Business Interruption Insurance is Going to Save Your Company Presented by: Christopher Chiero, ARM,...

Business Interruption Insurance is Going to Save Your Company

Presented by:

Christopher Chiero, ARM, CFPSArthur J Gallagher

Risk Management Services, Inc.

© 2012 ARTHUR J. GALLAGHER & CO.

Today we will look at…

• The Importance of Business Interruption Insurance.

• A policy and talk about how coverage applies.• How to accurately determine your limit.• What to watch for… Common Pitfalls• Mitigating the exposure.• Negotiating terms.• Take you through a loss scenario (case study).


A Wise Man Once Said…

“When it comes to Business Interruption, 50% of the policyholders out there are under-insured and the other 50% are over-insured. So you either do not have enough coverage or you are paying too much money for your policy.”

Why is that?


What is the intent of Business Interruption Insurance?

• Business Interruption is a first party coverage that is part of your property policy. The purpose of “B.I.” is to indemnify the policyholder for their financial loss due to the incident triggering coverage.

• Simply put, it is there to make a property loss as seamless to your income statement as possible.


Why is Business Interruption Insurance so important?

Protects your company from…

• Lost Income

• Loss of Market Share

• Lost Strategic Alliances or Partnerships

• Lost Time of Key Employees… or worse

• Loss of Key Employees


Protecting Net Income

The Recommended Approach

•Purchase Business Interruption Insurance

•Have a plan for what to do immediately after a loss.

•Consider who you want on your claim team.

© 2012 ARTHUR J. GALLAGHER & CO.© 2012 ARTHUR J. GALLAGHER & CO.

Getting Started with the Policy


Getting Started


What is being covered?

The Basics

• Net Income

(Net Profit or Net Loss)

• Necessary Continuing Expenses

Common Optional

BI Coverages

• Extra Expense

• Extended Period of Indemnity

• Supply Chain

• Contingent BI

(Dependent Property)

• Ordinary Payroll

(Key Employees)

There are several other options to this coverage type. Talk to your broker or agent for details.


Some Examples of “Necessary Continuing Expenses”

• Mortgage Payments• Rent• Property Taxes• Salaries• Equipment Leases• Insurance Premiums• Service Contracts (if no “out” clause)• Ordinary Payroll (optional)• Any expense that you cannot get out of despite the loss

incident.


Not Examples of “Necessary Continuing Expenses”

•Utilities Used in Production

•Raw Materials

•Advertising

•Repairs & Maintenance

•Supplies

•Housekeeping/Janitorial


So just how is coverage triggered?

•You must start with a “Covered Cause of Loss.”

•At an insured location.

•For an incident that occurred during the policy period.



• Fire

• Flood

• Wind/Hail

• Earth Movement

What is a “Covered Cause of Loss?”

• Civil Authority• Ingress-Egress• Terrorism/TRIPRA• Vandalism• Sprinkler Leakage• And Others…



What is a “Covered Location?”

• Listed on the Policy• Could include locations not directly

operated by your company.• May include other dependent

properties as well.

We will go over how you develop your coverage including some alternate locations as noted above.


A Few Key Terms

Period of Restoration


Extended Period of Indemnity

A Few Key Terms


Chronology of a Claim

Time of Loss



Income


Common Pitfalls• Did not purchase the proper

Cause of Loss• Did not Purchase a sufficient


• Did not identify and purchase the appropriate limit.

• Did not Pre-Plan the Loss Scenario which extended the loss beyond the coverage period

What we just covered…

Now we should have a look at…


What should the limit be?

Remember:

»Limit too High = You paid too much premium

»Limit too Low = You are underinsured and could be susceptible to a financial

disaster


Proper Limits

•One year of exposure is the benchmark. This includes every location, every subsidiary. That is how it is underwritten no matter what you put down as your limit.

•The proper limit is different for each client and it will change every year. Your profit, your expenses, your projected revenues, etc.


How do you establish your limits?

•BI Worksheet?

•BI Analysis/Study?

•Raw Income?

•Lost Rent?

•Estimated as a Percentage of Projected Income?


Many Companies simply apply a percentage of projected income?

»This is not very effective and doesn’t give you any insight as to whether you have enough coverage.

»Remember, the insurance company is not replacing your Gross Income. They are maintaining your Net Income.




BI Worksheet» Good Ballpark Estimate» Accepted By Underwriters

» Not necessarilytailored for your business

» Has limitations if your business

is growing consistently.


