Business Interruption Insurance is Going to Save Your Company Presented by: Christopher Chiero, ARM, CFPS Arthur J Gallagher Risk Management Services, Inc.

Today we will look at… The Importance of Business Interruption Insurance. A policy and talk about how coverage applies. How to accurately determine your limit. What to watch for… Common Pitfalls Mitigating the exposure. Negotiating terms. Take you through a loss scenario (case study).

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.” Why is that?

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 Key Employees… or worse Loss of Key Employees

The Recommended Approach Protecting Net Income The Recommended Approach Purchase Business Interruption Insurance Have a plan for what to do immediately after a loss. Consider who you want on your claim team.

Getting Started with the Policy

Getting Started

What is being covered? The Basics Net Income (Net Profit or Net Loss) Necessary Continuing Expenses Common Optional BI Coverages Extra Expense Extended Period of Indemnity Supply Chain Contingent BI (Dependent Property) Ordinary Payroll (Key Employees) There are several other options to this coverage type. Talk to your broker or agent for details.

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 expense that you cannot get out of despite the loss incident.

Not Examples of “Necessary Continuing Expenses” Utilities Used in Production Raw Materials Advertising Repairs & Maintenance Supplies Housekeeping/Janitorial

So just how is coverage triggered? You must start with a “Covered Cause of Loss.” At an insured location. For an incident that occurred during the policy period.

So just how is coverage triggered? What is a “Covered Cause of Loss?” Fire Flood Wind/Hail Earth Movement Civil Authority Ingress-Egress Terrorism/TRIPRA Vandalism Sprinkler Leakage And Others…

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 Time of Loss Period of Restoration Extended Period of Indemnity Income

Common Pitfalls What we just covered… Now we should have a look at… Did not purchase the proper Cause of Loss Did not Purchase a sufficient Extended Period of Indemnity Did not identify and purchase the appropriate limit. Did not Pre-Plan the Loss Scenario which extended the loss beyond the coverage period What we just covered… Now we should have a look at…

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 is the benchmark. This includes every location, every subsidiary. That is how it is underwritten no matter what you put down as your limit.

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? 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 Good Ballpark Estimate Accepted By Underwriters Not necessarily tailored for your business Has 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 Magnet Property locations Any location that you can establish a legitimate connection to your Net Income.

Here are a few other items you would like to have a look at. 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 (Note: This does NOT include attorney’s fees) This is your defense against, “Well, their guy says…” Little: A Waiting Period as short as possible. Waiting Period is the amount of time you have to be down before coverage is triggered. Often times there is a straight up deductible as well.

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. Big Claim Data Prep Expense Limit Short Waiting Period

Risk Management A word about business continuity planning How to ensure that your coverage is not too short in duration or limit.

Business Continuity Planning NFPA 1600 – Disaster Management & Business Continuity FEMA - Emergency Management Guide for Business and Industry http://www.fema.gov/pdf/library/bizindst.pdf

Pre-Planning How to get the most bang for the buck when negotiating your policy… Show that you have put some thought into the limit. This gives an underwriter confidence that they are getting adequate premium for the exposure. Demonstrate that you have some game plan for when a loss occurs.

What to do if you have a claim? Who is on your team and what do they bring to the table? Internally Those who bought the policy and established the coverage limit. Risk Manager Finance Management Operations Management Externally The Insurance Broker or Agent A Forensic Accountant Coverage Attorney/Counsel Professional Expertise such as Engineer or Contractor

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… Time of Loss Period of Restoration Extended Period of Indemnity Income

Case Study The Period of Restoration can be partially offset by initial repairs. In fact, it is right in your policy. You have a responsibility to do whatever is reasonably possible to minimize the severity (dollar amount) of the claim. 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.

Questions? You can always call or e-mail with a question… Christopher_Chiero@AJG.com 630-294-5460

About the Speaker… Christopher Chiero, CFPS, ARM 15 Years Loss Control 5 Years Underwriting Member NFPA SFPE Featured Speaker World Safety Conference REBEX (Risk & Employee Benefits Expo) Milwaukee RIMS Chapter Luncheon Series Windy City Summit