BUSINESS INTERRUPTION SPECIALIST INTEREST GROUP “Business Interruption – What is the problem?” Thursday 4 June 2009 The Willis Building, City of London

BUSINESS INTERRUPTION SPECIALIST INTEREST GROUP – INTRODUCTION – Damian Glynn – Harry Roberts – Loss Adjuster Graham Herridge – Claims Diane Jenkins – Broker – TEA/COFFEE – Jonathan Samuelson – Loss Assessor Martin Singleton – Underwriter Graham Eklund QC – Barrister – NEXT STEPS

BUSINESS INTERRUPTION SPECIALIST INTEREST GROUP “Business Interruption – What is the problem?” Harry Roberts FCA, FCILA, MAE Director – Cunningham Lindsey

Depreciation as a Saving Business Interruption – What is the Problem? ICW – “Additional Expenditure” Uninsured Standing Charges Clause

The Business Interruption Wording Can The Status Quo Survive In An Era Of Treating Customers Fairly? Graham Herridge FCII Zurich Major Loss Team 4 June 2009

An Approach To Handling Major Loss Claims – Some Minimum Requirements Conduct likely to engender goodwill & trust Transparency – clarity of understanding around policy wordings/how the policy will respond Certainty – early admission of policy liability Hopefully collaborative Supportive of the insured business (but not interfering) eg release of interim payments Does the BI Wording fit the bill?

Demonstrating The Problem – 2 Examples Conflict between definitions of Gross Profit Depreciation as a Saving

Could There Be A Win/Win Solution? An enhanced clarity of wording Allows insurers to occupy the “moral high ground” with a tangible demonstration of TCF Allows an insurer to offer wider cover for a premium (Depreciation as a saving) Provides brokers with an opportunity to demonstrate their ability to “add value” There is of course the alternative view…….

The Cynic’s View of Life It suits insurers’ purpose to have doubt/uncertainty given BI will invariably come down to a negotiated settlement.

Diane Jenkins Broker Aon Limited

Gross profit – according to ABI web site “Business interruption insurance will compensate for the short-fall in gross profit together with paying any increased working costs and extra accountants’ fees incurred.”

Specified Working Expenses means; (1) Purchases and related discounts (2) Bad Debts unless otherwise stated in the Schedule The Specified Working Expenses have the meaning usually attached to them in the Insured’s accounts Example wording – specified working expenses

Uninsured Variable Costs Purchases and related discounts Bad debts unless otherwise stated in the Schedule The Uninsured Variable Costs have the meaning usually attached to them in the Insured’s accounts Example wording – uninsured variable costs

Unspecified Suppliers or Storage Sites The premises of any other of the Insured's suppliers manufacturers or processors of components goods or materials but excluding the premises of any supply undertaking from which the Insured obtains electricity gas water or telecommunications services (including the provision of extranets or access to or presence on the internet or access to applications and related services over the internet) Example of suppliers extension

Damage as insured to any suppliers’ or customers’ premises within Great Britain Northern Ireland the Channel Islands or the Isle of Man up to a limit of 10% of the sum insured by this insurance as stated in the Schedule or £1,000,000 whichever is the less Example of suppliers extension

…insured damage at the premises of one of your suppliers operating and based in the European Union, other than water, gas, electricity or telecommunications services Example of suppliers extension

Section 2 of this policy shall be avoided if after the commencement of this insurance (i) the Business be wound up or carried on by a liquidator or receiver or permanently discontinued or (ii) the interest of the Insured ceases other than by death or (iii) any alteration be made either in the business or in the Premises or property therein whereby the risk of loss, destruction or damage is increased unless admitted by the Insurers in writing. Standard Alteration Clause wording

Alteration in Risk or Interest This Policy shall be avoided with effect from the date the event occurs if after the commencement of this Insurance……. (iii) the Business does any of the following (1) making a composition or arrangement with creditors; or (2) have a proposal for a voluntary arrangement for a composition of debts or scheme of arrangement approved in accordance with the Insolvency Act 1986, or (3) have an application made under the Insolvency Act 1986 to the court for the appointment of an administrator; or (4) have a winding-up order made or (except for the purposes of amalgamation or reconstruction) a resolution for voluntary winding up passed or have a provisional liquidator, receiver or receiver and manager of his business or undertaking duly appointed; or (5) have an administrative receiver, as defined in the Insolvency Act 1986, appointed or having possession taken by or on behalf of the holders of any debentures secured by floating charge or of any property comprised in or subject to the floating charge. unless agreed by the Insurers in writing. Modern Alteration clause wording

