Why business interruption should be a focus of every renewal with your insurance broker
By Scott Feasy & Darren Rondeau
For many manufacturers, a serious loss is often complex and the effects are long-lasting. One immediately thinks of the building, equipment, the work in progress, and the bills. While the property policy will have a significant part to play, one of the most important coverages to safeguard the financial integrity of your firm after a serious loss is Business Interruption (BI). Carrying the correct amount with an adequate period of indemnity and addressing your labour force are all keys to avoiding cash crunches, labour shortages, and solvency issues.
Business Interruption requires a deeper dive than just completing the worksheet every year – which should be an automatic. Two things that insureds/controllers dislike about BI at renewal are filling out a new worksheet and wondering if the cost-benefit of the coverage is really worth it.
Do the work
Filling out the worksheet properly each year is vitally important. It provides the blueprint for both yourself and the insurer to navigate all the costs involved in the loss. The coverage itself often carries a 100 per cent co-insurance requirement, which means that you have to be extremely accurate or risk creating a co-insurance penalty for yourself.
If your sales go up by 10 to 15 per cent and you say to your broker “we’ll just leave it the same as last year,” then the claim will get adjusted on last year’s limit, not your increased number. That may not be a big issue if you can get up and running again in a short time period, but it will have an effect if you are at the 10- or 11-month period and facing a BI limit shortfall.
You say no one is expendable
The biggest portion of your BI worksheet deals with salaries and payroll. Officers, executives, and key managers are accounted for and their annual remuneration are included in the salary portion, but what about the rest of your team? In the past, most employers would choose 60, 90 or 180 days with respect to “Ordinary Payroll” coverage for this segment of their workforce.
Increasingly, we hear from employers that no one is really expendable. Those employees that make up the rest of your payroll likely have some special skills and training. They bring experience, expertise, and reliability to your company; characteristics that are perhaps not so easy to find these days. Have the discussion with your broker and the insurer about making this part of the coverage available for 365 days.
Presumption of resumption?
One of the most overlooked components of the BI coverage is the “Period of Indemnity.” Unless otherwise reviewed and re-evaluated, the period of indemnity is 12 months. This means your BI coverage is limited to 12 months from the date of the loss, regardless of where you might be in your recovery.
When you consider all the potential obstacles you may face in returning your business to normal, these obstacles can stack up. Here are a few to think about: lengthy investigation by various experts, delays in permitting (never!), developing reconstruction plans, zoning requirements and by-laws, the season and weather in which you are building, adjusting the loss from both a Property and BI perspective, ordering, installing and calibrating specialized equipment – these are but a few standard impediments one can expect on the road to recovery.
Given the current situation with interrupted supply chains, increasingly complex transportation logistics, and relentless pressures from creditors, will 12 months of coverage be enough time to fully restore your operations after a serious loss?
Benefits beyond the cost
You could be well-served by exploring a longer period of indemnity, such as 18 or 24 months. Is it going to cost more money? Yes, but there are clear benefits.
Take your current premium amount and divide that number against your total cost of sales. Now take that 18- to 24-month number, and divide it against your total cost of sales. In all likelihood, the increase is going to be minimal, and could make a significant difference in helping your business endure the disruption of a serious loss.
When you purchase the Profits or Extended form, BI coverage does not end when you are ready to open the doors again. It continues until your sales return to where they would have been, had you not suffered the loss. If it takes longer for your customer base to return and for your operations to be fully functional once again, you will still get paid for the shortfall in your lost profit. This could be the difference in failing or succeeding once you have re-opened for business.
Be thorough, be accurate, be covered
When an insurance loss goes sour on the insured’s
side, specifically for Business Interruption, these are some common factors:
• you never carried the BI coverage (your historical percentage of reopening are quite slim)
• failing to accurately complete or update the BI worksheet which could result in insufficient BI limits (you are going to run out of insurance money before you’re up and running)
• not including your Ordinary Payroll (what is the true cost of training new workers, and what is their productivity rate when they start, when you have lost customers?)
• your indemnity period is not long enough (you got the Building and Equipment limits right but you are only operating at 70 per cent of pre-loss levels)
To ensure you are properly covered, here are a few questions to consider for the BI discussion:
1. Am I completing a worksheet and having the discussion every year?
2. Do I understand my type of BI cover?
3. Am I putting in my projected numbers for the upcoming year?
4. What is my period of Indemnity and if everything fell into place, what is the time period?
5. Am I covering my “ordinary payroll” and for how long?
6. Do I have a Disaster Recovery Plan in place to reduce my reliance on the insurance?
Another important part of the BI discussion is Extra Expense, but we’ll save that for another column.
Scott Feasey is Senior Vice President Commercial Insurance – Prairie Region and Darren Rondeau is Vice President, Claims – Prairie Region with Gallagher Canada, a global leader in insurance, risk management, and consulting services. With more than 35 offices across Canada, and with client service offered in more than 150 countries, Gallagher provides local service with global reach and expertise.