MARSH RISK

MANAGEMENT RESEARCH

BUSINESS INTERRUPTION INSURANCE

EFFICACY: FIVE KEY ISSUES
FEBRUARY 2015
CONTENTS

1 INTRODUCTION
2 GETTING THE VALUES RIGHT
4 SETTING THE INDEMNITY PERIOD
6 WIDE AREA DAMAGE
8 SUPPLY CHAIN
10 CLAIMS SETTLEMENT
13 CONCLUSION
14 DEFINITIONS

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INTRODUCTION
Business interruption (BI) is not just a The five issues selected for this report are
consequence of property damage; it can be as follows:
anything that interrupts a business. Terrorism,
ȫȫ Getting the values right.
supply chain failure, natural catastrophes,
and cyber-attacks all have one thing in ȫȫ Setting the indemnity period.
common — the threat of BI. This emphasizes ȫȫ Ensuring BI claims are paid in wide area
the importance of organizations being prepared damage scenarios (natural catastrophe risk).
and ensuring funds are available to pay for loss
ȫȫ The limitations of supply chain cover in
mitigation and continuity plans. As businesses
PD/BI policies.
become more exposed to such major events,
risk management and risk transfer must work ȫȫ Optimizing claims settlement.
together to make companies more resilient.
The Business Interruption Wording Review Report,
BI doesn’t necessarily fit into the existing
published in 2012 by the Chartered Institute of
insurance categories; therefore we need to
Loss Adjusters (CILA), highlights many other
build an enhanced level of comfort and
concerns that are worthy of consideration;
security with regard to BI and risk.
however, the five chosen in this publication
Nevertheless, a property damage event remains reflect the primary concerns raised by colleagues,
one of the major exposures a company can face, clients, loss adjusters, lawyers, and insurers, and
and property damage/business interruption represent the core areas where we believe that
(PD/BI) is one of the main insurances purchased. improvement is required. Some solutions have
It is therefore a great place to start on our been proposed by both insurers and brokers;
journey towards improved BI coverage. however, the majority of policies placed today
continue to reflect the issues raised, and, for this
This report builds upon client survey data,
reason if no other, are worthy of our attention.
case law, industry statistics, and the views of
global business leaders to consider five key
issues in BI, the limitations of existing cover,
and the mechanisms for its improvement.
 GETTING THE VALUES RIGHT
As with all types of insurance, ensuring the FIGURE DECLARATIONS % POLICIES WITH VALUES
DECLARED TOO LOW

values declared are accurate and provided in 1 Source: Chartered Institute

of Loss Adjusters
IF TOO LOW, BY WHAT %

accordance with the policy definition is critical 70%

in the placement of PD/BI cover. The penalties

63%
60%
for getting the values wrong can be significant,
with the application of an averaging provision 50% 52%
50%
reducing recovery proportionally, and, even 45%
with the protection of a declaration-linked policy 40%
37% 40%

(133.3% values uplift), there is the potential for

30%
insurers voiding cover entirely.
Unlike many other types of insurance, gross profit
20%

(or gross earnings) values are not typically collected by

businesses for any other purpose. Moreover, gross profit 10%

utilized in corporate accounts does not equate to the

insurance gross profit calculation required by the policy. 0%
There is some confusion around how that value should
CILA CONFERENCE CILA CONFERENCE CILA SURVEY
be calculated, which is further compounded by the need 2008 2009 2012
to reflect future growth and establish a figure to match
to the indemnity period. Historically, this has resulted
in significant numbers of incorrect declarations being
BUSINESS COMMENTARY
made. FIGURE 1, taken from the Chartered Institute of
Mark Dawson, risk manager at global travel company
Loss Adjusters (CILA), shows that, in 2012, 40% of all
Thomas Cook, explains how the company is improving
declarations were too low – by as much as 45%.
data collection:
Interestingly, the CILA statistics do not suggest
“We currently collect property values from all sites/
any significant improvement in the accuracy of
business units using a basic questionnaire and manually
valuations between 2008 and 2012 (the most
collate the data. We are looking to improve this process
recent statistics available). The 2014 Eurokey case
potentially through the use of an electronic value collection
(see opposite) illustrates the potential impact of
tool. BI values had previously been gathered at a business
inaccurate declarations in the event of a claim.
unit level, but now they are established centrally, based on
an agreed insurance gross profit definition.”

