BUSINESS INTERRUPTION

Business Interruption
Why purchase
a Business Interruption Policy?
?
To protect _______
in the event of an
Insured Loss

Reference : Charles Taylor

What Happens After The Fire

Engine Leaves?
Production stops for how long? 1 week? 1 month? 1 year?
Cost of business operation continues : salary, rental, installments, bank charges/interest,
insurance, etc.
Stock in hand depleted
Cannot meet orders
Cash flow reduced
Credit restricted borrowing to survive?
Increase in cost of working to resume and maintain production
Skilled workers join competitors
Net profit rapidly disappears
Lack of financial means to rehabilitate the business

Reference : Charles Taylor

What does a BI Policy Seek to Do?

To protect the Net Profit

To pay expenses to maintain the

business, e.g. Fixed costs, such as to
meet cost of employees who remain, but
not fully productive.
To fund the increase in the cost of
maintaining the production or the extra cost
of maintaining the production elsewhere
(subject to economic limit).

Reference : Charles Taylor

Losses Not Covered by BI Policy

Deterioration of
undamaged stock

Failure to recover
debts

Fine, damages and/or

penalties arising from
breach of contract

Third party claims

Loss of goodwill

Under insurance of
the material damage
policy

By extraordinary
events taking place
during the
interruption

By restrictions
imposed by the
authorities on the
reconstruction or
operation of the
business

Cost of preparing
claims

Due to the insureds

lack of sufficient
capital for timely
restoration or
replacement of
property destroyed,
damaged or lost

Reference : Charles Taylor

Conditions for a Valid Claim

The Business Interruption loss must be the result of loss of or damage
by one of the insured perils;

The loss of or damage must occur at the premises used by the Insured
for the purpose of the business the address of which is stated in the
policy schedule;

The loss of or damage must cause interruption of or interference with

the business carried on by the insured at the premises stated in the
policy schedule and the indemnity is confined to loss arising from such
interruption or interference at those premises;

There must be in existence a Material Damage Policy covering the

interest of the insured in the damage sustained Material Damage
Proviso.

Reference : Charles Taylor

What is TURNOVER?
The money paid or payable to the Insured for goods
sold and delivered and for services rendered in
course of the Business at the Premises.
Also known as :
Sales
Income
Receipts takings
Revenues
Fees
Royalties
etc.
Reference : Charles Taylor

What is TURNOVER?
There are 3 components in Turnover :
1. Fixed Cost (Standing Charges)
2. Variable Cost (Working Expenses)
Net Profit; 10%
3. Net Profit

Fixed Cost; 30%

Variable Cost; 60%

Reference : Charles Taylor

What is TURNOVER?

Reference : Charles Taylor

Business Charges/Expenses

Reference : Charles Taylor

Business Charges/Expenses

Reference : Charles Taylor

The Period of Insurance

Reference : Charles Taylor

Maximum Indemnity Period

Factors for consideration :
Availability of alternative premises;
The estimated period of repairs/reconstruction;
The availability of raw materials;
The lead time in the replacement of machinery;
The availability of manufacturing the product by
sub-contractors;
The estimated time required to recover
customers;
Whether business is seasonal.
Reference : Charles Taylor

The Indemnity Period

Why it has to be adequate?
If the indemnity period chosen is insufficient, the
Insured have to bear.
All loss after the Maximum Indemnity Period.
All ICW which achieved benefit after the
maximum indemnity period.

Reference : Charles Taylor

Maximum Indemnity Period

The maximum Indemnity Period should be sufficient to
allow for :
Clearance of site
Preparation of plans and drawings
Obtaining local authority permits and obtaining tenders
Erection/construction
Obtaining raw materials and installing machinery and
equipment (check lead time for special machines)
Recruiting and training new staff, if necessary
Regaining lost customers after full production is restored

Reference : Charles Taylor

Material Damage Proviso

Provided that at the time of the happening of the damage there shall
be in force an insurance covering the interest of the insured in the
property at the premises against such damage and that payment shall
have been made or liability admitted therefor under such insurance
To have a valid claim, the Insured must :
1. Have a material damage policy insuring the loss of property, and
2. They must be a liability under that policy.
Objectives :
3. The Insured is in the financial position to resume/rehabilitate the
business.
4. No necessity to insert warranties & no necessity to investigate the
loss.

Reference : Charles Taylor

BI Policy Cover
Loss of Gross Profit due to :
Clause (a) Reduction in Turnover, and
Clause (b) Increase in Cost of Working
Reduction in Turnover :
The sum produced by applying the Rate of Gross Profit to the amount
by which the Turnover during the Indemnity Period shall in
consequence of the damage fall short of the Standard Turnover.
(Rate of Gross Profit x Reduction in Turnover)
Increase in Cost of Working :
Additional expenditure necessarily and reasonably incurred for the
sole purpose of avoiding or diminishing the reduction in Turnover.

Reference : Charles Taylor

Looking at Accounts
Trading Accounts
Related to direct cost of making and/or selling stocks, e.g. The cost of
raw materials, wages, packing, carriage, utilities, etc.
Profit and Loss Account
Opened by bringing down the Gross Profit from Trading Account.
Left list of overheads that are not direct cost.
Right extraneous items of receipts, e.g. Interest receivable, rent
receivable, etc.
The balance between the two sides will be shown as Net Profit.

Reference : Charles Taylor

Trading Accounts
Opening Stock
40,000
10,000
Work in Progress
Purchases
500,000
Packing
46,000
Carriage
30,000
Salary
420,000
Electricity
10,000
Fuel
30,000
Gross Profit
459,000
1,545,000

Sales (Turnover)
Closing Stock
Work in Progress

1,500,000
36,000
9,000

1,545,000

Reference : Charles Taylor

Definition Gross Profit

Gross Profit
The amount by which
The sum of the amount of the Turnover, Closing Stock and Work in
Progress shall exceed.
The sum of the Opening Stock and Work in Progress and the
amount of the Specified Working Expenses.

Gross Profit =
(Turnover + Closing Stock + Work in
Progress)

(Opening Stock + Work in Progress +

Specified Working Expenses)
Reference : Charles Taylor

Rate of Gross Profit

Definition
The rate of Gross Profit earned on the Turnover during the financial
year immediately before the date of damage.

Rate of Gross Profit =

X
Gross Profit
100
Turnover

Reference : Charles Taylor

Increase in Cost of Working

Key words as per policy
Additional expenditure
Necessarily and reasonably
incurred
For the sole purpose of :
Avoiding or diminishing the
reduction in turnover
Which but for that expenditure
would have taken place
During the indemnity period in
consequence of the damage
But not exceeding the sum
produced by applying in the Rate
of Gross Profit to the amount of the
reduction thereby avoided
Reference : Charles Taylor

Adequacy of Insurance Cover

Reference : Charles Taylor

Information to Adjust the Loss

Reference : Charles Taylor

Information to Adjust the Loss

Reference : Charles Taylor

Claim Documents

Reference : Charles Taylor