Business Interruption (BI) claims can be some of the most difficult and hotly contested in the insurance world – particularly in the aftermath of natural catastrophes. Today, in the wake of a number of recent large losses following major fires and explosions, floods, storms and earthquakes, Business Interruption has been increasingly thrust into the spotlight.
This is no surprise given the size of some of these claims. Typically the BI proportion of a claim will account for the majority of the loss and well over 50% of the incurred loss. And it is now not uncommon to see single risk claims exceed USD 100 million – in some cases even approaching the USD 1 billion mark.
This is fuelled by number of factors outlined below:
- increased interdependency risks due to complex global supply chains and business structures as individual companies and whole industries become more interconnected.
- adoption of highly specialized production equipment, lean manufacturing processes and just in time inventory practices.
- emerging risks such as disruptive technology and the Internet of Things (IoT) adding new complexities to the risk landscape.
At Swiss Re Corporate Solutions we’ve recently run a number of Business Interruption masterclasses in the Asia Pacific region where attendees have consistently shared with us that BI claims can be a source of frustration often resulting in challenges and delays in settlement. A key reason for this is that the cover that they had purchased did not function in the way they expected in the event of a loss.
So what can policy holders do to avoid claims challenges? We’ve compiled a list of top tips to consider when arranging your BI cover to minimize uncertainty in the event of a loss.
Understanding your business interruption cover – Read your policy!
While this may sound obvious it’s arguably also the most important piece of advice. Understanding the basis of cover is key to knowing how the cover will apply and what reasonable proofs are required in the event of a Business Interruption claim.
Before inception, take time to read through the policy with your broker and insurer to gain a better understanding of what will be covered and how the BI policy will respond in different scenarios. This should also include information about how claims are to be reported, communication protocols and what information will be required by your insurer.
Work together with your broker to avoid some of the most common mistakes, namely:
- Underinsurance caused by a miscalculation of the Sum Insured
Calculation of the correct BI Sum Insured for your business can be complex – confusion is often caused by the difference between financial accounting and insurance policy terminology, which can result in unintended gaps and surprises in the event of a claim. When calculating your Sum Insured, ensure you are taking into account projected year on year growth rates – project forward 12 months from the end of the policy period, not the beginning, to ensure that in the event that you encounter an incident on the last day of your policy period, you are not underinsured. It’s also worth remembering that clients can take advantage of a
premium refund clause, which applies in the event of being over insured. - Inadequate Maximum Indemnity Period (MIP) causing underinsurance where the period of reinstatement extends beyond that provided in the policy
To avoid this, robust loss scenario and Maximum Probable Loss estimation prior to the selection of a MIP is crucial. Consider these questions – What are your organization’s critical supplies? Where does your organization lie within your key suppliers’ priorities in the event that the entire industry may be affected? Are you heavily dependent on a key customer and have you considered the longer term effects of losing a contract if you can’t maintain supplies? Depending on the nature of your business, what are the longer term ramifications in the case of wide area damage? - Overlooking the impact of Non-Physical Damage Business Interruption (NDBI)
Non-Physical Damage Business Interruption (NDBI) can result from a multitude of scenarios such as nat-cat events causing wide area damage with the potential to adversely impact businesses that have suffered no property damage. Without property damage, a traditional BI policy will not respond and businesses may be faced with significant losses to their revenue streams. Consider the likelihood of such an event and how your business could be directly or indirectly affected when choosing the appropriate policy extensions and Indemnity Period. We go into this in more detail in Chapter 8.
Create a comprehensive Business Continuity Plan (BCP)
In addition to the traditional tasks of risk management – identifying, analysing, reducing and transferring risks – companies today are expected to prepare systematically to deal with loss events. Preparedness, involving the establishment of a sound emergency and crisis management plan, commonly referred to as a “Business Continuity Plan” is crucial.
Having a comprehensive and most importantly an up-to-date BCP in place is essential and should cover initial disaster recovery plans, reinstatement plans, and insurance company communication plans as a minimum.
Business Continuity Planning may reveal key issues that will arise when resolving a claim. This will help ensure that the process of resolving the claim does not cause further delay at a time when speed is of the essence. It will also allow management teams to focus on ensuring the business fully recovers and reputational damage is minimized following a loss rather than worrying about claims resolution.
Know your business
In arranging business interruption insurance, it is helpful to pull together a team of multi departmental stakeholders from the organization to obtain a holistic view of the business in the case of a crisis. Regrettably this does not often happen.
Aside from the insurance manager, involving the finance director for a numbers review, consultation should also extend to senior production managers who understand the manufacturing process, its bottle necks and critical components, senior procurement managers, senior sales managers and logistics managers. The potential supply chain risks are critical in today’s world.
Ask your insurer about their Claims Commitment
Understand your insurer’s ‘Claims Commitment’ so you can know what to expect when a claim is submitted. Be familiar with who you will be dealing with, what you will be asked to provide, what information will be shared and whether advance payments can be made to alleviate cash flow difficulties and place orders for replacement critical assets. It is also not a bad idea to ask your brokers to introduce you to your Insurer’s claims manager and the proposed loss adjusters at policy inception.
Swiss Re Corporate Solutions’ Claims Commitment provides for a 50% upfront property payments as well as timelines on claims response and settlement. You can find our claims commitment here
Eamonn Cunningham former chief risk officer, Scentre group explores how to ensure the best chance of success with a claim.
Information and data disclosures
It goes without saying that the provision of complete and accurate information on BI exposures to carriers is of the upmost importance. It will help your cause when your carrier is considering your claim if it has a complete understanding of how your business comes together, and what are the internal and external interdependencies. You need to have knowledge of the main revenue and cost drivers. The last thing you want your carrier to say when the claim is submitted is “I did not know about that”. The message is, don’t just give your carriers the numbers, give them the full story about the business as well. It is important that this gets into the underwriter file.
Timely notice
Your broker and carrier need to be advised of any circumstance that could give rise to a claim as quickly as possible.
Claim preparation
Consider using the services of a forensic accountant to prepare, or at least format, your claim. Talk to your broker as they can assist you in this regard.
Accounting systems and records
Work with in-house accounting to ensure that separate general ledger accounts are opened up to capture relevant costs. Create separate files particularly for non-cash-flow information.
Record retention
Make sure you retain copies of all relevant records, these could include business plans (past and current); budgets and any forecasts (past, current and future); financial statements; tax returns; supplier contracts; wage and payroll information (including, where necessary, a description of what people do, if it is not otherwise clear); and specific accounting records with receipts for any additional costs incurred. It is also a good idea to add additional information to any records or documents, if the rationale for its incurrence is not clear.
Photos, photos, photos…
You can never take enough photographs. For example, receive an emergency stock of supplies, photograph it. If you create a new flyer to be sent to customers, photograph it.
Polish your claim with a comprehensive narrative
Put yourself in the shoes of the carrier’s claims manager. Attempt to figure out what questions they will ask and the concerns that they may have, then answer them in a comprehensive narrative attached to the claim. For example, if you are relying on future period budget amounts to underpin revenue numbers in your claim, indicate how accurate your budgeting process has been in the past. Perhaps even go so far as to describe the quality assurance and vetting regime you put your budgeting process through to improve its reliability.
