Business Interruption cover is an integral component of an insurance portfolio but is often the least understood.
This is highlighted during hard insurance markets when the cover is reduced by shortening the indemnity period or increasing the deductible in an effort to cap spiralling insurance premiums. In some instances the cover is even abandoned!
When allowed to operate correctly a Business Interruption policy restores cash flow. The following two case studies may assist an understanding of the importance of an appropriately arranged Business Interruption Insurance: -
Case Study 1
On 1 July 2004, Mrs Sweet’s chocolate factory is razed by fire. Not only must she find a temporary factory but it will take at least 3 months before manufacturers in Switzerland can replace the equipment needed for Mrs Sweet to recommence making her melting moments.
This means no income until 1 October 2004!
Without any income, Mrs Sweet is unable to pay ongoing fixed costs such as wages to her experienced chefs, her key administrative staff, rates, taxes, etc.
Without any income, Mrs Sweet is also unable to pay additional costs to save the business e.g. costs to: -
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Hire temporary ovens.
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Air-freight the replacement ovens from Switzerland.
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Divert telephone, mail, facsimile, etc.
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Utilise mobile phones for additional communication.
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Work overtime to make up lost downtime.
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Print and mail notices to customers advising of temporary arrangements.
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Hire competitors spare capacity to make melting moments.
Shortly after the fire Mrs Sweet obtains copies of her insurance documentation. To her horror she discovers that in an effort to reduce her premium she cancelled the Business Interruption cover last year.
The Material Damage cover remains intact but what use is it? Mrs Sweet has no funds to implement any loss minimisation measures. By the time the damaged equipment and building is reinstated her chef will have resigned and may have taken a position with her competitor, her customers will have sourced their supplies of chocolate elsewhere and her market will have disappeared.
Perhaps it is extreme, but this case study demonstrates that adequate Business Interruption cover is an important adjunct to the property cover and should not be underestimated even in times of high premiums.
Case Study 2
A major Australian manufacturer exporting products to Asia and Europe sustained a Property and Business Interruption Loss as a result of a fire.
No cover for Business Interruption was in place!
This Policyholder mitigated its loss at every opportunity and promptly commenced trading from alternate premises.
Following are some of the loss minimisation measures implemented to save the business: -
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Staff, including the Managing Director and administration personnel, worked many nights until 2am.
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Extended finance was obtained.
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Alternate financing for consignment stock was arranged.
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Work was sub contracted to competitors.
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National and international trade fairs were attended (with minimal stock) reinforcing market presence.
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Visits to major local and international customers reassuring them the business would continue to meet their needs.
Costs associated with these actions were borne by the Policyholder.
This was one of the better examples of a business rising from ashes within a short period of time in the absence of cover for Loss of Profit.
Fortunately they had many factors in their favour.
Their excellent reputation in the industry, the availability of sizeable alternate premises close to the destroyed property and the positive attitude of staff led by a seemingly tireless Managing Director all contributed to the prompt recovery of the business.
Success was not achieved without considerable costs both financially and personally.
If Business Interruption cover had been in place, at least the financial burdens may have been alleviated.
Also See: - Accumulated Stocks and Business Interruption
Author
Published with permission of Claim Solutions Pty Ltd.
Insurance Policy
Country: - Australia.
Policy Description: - Mark IV Industrial Special Risks (ISR) policy.
Insurer: - Not specified.
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