According to Mark, the following changes have been

made to the way program limits are set:

“The program limits were historically set based upon

what had previously existed. This changed recently to
reflect the correct values – we are now able to verify the
adequacy of the limit. Our BI declared values are now
accurately calculated and reflect the new insurance gross
profit definition in our policy. The program limits are
also closely aligned with our maximum foreseeable loss
(MFL) and normal loss expectancy (NLE) exposures, with
sub-limits following those calculations. We started again
from scratch, calculating several key loss scenarios.”

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SPOTLIGHT
Eurokey’s limited BI recovery underscores the critical importance of
GETTING THE VALUES WRONG communication in gathering information to supply to insurers. Although
the annual information-gathering process can be cumbersome at
The case of Eurokey Recycling Ltd v Giles Insurance Brokers Ltd, times, and there can be, for example, temptation to rely on last year’s
2014, EWHC 2989 (Comm) highlights the potential impact of figures, it is potentially perilous to do so. Collecting key financial figures,
inaccurate declarations. including turnover (revenues) – both historical and projected – is an
essential first step in a process that must be undertaken with care. The
Eurokey Recycling, a company that provides recycling and waste
information gathered not only serves to inform insurers about the risk, it
management services, suffered a fire in May 2010. Following the fire,
should inform your BI purchasing decisions, including what sum to insure
the insurer soon focused on significant discrepancies between the sums
and what indemnity period to seek. Therefore, careful teamwork and
Eurokey had declared for the values of its stock, plant and machinery, and
communications, both internally and with a broker, are needed.
BI at the policy’s inception and the actual figures as of the time of the loss
just several weeks later. Faced with the threat that the insurer would seek The potential impact on a business of declaring inaccurate or
to avoid the policy and the likely application of an averaging (coinsurance) inappropriately calculated values can be significant; however, for a
provision because the company was underinsured, Eurokey accepted a large and complex organization, collecting all the required data and
total recovery of US$820,000 (£550,000). In Eurokey’s later dispute with submitting accurate values is unlikely to be straightforward.
its broker, the company said it believed it could have achieved an
insurance recovery of US$4.1 million (£2.7 million) had values been
declared differently, and the coverage been based on those values.

