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Indemnity Periods and Underinsurance

Business Interruption insurance policies are designed to return companies to the trading position they were in before a loss. It is one of the most important covers for any business. After all there seems little point in rebuilding, re-equipping and restocking a factory if the customer base disappears during the period of inactivity, following damage caused by an insured peril.

Written by Paul Brown on 30th October 2019

Indemnity Periods and Underinsurance

Business Interruption insurance policies are designed to return companies to the trading position they were in before a loss. It is one of the most important covers for any business. After all there seems little point in rebuilding, re-equipping and restocking a factory if the customer base disappears during the period of inactivity, following damage caused by an insured peril.

And yet Indemnity Periods are notoriously understated. Leading insurer, Aviva finds that 67% of businesses insure for 12 months, or less when most will need at least 18 to 24 months to recover, if not more . 

The maximum Indemnity Period specifies the length of time for which compensation is payable under a business interruption policy. Selecting an adequate Indemnity Period is crucial because once this period ends, the claim payments will cease, even if the sum insured has not been exhausted. However, an insufficient Indemnity Period is one of the leading causes of underinsurance for this type of cover typically due to underestimating the range of factors that could delay recovery.

To calculate the correct Indemnity Period, businesses must consider a wide range of potential circumstances and factor in worst-case scenarios. These will probably include planning delays, inquiries and investigations, long-lead in times for replacement equipment and the time and cost of winning back lost business.

 

 

 

Planning Delays

In the event of a total loss, such as following a large fire, a business will have to gain approval from the relevant local authority before demolishing and rebuilding affected properties.

Planning permission is not guaranteed and strict conditions may be imposed before work can begin. A typical example will be with the type of materials that can be used which is especially relevant for listed buildings.

Environmental issues are also a relatively recent phenomenon and following a loss , businesses may have to undergo expensive and time-consuming surveys, e.g. ground contamination, noise, flood risk etc.

Other factors that could add to delays include:

· Site clearance and debris removal

· The discovery of hazardous materials during demolition, such as asbestos

· Investigations and inquiries into how the damage occurred (e.g. by the Health and Safety Executive)

Equipment and Machinery Replacement

Claimants in manufacturing will often find it challenging to source suitable alternative premises and replace specialist equipment and machinery.

This is particularly true if equipment needs to be sourced and shipped from overseas and the situation is likely to be further complicated by Brexit.

Winning Back Lost Business

Once a property has been reinstated re-equipped and restocked, it may still take a significant amount of time to commission the equipment, train new staff and then win back lost customers. An Indemnity Period must therefore factor in the maximum time it could take to return to its former business level. In fact many businesses, that have survived a loss, will attest to the fact that they never did recover their pre-loss turnover, which in itself is an argument for purchasing the longest Indemnity Period that can be afforded.

Conclusion

In response to the issues raised the most appropriate Indemnity Period should typically be for at least 24 months.  Of course, no two businesses will face exactly the same set of exposures and in order to ensure adequate coverage policyholders should work with their Insurance Broker to understand both their exposures and the business continuity measures in place to prepare for worst-case scenarios.

Speak to your usual Franklands contact to help establish the correct Indemnity Period for your business.

 

 

 

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