Intermediate Level

What if your business premises

having a catastrophic fire?
Not only suffer from the loss of stock or damage to the building BUT also
unable to fulfill orders, or conduct business while the building is repaired or
rebuilt.

Will your business be able to survive the disruption?

Business Interruption Insurance is

the answer !
What is Business interruption?
UK policy wording established in 1930s as Consequential loss
insurance linked to property damage coverage
US policy coverage differentiate the Indemnity Period
 DEFINITION
Direct Business Interruption (BI)
Damage to the insured facility.
Business Interruption Interdependency
(BII)
Caused by one to another Corporate
facilities in the Company
DEFINITION
Contingent Business Interruption (CBI)
Outside supplier or loss of a major
customer.
BI caused by an incident unrelated to
property damage.
For example strikes, pandemic, insolvency.
Denial Access, Public Authority, etc
(Some insurers limit it into a within
defined risks)

The calculation of a Business
Interruption Loss or Value is basically an
Accounting Function.
However, this does not mean that it is
incomprehensible by non-accountans.
Business Interruption coverage is to
provide for earnings the Insured would
have earned had the loss not occurred.
The decision to produce for the Insured
is affected by:
Business Trends
Market Conditions
The weather
The Financial Condition of the Insured.
The objective of a Business Interruption
calculation is to consider as many
factors as possible and be able to
reduce the gray areas so that, at a
settlement meeting, the parties involved
will have a minimal amount of
differences.
 Policies are written in very broad terms and are
interpreted differently by different people and the courts.
In general, adjustment problems aris becaouse of
misunderstanding of value and loss on the part of the
underwriters and/or the Insured.
Common problems in connection with an adjustment are:
1. The determination of the proper period of indemnity
2. The projection of anticipated sales or sales value of
production
3. The determination of which expenses must
necessarily contiune
4. The development of values to comply with
coninsurance requirements.
 The Insured should be made aware, at the
time Business Interruption Insurance is
purchased, that his is entitled to collect for
only such length of time as is necessary to
repair or replace the damaged or
destroyed property, with the exercise of
due diligence and dispatch.
Projections of activity during the indemnity
period should take into consideration all
factors that may have affected the
Insureds business.
To restore a business to the same
financial position as if a loss event
had not occurred following a
disaster
 Damage to the Insured Property &
caused suspension to the business
operations.
Restore Insured business for profits
but not in a better position.
Business with track record of profits(*).
The Insured has duty to mitigate
losses

(*) tailored made ins. policies deal with different situation

 Loss of Insured Gross Profit (GP)
Due to Reduction in turnover
Rate of GP x The Reduction in Turnover

Increased Cost Of Working

Subject to economic limit (Rate of GP x The
Amount of the Reduction in Turnover avoided
by additional expenditure)

During Indemnity Period

 Loss in respect of Payroll
Reduction in turnover
Rate of Payroll x The Reduction in Turnover

Increased Cost Of Working

Rate of Payroll x The Amount of the Reduction
in Turnover avoided by additional expenditure

The policy can be endorsed to cover payroll (dual basis)

if and when required.
 Loss of Revenue(full Rev)
Short fall in (full) revenue
Increased Cost Of Working
Econonic limit = 100%(ROREV) avoided revenue loss.

During Indemnity Period

 Gross Profit

Revenue Cost of Goods Sold (COGS)

COGS refers to direct costs attributable to the

production of goods sold by the Company

including
Direct Materials & Direct Labour

excluding
Indirect or Fixed Expenses such as Facility Costs,
Administration, Insurance, etc.
 Net Profit)

Gross Profit Fixed/Indirect

Expenses
 Coverage
the time of the loss business is running
at its pre-loss state

Covers the profits would have earned, had

the damage not occurred.

covers operating expenses, or fixed costs,

still being incurred.
 Prevention of Access Property Damage
hinders access to the situation.

Prevention of Access Human Life, Injury,

Murder or Suicide
prevents or hinders access to the situation.

Prevention of Access Closure by Any

Authority
Due to :

1. Defect in drains or other sanitary arrangements,

or
2. The escape of fumes or any hazardous material.
 Failure of Utilities
(but excluding all off-shore oil and gas
installations including undersea oil and gas
pipelines, that supplies: power or gas, water or
sewage, telecommunications).

Costumers/Suppliers Premises
The property stored, deposited, processed,
repaired, altered or renovated
 Closure of Transport Routes, Ports or
Airports

Due to 1. property damage, an order by a

lawful authority
 Natural Disaster Cover Can be
extended with additional premium

Electronic Data & Programs

War/Confiscation/Nuclear
Terrorism
Seepage, Pollution and
Contamination
Some more exclusions
discussed under MD Policy
Sec I