Mark identifies the reasons that drove the change in RECOMMENDATIONS

approach, and outlines some further changes he would
like to implement in the future, as follows: The statistics provided suggest that inaccurate
value declarations are a significant issue, both for
“We suspected our BI declared values were too low, and business purchasers (who are exposed to potential
we did not have a clear view of our worst lost scenario. Our underinsurance penalties) and insurers (who do not
preference is for a proactive approach (rather than reactive receive a full understanding and premium for the risk
post-loss). Our broker negotiated for the consultancy costs of that they are insuring).
a BI review to be funded by the market. The comprehensive
and detailed report widened our understanding of our own By taking the time, pre-renewal, to accurately
exposures and convinced insurers to offer wider cover at calculate annual gross profit (or gross earnings) values,
a lower rate. The detailed modeling considered a number companies can, with the help of their broker, materially
of potential scenarios, and the recommendations provided reduce the likelihood of post-loss disputes and help
informed both the purchase of program limits and the ensure full recovery in the event of a claim.
inclusion of key policy extensions. The insurer- and broker-
supported BI review allowed us to accurately calculate A detailed BI review is the most comprehensive
the exposures, tailor our cover, and utilize the premium mechanism for setting accurate policy limits that
savings to extend cover in other areas. It is much easier to reflect true exposure, with policy extensions established
negotiate cover and premiums on this basis – it put us back to reflect specific business risks. This approach is
in the driver’s seat. Insurers were involved in the process, considered essential for large, international companies,
and gained a much greater understanding of the risk and will benefit all businesses seeking to accurately
and exposures faced, so it is a great example of tripartite present their risks.
collaboration for a successful result.
It is, however, perhaps time to consider an approach
We are a continuingly evolving business and I would based on existing accounting data or annually published
anticipate undertaking a BI review at least once every three accounts. An underwriting mechanism based on annual
years to ensure that our cover is closely aligned with the wage roll and accounting gross profit could provide a
changing risks we face. It is essential to ensure declared similar declaration mechanism for companies that is
values are correct to avoid underinsurance issues in claims.” less liable to error, while providing underwriters with
an adequate indication of exposure.
 SETTING THE INDEMNITY PERIOD
The maximum indemnity period (MIP) is the ȫȫWhen the company is highly dependent on a few
period for which insurers will indemnify the customers – loss of a single customer can have a
significant impact, and gaining replacement
claimant for financial loss arising from an customers can be a lengthy process.
insured event. In contrast to US gross earnings
While the length of the MIP can vary for a number
(GE) policies, gross profit policies require of reasons (not least the insurance buyer’s industry),
the declaration of a fixed MIP at placement. our survey of Marsh clients in regions that use the
gross profit form (FIGURE 2) suggests that a significant
This period should be adequate for the business percentage of companies continue to rely on periods of
to reconstruct and recover trading and profit 12 months or less.
levels to those that would have existed had the Furthermore, when UK companies undertake more
loss not occurred. detailed reviews, the majority (55%) subsequently
elect to change the period, with most increasing the
The estimate of recovery time is essential for both period insured.
gross profit and GE policies. GE policies offer actual
reinstatement time plus a set period of recovery. BUSINESS COMMENTARY
For businesses, setting an appropriate MIP can be Following a recent business interruption review in the Asia
significant, given the number of factors that can Pacific region, we asked for some feedback on the results.
influence both physical reconstruction and recovery (The respondent has requested to remain anonymous.)
time. Factors for consideration in setting the time to
return to normal profit can include: How have indemnity periods been set?

ȫȫWhere there are long delivery times for materials or “Historically, we did not purchase BI cover, other
specialist machinery that needs to be replaced. than additional increase cost of working (AICW).
The indemnity period was 12 months across the asset
ȫȫWhen the business is carried out in property – for
base, increasing to 18 months upon the appointment
which the insured is either a tenant or owner – that
of a new broker. The indemnity period was based purely
would take a long time to rebuild as a result of its scale,
on the AICW exposure with respect to redirection
location, or other factors (such as historic listing or
between the company’s two key handling facilities.
planning restrictions, for example).

