Business Interruption
Values & Exposures
Dempsey, Myers & Company
Quinnipiac University
June 14, 2006
Today’s Presentation
BI Basics
 BI Values Explained
 Values v. Exposures
 Hypothetical Claims
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A Business Interruption Primer
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The purpose of BI coverage is to do for the
business what it would have done for itself
had there been no loss.
Coverage generally triggered by physical
damage.
Reimburses net profits, continuing expenses
and expenses incurred to reduce loss
Optional coverage for extra expenses to
continue operations
Duty to mitigate
Coverage Triggered by Direct
Damage to Insured Property
Underlying Form:
ISO/Proprietary/Manuscript
 Extended Period of Indemnity
 Research and Development
 E-Commerce
 Extra Expense
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Coverage Triggered by
Damage to Other Property
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Contingent Business Interruption
Contingent Extra Expense
Interdependent Properties
Civil Authorities
Ingress/Egress
Service Interruption
Leasehold Interest
Royalties
Business Interruption
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Three Essential Variables:
– Time
– Revenue
– Costs
Business Interruption
Key Revenue Streams - 2006 ($2.95b)
Auxiliary
activities
13%
Departmental
activities
4%
Investments/Other
2%
State of Michigan
38%
Student fees
24%
Local and private
programs
7%
Federal
programs
12%
Business Interruption
Expenditures and Surplus - 2006
G&A expense
6%
Fixed/other
4%
Surplus
5%
Instruction/research
40%
Operating
expense
18%
Scholarships
10%
Services
17%
Business Interruption
Reclassification of Expense Components
Fixed Cost
10%
Surplus
5%
Semi-Variable Cost
21%
Variable Cost
64%
BI Loss - Total Suspension
Projected
Actual
Loss
$1,000,000
$0
$1,000,000
Variable Costs
$500,000
$50,000
-$450,000
Other Costs
$400,000
$300,000
-$100,000
Net Profit
$100,000
-$350,000
$450,000
Sales
BI Loss - Partial Suspension
Sales
Projected
Actual
Loss
$1,000,000
$400,000
$600,000
Variable Costs
$500,000
$250,000 -$250,000
Other Costs
$400,000
$350,000
-$50,000
Net Profit
$100,000 -$200,000
$300,000
Business Interruption Loss
Evaluate Nature of Revenue:
– Will it abate in the event of loss?
State
of Michigan appropriations
Other government aid
Student fees
Auxiliary activities
Research grants
Interest
Business Interruption Loss
Evaluate Nature of Cost:
– Will it abate in the event of loss?
Instructional
costs (salaries, supplies)
Utilities and maintenance
Auxiliary expenses
Research costs
General & Administrative costs
Depreciation and interest
What are BI Values?
A projection
of what the business will do
during a 12-month period
What are BI Values?
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Annualized estimates of net profit and
“continuing” (fixed) expenses
May or may not include “ordinary payroll”
(direct labor expense)
Computed for each insured location where
earnings are produced
Policy requirement of most insurance markets
How are BI Values Used?
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To determine annual premium
To allocate premium to business units
To determine Probable Maximum Loss (PML)
and Maximum Foreseeable Loss (MFL)
yardsticks
To determine location limits of liability
To determine Average Daily Value (ADV)
deductibles
BI Value Concerns
of the underwriter
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Location exposures and values
– Are high MFL locations properly identified?
EQ and windstorm exposures
– Are significant interdependencies
recognized in the underwriting process?
– Are significant CBI exposures disclosed?
– Are adequate loss control measures in
place to reduce loss exposures?
BI Value Concerns
of the risk manager
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Conceptual framework and accuracy
– Do business units understand the purpose and
importance of accurate BI value reporting?
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Premium allocation
– Are reported values calculated consistently among
business units and locations?
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Process efficiency
– Is the right amount of data reported?
– Is the collection process rational and efficient?
BI Value Concerns
shared by risk managers and underwriters
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Accuracy
– Are reported values based on reality?
– Are values computed in a manner consistent with industry
standards across all insurance markets?
– Are reported values suitable for calculating PML’s and
MFL’s, and for allocating insurance capacity?
– Are reported values a reasonable basis for calculating
premiums and determining location limits and deductibles?
Hypothetical Claim 1
Dormitory Flood
Assumptions
 Heavy rains flood basement and first floor
 Dormitory evacuated
 Students relocated
– Hotels and other temporary quarters
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Two month repair period
Ten students quit school, seek refunds
Hypothetical Claim 1
Dormitory Flood
Assumptions
 Heavy rains flood basement and first floor
 Dormitory evacuated
 Students relocated
– Hotels and other temporary quarters
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Two month repair period
Ten students quit school, seek refunds
Hypothetical Claim 1
Dormitory Flood
Issues Presented
 Value of extra expense loss
– Living expenses
– Transportation
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Value of business interruption loss
– Lost room revenue
– Lost vending profits
Hypothetical Claim 2
Service Interruption - Student Center
Assumptions
 Natural gas curtailment in January
 No heat or hot water
 Building closed for one week
– Book Store closed
– Food service suspended
– Meeting rooms closed
Hypothetical Claim 2
Service Interruption - Student Center
Issues Presented
 Value of business interruption loss
– Lost Book Store Profits
– Lost Food Service Profits
– Loss Mitigation
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Value of extra expense loss
– Meeting relocation costs
Hypothetical Claim 3
Laboratory Fire - R&D Loss
Assumptions
 Biochemical experimentation
 US Government funded for fiscal 1997
 Three-fourths completed at time of fire
 Entire experiment lost; nine months to replace
 Grant revenue $1 million; fixed cost $83,000/month
 One month total suspension to repair fire damage
 Risk of losing future grants if fail to complete
Hypothetical Claim 3
Laboratory Fire - R&D Loss
Issues Presented
 Value of business interruption loss
– Total suspension period - 30 days
– Remainder of period - 9 months
– Lost opportunities
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Other potential losses
– Expediting costs
– Extra expenses
Q&A
Contact Details
Sharon Pisko Wolfe, CPA
Dempsey, Myers & Company LLP
426 Danbury Road
Wilton, CT 06897
203-762-5052
sharonwolfe@dempseymyers.com
Karen Henricksen, CPA, CFE
Dempsey, Myers & Company LLP
127 East 56th Street, 4th Floor
New York, NY 10022
212-319-8717
karenhenricksen@dempseymyers.com