The Impact of Business Interruption Insurance: Why You Need Coverage

Business interruption insurance is frequently included as part of a company's business continuity strategy. The insurance is intended to pay an insured for the financial effect of a business interruption or interference caused by physical damage to insured property or other significant external events, such as damage at a supplier's or customer's facilities. 

The goal is to return the company to the same financial position it would have been in if the loss had not happened, according to the policy's terms and conditions.

There have been a number of significant events in recent years that have resulted in large business interruption claims, including the 2004 Tsunami, Hurricanes Katrina and Rita in 2005, weather events in Queensland, Australia, and South Africa in 2008, the Icelandic ash cloud in 2010, and the Chilean earthquake in 2010. 

Claims are prompted not just by natural disasters, but also by man-made disasters such as the Deepwater Horizon. Other man-made events include severe machinery breakdowns or the loss of computer systems to firms that rely heavily on the machinery or computer systems to function.

As firms outsource more, the attention has shifted to business interruption as a result of these suppliers' failure to service clients, as well as other interruptions of vital services. Businesses are increasingly having contingent business interruption coverage, which is typically triggered by non-physical damage incidents. The recent floods in Queensland, Australia, is the present focus of the insurance and reinsurance sector.

Catastrophes of the type described above have a national and worldwide impact on numerous industry sectors. The following industries may be impacted:

• Mining: Queensland is Australia's greatest producer, mostly of coking or metallurgical coal used in steel production. It also generates thermal coal, which is used to generate electricity. Most, if not all, mining companies have declared force majeure in their contracts with consumers, either totally or partially.
  
  
• Coal seam gas drilling in Queensland's Surat Basin has been suspended owing to flooding. This industry sector was also severely impacted by Hurricane Katrina and the Deepwater Horizon oil spill.
  
  
• Port/Rail Operators: Floods have destroyed rail lines in Queensland. This interrupts the transit of commodities for export, such as coal supply.
  
  
• Utilities: Given the property destruction and impact on infrastructure, the floods in Queensland will have a significant impact on electricity generation, gas, telecommunications, and water delivery.
  
  
• Leisure/travel: The impact of the Queensland floods on the leisure and tourist industries is self-evident. Similarly, high-profile tourist destinations in Thailand were hit by the 2004 Tsunami.
  
  
• Agriculture: Australia's wheat, sugar, fruit, and cotton exports have all suffered to differing degrees, and fertilizer manufacturers may also suffer.
  
  
• Manufacturers and retailers confront not just property damage, but also logistical challenges in moving goods to stores, consumers, and ports.
  
  
• Both airlines and airport operators are involved in aviation.

Natural disasters also have an impact on household structures as well as state municipal property and activities.

As a result, business interruption insurance and reinsurance claims can be especially challenging to handle, and this essay focuses on the challenges that frequently occur in business interruption claims.

Material or property damage

Typically, business interruption claims are tied to material damage/property damage. One of the first considerations is whether or not there is a legitimate incident that activates the insurance cover. The following concerns may arise:

• Whether the insurance is activated, such as whether a weather event/flooding triggered coverage; or whether the damage happened during the policy term.
  
  
• Was the property damaged covered by the policy?
  
  
• Was the cause of the damage covered by the policy?
  
  
• Is there a series of events or occurrences, and if so, how will the loss be distributed among them? When there are sophisticated multilayer programs where the interests of distinct levels may diverge, the problem might be worsened.

Business disruption

Claims for business interruption insurance are frequently the claims that lead to the biggest, most complicated, and disputed claims. This is owing to the numerous elements that influence loss calculation. Sub-limits are common in policies and can have a significant influence on coverage. Among the difficulties that may occur are:

• Collecting and tracking information for the purpose of drafting or scrutinizing a claim: If a business is damaged by a flood, fire, or explosion, the premises and offices where the relevant paperwork is maintained may be ruined/destroyed.
  This makes it difficult for an insured to support portions of their business interruption claim and raises issues not only with the insured proving their loss, but also at the insurance and reinsurance levels because, in the absence of documentation, certain assumptions are often incorporated into the loss calculation, which may be contentious. In the case of larger firms, financial data and production paperwork are frequently stored in more advanced electronic systems and in multiple geographical locations, therefore this issue may not be as serious.
  
  
  
• Basis of indemnification: The policy will provide the basis for calculating the business interruption claim. This is frequently confined to the 'Loss of Gross Profit' as a result of decreased turnover. However, bringing a claim on an output alternative or loss of production income basis may be a possibility. The premise on which the claim is submitted can have a major influence on the resources and skill sets needed for the loss computation, as well as the amount of the loss. In order to measure typical turnover or production, the computation will frequently begin with a look at the fiscal year immediately before the date of harm.
  
  
  
• Increased cost of working/additional increased cost of working claims: this coverage may be included in the insurance. This is additional expenditure paid by the insured that is reasonable and necessary for the express purpose of preventing or mitigating the loss in turnover or output caused by the damage. There may be questions about whether the increased spending was solely for the purpose of decreasing the loss. There may be an extension to the policy that offers indemnification for expenditures spent by the insured that exceed the policy limitations for the higher cost of employment. This is referred to as the additional cost of employment. Documentation of the decision-making process and expenses, which is sometimes overlooked in the rush to get back to business, is a critical problem in claims involving these factors.
  