Jonathan Samuelson FCA Partner, Harris Balcombe LLP

1.Prior agreement for contentious ICOW expenditure

2.Customer Compensation Demands

3.Payments on Account

CILA – BI SIG Business Interruption – What is the problem? Martin R Singleton FCII Technical Manager (Property) Commercial Property Underwriting Strategy Dept Aviva Insurance UK Limited

What is the problem with….…… Declaration Linked BI Covers? Severe underinsurance with no penalties. Insurers inability to collect declarations. Has become standard in the market - not for select few which it was originally aimed at. Much misunderstanding of the additional premium conditions.

What is the problem with…….. Adding an average clause? We need to start with adding an Annual Turnover definition as per standard SI basis BI covers: “(b)Annual Turnover The Turnover during the 12 months immediately before the date of the Damage.” Then we propose to include an average clause operating where the Estimated Amount is less than 50% of the Annual Turnover: “If at the time of the Damage the Sum Insured on Estimated Gross Profit is less than 50% of the sum produced by applying the Rate of Gross Profit to the Annual Turnover (proportionately increased where the Maximum Indemnity Period exceeds twelve months), You will be Your own insurer for the difference and bear a rateable share of the loss and the maximum amount We will pay is the Estimated Gross Profit stated in the Schedule.”

What is the problem with………. The additional premium provisions? We amend the additional premium provisions to a maximum of 33.33%: (b)exceeds the Estimated Gross Profit, You will pay a pro rata additional premium of up to 33⅓% of the premium paid.

What is the problem with………… The meaning of Vicinity? Lets end the debate and put a distance in: Prevention of Access. Damage to Property within a radius of one mile of the boundary of The Premises which prevents or restricts access to or use of The Premises.

Gross Profit Declarations Sprung v Royal Insurance Graham Eklund QC FOUR NEW SQUARE LINCOLN’S INN

A contract in speculation? Speculation in assessing gross profit Cf property cover – SI based on valuations 100% or % foresight Clarity as to the declaration required for indemnity periods longer than 12 months

Updating declaration – when? Whose responsibility to ensure it happens? No updating before a loss – why should insurer benefit? Contra proferentem - if the insurer has not made clear what is required Complexity of the content of the declaration

Policy term adjusting rate of GP and Standard Turnover for Trends etc Why not take full account of all trends/variations etc in assessing losses recoverable as an indemnity, without limit of indemnity imposed by speculative assessment of future profit?

Update assessment of GP after a loss, for all purposes? Adjustment of premium – if AoP would follow a fresh declaration, why not permit new adjustment of GP SI after loss – particularly if declaration could not reasonably have been made Why limit to %?

Sprung v Royal Insurance An insurer can not be liable for the consequential loss suffered by an insured if the insurer has delayed admitting liability or making a payment. Legal basis – there is no cause of action for the late payment of damages A “win/win” for insurers

Facts – malicious damage to machinery on 5/6 April By 31 October 1986, no admission of liability and a very modest payment only. Little interest in investigation Proceedings settled by insurer paying £30,000 plus interest and costs

Insured lost the opportunity of selling his business. Claimed £200,000, but valued by the Court at £75,000 Insured blameless except that he had not repaired his machinery – CA – that was his decision, even if he could not afford to do so Impecuniosity caused his loss!

Sprung’s business did not survive – unlikely the CA’s decision will survive Clear moral and commercial distaste of CA that insurers could behave as they did without risk – but not fully argued in CA CA - implied obligation to deal with matter within reasonable period of time But impecuniosity effectively a bar – insurer’s conduct not the cause

Impecuniosity argument is false, because there could never be a claim If repairs are undertaken – no loss If repairs not undertaken – insured’s fault HOL has recognised impecuniosity may not be a bar to a claim. Lagden v O’Connor [2004] 1 AC 1067

Breach of duty of utmost good faith Applies to insurers in post contract circumstances – including after a loss. See The Star Sea [2001] 1 Lloyd’s Rep. 1 Causes of action probably available which not relied on in Sprung and not argued fully Law Commission considering No longer assume “Sprung” will survive – it will probably go

“Business Interruption – What is the problem?” Next steps ………………….