B U S IN E S S IN T E R R U P T IO N & C B I CONCEPTS
Business Interruption (BI) claims can be complicated and are often misunderstood. In general, the purpose of Business Interruption coverage is to put the business in the same financial position it would have been in “but for� the event or loss. Simply put, this coverage will help to replace the cash flow that would have been generated in order to cover the operating expenses of the business and paying out the net profit, if the business is profitable. Contingent Business Interruption (CBI) losses occur when a key customer or supplier of a business has experienced a loss. The trigger for coverage is not physical damage of the Insured, but rather a covered cause of loss at the supplier/customer. It is common in these losses for extra expenses to be a large component of the claim as alternative suppliers may be utilized, driving an increase in costs. It is a common misconception that Business Interruption insurance covers a business’ lost revenues. This is rarely the case. The expenses of the business need to also be considered. Variable (non-continuing) expenses such as costs of goods sold and utilities are not going to be reimbursed by insurance due to the fact that these expenses are not incurred during a loss. Fixed (continuing) expenses such as rent and insurance will be reimbursed by insurance.
Business Interruption Policy Review - Source RIMS Business Interruption Survey 2017
It is important for risk managers and other key personnel to periodically review business interruption coverage to make sure it is meeting the needs of the business. The following questions can help guide this process: Has your CFO, COO and other key executives or managers with intimate knowledge of your operations and finances reviewed the BI coverage in place? Has this group explored likely loss scenarios, how the company and its operations would be affected, and potential mitigation efforts? Would your policy pay for the cost of these mitigation efforts? Does this group identify any scenarios that would not be covered? If not, plan to: ! Develop likely loss scenarios for, flood, fire, explosion, subsidence, wind, etc. ! Engage each individual to determine how these events would likely affect the business and operations. ! Analyze your profit and loss statement to determine sales that would be lost and expenses that would discontinue; i.e. estimate your business income loss under different scenarios.
In addition, consider the following questions: • Is the period of indemnity sufficiently long to allow your business to rebuild and restore operations? • How long will it take to replace key sites in the event of a total loss? • Would any of your buildings or sites require extensive code upgrades or have an extended permit or design phases that would extend the time to restore operations? • Is the increased cost of building to current codes covered? • Would repairs and replacement take place in stages, allowing partial operations to continue but extending the time needed to restore operations?
Are the limits of insurance sufficient to indemnify you against a complete loss of normal revenue during the period of indemnity? • When was the last time the time element limits were revisited? Has your business grown or operations substantially changed since then? • Does the policy contain sub-limits for off-site interruption and/or contingent business interruption? If so, are they sufficient? • Does the policy contain penalties for under insurance or co-insurance? If so, do you have sufficient insurance to avoid these penalties? • Is there a worst time of year for a loss to occur? If so, when is it and what would happen if you had a loss at or before that time? • Do you have adequate payroll coverage in your time element policy? Will you continue to pay employees to retain them after a loss? What if the period of shutdown is greater than six or 12 months?
Contingent Business Interruption (CBI) Considerations: • Does your policy cover your supply chain? • Does your company use services or materials that would be difficult to source elsewhere? • Are there bottlenecks in your production? Is there a key component that if its supply were interrupted the effects would extend to other lines and cause delays or stoppages of production? • If an event interrupts key supplier(s), is there coverage for losses incurred as a result of suppliers shutting down? Is this type of loss subject to a separate sublimit? • If the supply chain is affected by the same event, can you access alternative suppliers? • Are plans in place to mitigate the effect of lost suppliers? • Could currency fluctuations affect purchase prices of inventory or sales value of products? • What type of extra expense coverage is in place? If extra expenses must reduce the loss to be recovered, is it likely that you would incur extra expenses to maintain normal operations and customer relations that may not reduce the loss?
