The following Case Study considers the application of the Accumulated Stocks Clause in Section 2 of a Mark IV Industrial Special Risks (Industrial Special Risks) policy.
Gonzalez Wheels is a manufacturer of tyres for sports cars. The insurance broker, Harry, and the client, Speedy, meet just before the end of each financial year.
When they met last year (30 June 2004) Harry explained the need for Business Interruption insurance but was met with Speedy’s usual reply, "We’ll be right." Harry cautioned Speedy to consider the effect a fire would have on the business; production would cease, sales may reduce, cash flow may be disrupted. Ever the optimist, Speedy informs Harry that if they had a fire Gonzalez Wheels would be unlikely to suffer a loss of profit.
On 20 December 2004 fire swept through the production facilities. Cause was attributed to an electrical fault. Some of the machinery could be repaired but much of it could not be salvaged and had to be imported from Germany. This took a month and production did not resume until 31 January 2005.
In June 2005 Harry arrived at Gonzalez Wheels expecting no opposition from Speedy in relation to accepting Business Interruption cover. Amazed he listened as Speedy explained that he still did not consider Business Interruption cover to be necessary. "Sure", he explained, "production was restricted for about a month but finished goods were not destroyed and sales were maintained from accumulated tyre stocks. I told you I wouldn’t suffer a Loss of Profit!"
Tactfully, Harry enquired what level of finished goods was normally on hand at this time of the year. After shuffling through various documents, spreadsheets and budgets the eternal optimist replied, "About $500,000 at cost." Harry then asked Speedy for the actual cost value currently on hand and is told it is only $300,000.
Harry explained that if he had taken Business Interruption cover Speedy may well have been able to make a claim under the Accumulated Stocks Clause. This would have compensated him for an equitable allowance for stock levels to be returned to normal if these had been depleted to maintain sales.
Unfortunately it took the experience of a loss and, even then, further convincing before Speedy finally understood the necessity for Business Interruption cover and is now confident of more checkered flags!
Author
Published with permission of Claim Solutions Pty Ltd.
Insurance Policy
Country: - Australia
Policy Description: - Mark IV Industrial Special Risks (ISR) policy
Insurer: - Various
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