  
  
• Analysis of the cause of lost production/selling lost production: other variables that may impact the pace of production must be considered, and an insured must demonstrate that what is claimed as lost production was caused by property damage or another business interruption trigger. Similarly, the capacity to sell the lost produce "but for" the harm might be problematic. There might be a variety of reasons why the company did not continue on the path it had taken in the previous fiscal year. For example, when the overall financial crisis occurred in 2008, it may have impacted consumers' and clients' hunger or necessity for a certain service or product, which cannot be shown to be caused by physical damage. Indemnity term: The insurance will not give coverage for an indefinite amount of time. Typically, the indemnity offered will be restricted to a specific time period known as the "indemnity period." The indemnity period is often described in the policy as the time period commencing on the date of the occurrence of the damage and terminating when the effects on the company are no longer influenced by the property damage. This is often restricted to a maximum indemnity duration, which is typically 24 months.
  
  
• Extensions to cover: in addition to the additional rise in the cost of working extension, the insured may have negotiated or paid more for further extensions such as denial of access, when accessibility of the property due to property damage damages the company. Contingency business interruption insurance is an additional extension that may also be purchased as a standalone policy.
  
  
• additional/Special Circumstances clause: this permits the parties to consider additional factors that may affect turnover/production and the computation of the business interruption. Its goal is to guarantee that the amount indemnified is as close to the real amount lost by the insured as feasible as a result of the damage. For example, if the company is a commodity producer, such as wheat or coal, and the damage is extensive and affects a number of companies in the same industry sector, the disruption in production and supply can cause a price spike for that particular commodity globally. additional/Special Circumstances clause: this permits the parties to consider additional factors that may affect turnover/production and the computation of the business interruption. Its goal is to guarantee that the amount indemnified is as close to the real amount lost by the insured as feasible as a result of the damage. For example, if the company is a commodity producer, such as wheat or coal, and the damage is extensive and affects a number of companies in the same industry sector, the disruption in production and supply can cause a price spike for that particular commodity globally.
  
  
• Deductibles/occurrences: The number of deductibles that apply to a loss can be a source of disagreement. This is especially true when there are several possible sources of property damage and business interruption. Using flood, wind, or storm as an example, the policy would generally stipulate whether flood, wind, or storm form one incident, and therefore one deductible is due by the insured, by reference to a time restriction, such as 72 hours. The number of deductibles and the amount paid by the insured, insurer, or reinsurer would be affected by several events. Due to the varied interests involved, particularly big losses with excess layers on both insurance and reinsurance levels can generate substantial complications.

Dependent liability

This is business interruption insurance that is triggered by property damage at a supplier's or customer's premises, or by another trigger such as loss of utility, denial of access, or the act of a local authority/Government/Regulating Authority. Certain industry sectors, such as agriculture and mining, rely largely on utility suppliers (water, gas, and electricity) and, in the case of agriculture, on external contractors to provide huge machinery that is frequently required, such as at harvest season.

Port operators rely on manufacturers, commodity producers, logistics businesses, and rail companies to provide a continual flow of items to the ports for transportation. For example, there were substantial issues with gas supplies in Western Australia following the Varanus Island explosion in 2008, and there were concerns about supply continuity in South Africa as a result of weather events in 2008. 

While plans vary, expanded coverage for designated providers and loss of utility supply is common. With the deregulation of utility supplies, the identity of the contractual provider might frequently differ from the source of supply, posing questions about whether the policy reacts to business disruption caused by damage at the source.

Any company that is substantially reliant on other sectors for revenue should seek contingent business interruption insurance and incorporate relevant triggers in the policy. Many airport operators and airlines, for example, discovered that, despite being heavily reliant on the provision of airspace to generate revenue, when this was lost in 2001 (following the 9/11 attacks) and 2010 (due to the Icelandic ash cloud), the contingent business interruption trigger language in their policies was insufficient to respond.

Retrocession and reinsurance

settlement at the reinsurance level is unavoidably important in driving the settlement of insurance claims. As a result, it is critical to recognize the difficulties confronting reinsurers. Reinsurers are frequently worried about the effectiveness and efficiency with which claims are handled at the insurance level. 

In this regard, they may demand on control of the insurance claim (if the reinsurance policy contains a claims control provision) or otherwise attempt to assist in the investigation, adjustment, and payment of loss(es). Other concerns that may arise include:

• Triggers, aggregation, and excess/attachment points are all possible.
• If there is a captive or fronting arrangement, whether the insurance or reinsurance should be back-to-back, and how much the captive/front should pay for claim inquiry and negotiation.
• Reinstatement.
• Payment on account and how it should be managed, especially in the case of a reinsurance program with numerous levels and potentially conflicting interests.

In addition to the principals, business interruption insurance claims might include a large number of third parties, including loss adjusters, specialists, accountants, and attorneys, as well as paperwork.

What matters is that the claims process is properly project managed and that the opposing parties' perspectives are not polarized. To effectively resolve an insurance claim without resorting to costly dispute resolution, the insured, insurers, and reinsurers must work together throughout the process. 

That is not to suggest that there aren't differences of opinion and methods on how a policy should respond to a claim. In claims with various and substantial concerns, the parties should seek early agreement on those topics that can be agreed upon, allowing them to focus their attention, time, and resources on resolving the remaining disputed issues.