BI & CBI LOSSES AT A GLANCE
Overview: In order to determine a Business Interruption (BI) loss has occurred after an event, two areas will need to be reviewed: Revenues and Expenses. Revenues: Almost all BI losses have a negative impact on the revenues (sales) of a business. In order to identify if sales have been negatively impacted, there are a variety of methods that can be used: 1. Actual vs. Budget Comparison – Actual sales during the potential Period of Interruption can be compared to the organization’s budgeted sales during the same period. If there is a material difference (e.g.10% below budget), this may be due to the event in question. 2. Trend Analysis – If budgets are not available, or if they are unreliable, a quick comparison can be made to the prior year sales in the same period that has been impacted. If the business has been experiencing any growth or declines, these should be factored in. Again, if there is a material difference (e.g. 10% below last year), this may be due to the event in question.
Expenses: Sometimes companies are able to maintain and preserve their revenues during a period of interruption, but this can be as a result of spending more on items such as overtime payroll, expediting shipping costs, etc. If there are known expenses that have been incurred as a result of the event in question, these could potentially be submitted as part of a BI Loss. This is commonly referred to as Increased Costs of Working (ICOW). For manufacturers, there may be coverage for production losses even if no sales loss has occurred.
Sample BI / CBI Analysis
The following page shows an example of a simple BI calculation for a manufacturing facility that illustrates these concepts.
Document Requests
While each Business Interruption loss is different and unique, there are key pieces of information and certain documents that are almost always required to evaluate the financial impact of an event on a business. The following list includes some of these: Business Interruption (Due to Property Damage) 1. Timeline and description of the property damage and how each location was impacted including photos or video (if possible). Please include dates, times and specific details. 2. Monthly Profit & Loss statements for 24 months prior to the loss. 3. Budgeted/Forecasted Revenues for 24 months prior to the loss as well as the next 12 months. 4. Daily sales/production records. 5. Payroll Records for 3-6 months prior to the loss. 6. Federal, State, Sales & Use Tax Returns. 7. Copies of specific cancelled sales, bookings, events, contracts, etc. 8. Schedule of maintenance/planned shutdowns for the current year.
In addition, the following events/perils may have a financial impact on the business and may result in a recoverable BI loss: • Power outage • Civil authority – provide a copy of the official order of evacuation and when the order is formally lifted. • Ingress/Egress – include distance from the location and when access was restored • Looting In general, the more detail and information available, the easier it will be to quantify and present a business interruption claim.
Business Interruption Statistics and Facts
Source RIMS Business Interruption Survey 2017
17% of risk managers are “extremely confident” that their BI values and limits set are adequate.
35% of risk managers have 12 months as their length of the maximum indemnity period.
41% of RIMS member respondents who have had a BI claim in the past five years say it took 6 to 12 months to settle the claim.
58% of RIMS member respondents who have been through a claim say that “difficulty quantifying loss” was the biggest challenge faced.
68% of risk managers feel that their maximum indemnity period is adequate.
Common comments from individuals who were not confident with their BI values and limits ! “Lack of confidence due to interdependencies not being fully considered.” ! “I think dollar amounts are correct for a 12-month period but I think the time to rebuild after a major loss could be closer to two years.” ! “It’s very hard to quantify and the business changes so frequently that it’s hard to be confident that the values are accurate for long periods of time.”
Common reasons for having a BI claim challenged, reduced, delayed and/or declined. • • • • • • •
Basis clauses/conditions precedent Information requested by insurers was not available Insufficient limits or sub-limits purchased Late notification Under-declaration of insurance values Warranty breach Non-disclosure of material risk information
Please note that the specific coverage in place may have different requirements or areas of coverage that are not addressed above. Each loss is truly unique and while there is no one-size fits all approach, the steps listed above may help to identify a potential BI loss.
If you are unsure about the answers to any of the questions covered in this document or you do not believe that your policy will cover any of these items, talk to your broker or make alternative plans so your organization is not surprised by under insurance or events not covered. TO LEARN MORE CONTACT US:
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