Business interruption: mind the gap
The difficulty in anticipating all the problems that could arise from a business interruption event, such as a flood or fire, is leading to sleepless nights for brokers, with the spectre of litigation that could result from their clients being underinsured looming large.
“Some of the biggest claims that brokers have against their own professional negligence are for underinsurance in business interruption,” explains Pete Treloar, Professions and Specialty Commercial Underwriting Manager at Hiscox. Add into the mix a complex array of available insurance options and confusion reigns.
“It can be quite complicated to understand all the different products and work out how much cover to buy. We commonly see people getting it wrong and not buying enough cover.
Typically, the process goes like this – customers decide what insurance they believe is appropriate from four heads of business cover: loss of income; gross profit; increased cost of working (setting up a new office, for example); and additional increased cost of working (such as throwing a party to open the new office). Once they have decided what cover they want to buy they have two further decisions to make... which is where things can start to go awry.
The first decision is how much cover to buy. Calculating how much it would cost to set up in another office, for example, can be quite a difficult question to answer. “The second decision is considering how long you want the cover to last,” says Pete. “People will often buy cover for a year after that property damage event, but again, we see lots of cases where companies are suffering the losses of business interruption more than a year afterwards.”
Staring into the unknown
Events clients never dreamed of can cause long delays. “Quite often in construction projects, for example, lots of things can come out of the woodwork mid-way through,” says Pete. “We’ve had instances where, in the middle of a building project, an endangered species of bat was discovered on site and all work had to stop until they were rehomed.” Given the unknown nature of business interruption events, predicting how long cover should last can be a guessing game.
On top of this unknown is the intangible nature of some of the costs incurred. It is one thing calculating the cost of moving office, but when it comes to the intangibles, crystal-ball gazing may be required. Might employees need extra season-ticket loans to cover the cost of additional travel, for example? Will the company need to write to all customers to say they are still in business? Such scenarios might seem speculative, but after a fire or flood, they can become very real.
Recognising that this situation has become intractable for clients and brokers, Hiscox offers a simplified business interruption product. “Essentially, there are three quite big decisions you have to make: what cover to buy, what limit to buy and how long to buy it over,” explains Pete. “We want to look after our customers as well as we possibly can and try to do something different.”
Hiscox is focused on taking some of the difficult decision-making away through its Unlimited Business Interruption product. It includes the four main heads of business-interruption cover, has no financial limit and has been extended to five years rather than the standard 12-month period.
Once a client has successfully set up their cover, how else can they be prepared? Pete recommends a business continuity plan that sets out what steps to take in a crisis. That could involve having reserve office space on a retainer. Or it could mean defining a chain of contact with employees to communicate messages should the office close.
The amount of preparation needed is relative to the size of company, but, as Pete concludes, “If you take the time before something happens to plan it out and be prepared, then it makes your life a lot easier after the incident has happened.”