 22, 2016
Questions?
You can always call or e-mail with a question…
Christopher_Chiero@AJG.com
630-294-5460
About the Speaker…
Christopher Chiero, CFPS, ARM
• 15 Years Loss Control
• 5 Years Underwriting
• Member
» NFPA
» SFPE
• Featured Speaker
»
»
»
»
World Safety Conference
REBEX (Risk & Employee Benefits Expo)
Milwaukee RIMS Chapter Luncheon Series
Windy City Summit
© 2012 ARTHUR J. GALLAGHER & CO.