• Complete a BI study with your broker or agent.

OR

• Hire a professional firm to evaluate it by considering the big picture.

» This will give you the most accurate picture of your exposure and protect you from the extremes of being over-insured (pay too much premium) or being under-insured (which is potentially fatal for your business).



A few other items to keep in mind when developing your BI exposure

• Interdependency between plants• Key Suppliers• Key Clients• Supply Chain Issues• Timeliness of Restoration (i.e. imported foods or hard

to replace machinery)• I.T. Considerations (unique software applications that

help maintain the flow of revenue)


Covered Locations

•Includes all the locations where you do business (and should be scheduled in some way on your policy).

•Can also include:»Your Suppliers’ locations»Your Key Clients’ locations»Magnet Property locations»Any location that you can establish a legitimate

connection to your Net Income.


BIG & Little…

• BIG: A High Limit for Claim Data Prep Expense and/or Professional Fees (Note: This does NOT include attorney’s fees)» This is your defense against, “Well, their guy says…”

• Little: A Waiting Period as short as possible.» Waiting Period is the amount of time you have to be down

before coverage is triggered. » Often times there is a straight up deductible as well.

Here are a few other items you would like to have a look at.


Coverage Review

•Purchase “All-Risk” Coverage Triggers

•Negotiate the Longest Extended Period of Indemnity you can justify

•Make sure your Limits of coverage are sufficient.

•Cover the key Locations whether they are yours or not.

•Big Claim Data Prep Expense Limit

•Short Waiting Period


Risk Management

•A word about business continuity planning

•How to ensure that your coverage is not too short in duration or limit.


Business Continuity Planning

•NFPA 1600 – Disaster Management & Business Continuity

•FEMA - Emergency Management Guide for Business and Industry

http://www.fema.gov/pdf/library/bizindst.pdf


Pre-Planning

•How to get the most bang for the buck when negotiating your policy…

»Show that you have put some thought

into the limit. This gives an underwriter

confidence that they are getting

adequate premium for the exposure.»Demonstrate that you have some

game plan for when a loss occurs.


What to do if you have a claim?

Internally

• Those who bought the policy and established the coverage limit.

• Risk Manager• Finance Management• Operations Management

Who is on your team and what do they bring to the table?

Externally

• The Insurance Broker or Agent• A Forensic Accountant• Coverage Attorney/Counsel• Professional Expertise such as

Engineer or Contractor


A Case Study


Case Study• Manufacturer in the Midwest• Fire in Main Production Plant• In addition to the damage to the building, two, similar

production machines are damaged beyond repair. Machine #1 produces about 50% of the capacity of Machine #2.

• Building Repairs take one month.• Production Machine #1 is up and running in 8 weeks (from date

of loss).• Production Machine #2 is up and running in 12 weeks (from

date of loss).


Recall from an earlier slide…

Time of Loss



Income


Case Study• The Period of Restoration can be partially

offset by initial repairs.• In fact, it is right in your policy. You have

a responsibility to do whatever is reasonably possible to minimize the severity (dollar amount) of the claim.

• The point of this case study is just to show you that the claim will have a lot of grey area!

• This is another reason why you want the maximum number of days in the extended period of indemnity.


Case Study

•By using overtime, Machine #1 carried most (but not all) of the production that would be done by Machine #2. So this minimized the overall dollar amount of the claim.

•In the end, the Extended Period of Indemnity began when Machine #2 was back up and running at potentially full capacity.


Case Study

• The claim settlement» In this case, a two-year trail of Net

Income was used to establish a fair

benchmark.» It was determined that the insured was back to full capacity and

market share within 15 weeks total.» The client was issued payments for all lost profit and for the

applicable expenses.» Important to note: By using Machine #1 to make up for lost

production on Machine #2, the total dollar amount was reduced by an estimated 8% in the end.

April 19, 2023

Questions?You can always call or e-mail with a question…

[email protected]


Christopher Chiero, CFPS, ARM

• 15 Years Loss Control• 5 Years Underwriting• Member» NFPA» SFPE

• Featured Speaker» World Safety Conference» REBEX (Risk & Employee Benefits Expo)» Milwaukee RIMS Chapter Luncheon Series» Windy City Summit

About the Speaker…

Business Interruption Insurance is Going to Save Your Company Presented by: Christopher Chiero, ARM,...

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