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Business Insurance
Thursday, January 1, 2009
Value judgement

Judging from sums insured and indemnity limits nominated in policies viewed recently in claims, we were shattered to find that the asset values and financial impact on the insured bore little resemblance to the sums insured, indemnity limits and indemnity periods. In most cases the insured was severely prejudiced by the application of average (under-insurance) and inadequate business interruption cover. It is obvious that many brokers are not interacting professionally with their insured in:

• analysing risks,
• doing scenario planning in respect of the reinstatement of the business following a major loss; or,
• testing the validity of fire sums insured in terms of reinstatement value conditions.

In an article that recently appeared in “The Journal”, the author, Kevin Pratt states that around 20% of businesses in the U.K. suffer a major loss every year and that research suggested that 80% of those businesses closed down within 18 months and that 90% of businesses who lost their data closed down within two years.
“Nobody benefits from the demise of a business due to a catastrophe or other major loss. the impact is far reaching and extends to owners, shareholders, staff, suppliers, customers, brokers, insurers, local business community and a host of other stakeholders,” points out Gene Fivaz of Fivaz, Ogle & Associates.
The investigation into the impact (time and financial) of a catastrophe or major loss on the insured is a vital function of the broker as the outcomes are reflected in the revenue of the portfolio’s sums insured and indemnity periods.
He says that establishing the proper values at risk and financial impact of a major loss are paramount to providing correct and adequate cover. The new “buzz word” for the procedure is BCM (or business continuity management).
It is a broker’s duty to explain to the insured the terms and conditions of the material damage covers as well as the business interruption wording and in particular the meaning and where required the calculation of:
• nett profit,
• standing charges,
• uninsured working express / variables / specified working express,
• insured gross profit (as opposed to accounting gross profit),
• insured at risk (and that it must be vat inclusive),
• indemnity period,
• average,
• rate of gross profit.

It is also important that the Insured together with the broker, compile a BCM Plan which must include amongst others:
• insured premises,
• potential impact of a major loss (sales / turnover),
• recovery period,
• alternate premises,
• alternate sources of supply,
• reinstatement value of buildings,
• reinstatement value of plant and machinery,
• trading / expenses and other trends / business developments trends to be taken into account,
• impact of major loss at key supplier or customer, on the insured,
• impact of major loss on business arising from a supply failure by public utilities,
• impact on business of major damage to infrastructure in vicinity of insured preventing / impeding access, to Insured.

“The Business Continuity Management Plan should be reviewed at regular intervals particularly at the time of substantial changes in costs e.g. fuel, power, raw materials, building costs, wages, and so on,” advises Fivaz.
In closing, a word of caution, he adds: “Leaving the calculation of the insured gross profit to the insured’s accountant could be a recipe for disaster unless the broker is confident that the accountants are familiar with the covers and the terminology. The extract is probably best done by the broker or in conjunction with the accountant.
“Obviously an article of this nature cannot deal with all aspects of the covers in question. But it is hoped that at the very least it serves as an aide memoir or basic guide to the broker.”

Copyright © Insurance Times and Investments® Vol:22.1 1st January, 2009
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