Business Interruption

&
Insurance Policy
Business Interruption Insurance is Going to
Save Your Organization
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.”
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 Employees…
 Loss of Key Employees
 Anything else
Protecting Net Income
The Recommended Approach

•Purchase Business Interruption Insurance

•Have a plan for what to do immediately after a loss
Getting Started with
the Policy
What is being covered?
The Basics Common Optional
BI Coverages
 Net Income
 Extra Expense
(Net Profit or Net Loss)
 Extended Period of Indemnity
 Necessary Continuing Expenses
 Supply Chain
 Contingent BI
(Dependent Property)
 Ordinary Payroll
(Key Employees)

There are several other options to this coverage type.

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 other expense
So just how is coverage triggered?
What is a “Covered Cause of Loss?”

 Fire
 Flood
 Wind/Hail
 Earth Movement
So just how is coverage triggered?

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
A Few Key Terms

Extended Period of Indemnity

Chronology of a Claim

Income

Period of Restoration

Extended Period
of Indemnity
Time of Loss
  Did not purchase the proper
Common Pitfalls Cause of Loss

What we just covered…  Did not Purchase a sufficient

Extended Period of Indemnity
Now we should have a  Did not identify and purchase
look at…
the appropriate limit.

 Did not Pre-Plan the Loss

Scenario which extended the loss
beyond the coverage period
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
•The proper limit is different for each client and it will
change every year. Your profit, your expenses, your
projected revenues, etc.

 One year of exposure can be the benchmark. This includes every

location, every subsidiary.

How do you establish your limits?

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.
How do you establish your limits?
 BI Worksheet?
 BI Analysis/Study?
 Raw Income?
 Lost Rent?
 Estimated as a Percentage of
Projected Income?
How do you establish your limits?
BI Worksheet

 Good Approximate Estimate

 Accepted By Guarantors

 Not necessarily tailored for your

business
 Have limitations if your business
is growing consistently.
How do you establish your limits?

 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

 Property locations

 Any location that you can establish a legitimate connection to your Net
Income.
 BIG & Little……
Here are a few other items you would like to have a look at.
BIG:
 A High Limit for Claim Data Prep Expense and/or Professional Fees
Little:
 A Waiting Period as short as possible.
 Waiting Period is the amount of time you have to be down before coverage is triggered.
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.
 Short Waiting Period
 Business Continuity Planning
National Fire Protection Association
 The National Fire Protection Association is a United States trade association,
albeit with some international members, that creates and maintains private,
copyrighted, standards and codes for usage and adoption by local
governments
 NFPA 1600 – Disaster Management & Business Continuity
http://www.nfpa.org/assets/files/AboutTheCodes/1600/1600-13-PDF.pdf
 Federal Emergency Management Agency (FEMA )
 The Federal Emergency Management Agency is an agency of the United
States Department of Homeland Security. The agency's primary purpose is to
coordinate the response to a disaster that has occurred in the United States.
http://www.fema.gov/pdf/library/bizindst.pdf
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…

Income

Period of Restoration

Extended Period
of Indemnity
Time of Loss
 Case Study
 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.