FIGURE LENGTH OF

2
MAXIMUM
UP TO
INDEMNITY 12 MONTHS
PERIODS (MIPS)
OF MARSH
CLIENTS BY
REGION 12 - 18 MONTHS
Source: Marsh

UK
18 - 24 MONTHS
INDIA

MENA

SOUTH AFRICA MORE THAN

24 MONTHS

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

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SPOTLIGHT
About six months after the fire, with rebuilding still in the planning
IT’S NOT JUST THE NUMBER stages, the insured installed a portable unit in the car parking area of the
OF MONTHS development and resumed limited operations. That temporary location,
though, has generated only 35% of its expected turnover and, while the
A UK retail organization has been traveling a long road to continuing its insurance cover responded to the approximately 65% revenue shortfall,
full operations, and even its relatively lengthy BI indemnity period has run the policy’s 18-month indemnity period has now expired.
out. It operates a retail convenience store – a small four-unit commercial
development owned by the borough council (local government), which is This claim is evidence that even a comparatively lengthy indemnity period
situated in a densely populated residential area. of 18 months may not be sufficient under certain circumstances. Due
consideration should be given to the impact the surrounding area may
In March 2013, a fire originated at an adjoining store and engulfed the have on rebuilding, and, for commercial lease tenants, the characteristics
development, completely destroying the insured’s store. The rebuilding of the landlord that may affect the rebuilding timeline.
process suffered several delays, and it was not until late 2013 that the
borough council awarded the construction contract to start the rebuilding Businesses are increasingly recognizing the importance of setting
process. Although the building was a basic single-story structure of carefully considered indemnity periods, rather than accepting
relatively modern construction, and might have been rebuilt, under standard 12-month limits.
ordinary circumstances, in a period of nine to 12 months, rebuilding is not
expected to be completed until early 2015.

The basis for insuring BI did not match the ever-changing

nature of our business. Accordingly, a BI review was
RECOMMENDATIONS
conducted by our broker, resulting in the purchase of gross
The importance of taking the time to assess and set
revenue cover, as well as an increase in the level of AICW
appropriate indemnity periods is being recognized by
protection. With respect to the indemnity period, this was
more businesses, and working with brokers and insurers
increased to 24 months, based on the worst-case scenario
on business-specific scenarios is an effective mechanism
of a major loss at a key distribution facility.”
in crafting the right cover. In establishing realistic
scenarios it is also important to consider, not only
Is the indemnity period the same for all locations?
external factors, but also existing business continuity
planning. It is vital to understand that the indemnity
“Yes. 24 months applies across the whole portfolio. This is
period is for loss of gross profit and/or increased costs.
reflective of “worst-case scenario” rather than an analysis
Profit may be protected through mitigating actions, but
based on specific locations. This is also reflective of what is
those actions may attract increased costs, for which a
available in the current market at minimal cost.”
suitable MIP is required.
Has this changed in recent years? If so, why and how?
An alternative tactic may, however, be to adopt the US
gross earnings approach, whereby the MIP is not a
“A recent review of the risk exposure, as it more
set time period, but rather the time taken to reinstate
appropriately relates to the different aspects of our
(however long that might be) plus a fixed recovery
business, has altered our perception of the impact of a
period. This can be valuable for complex businesses with
major loss, and the time agreeing appropriate works
specialist equipment, although care should be taken to
with all parties. We continue to work closely with our
ensure that the post-reinstatement recovery period is
broker to ensure that the indemnity periods selected are
maximized (90 days is often the standard limit provided).
appropriate. With respect to key distribution facilities,
12 months is not sufficient to clear a site, go through
More challenging may be to discard the MIP completely.
planning permissions, rebuild, and recover production/
Businesses are obligated to mitigate their losses, and,
revenue to pre-loss levels.”
with a good knowledge of exposures, underwriters should
be able to price risk without an arbitrary time limit.
 WIDE AREA DAMAGE
The devastation caused by natural catastrophe No one is safe from natural catastrophe events, but the
events remains the worst loss scenario facing situation is intensified due to the uncertainty around
cover provided by traditional policies. One issue is
many businesses. This is due to the increased in relation to sufficiency of limits — frequently, it is
exposure to natural hazards in today’s global insurers that dictate the limits available (rather than
the insured determining the limits that are required)
marketplace, both directly and indirectly — the other, and more fundamental, issue is the doubt
(through global supply chains or an over the effectiveness of coverage.
international customer base). Munich Re produces continuous analysis of insured
losses as a percentage of total losses in relation to
The AGCS Global Claims Review 2014 reviews the
natural catastrophe events. Some are really quite
primary causes of global property claims worth more
shocking, as can be seen below.
than €1 million (US$1.14 million) for the five years
between 2009 and 2013. As can be seen in FIGURE 3,
wide area damage events (such as exceptional rain, INSURED PROPORTION OF RECENT SELECTED NATURAL
earthquakes, and flood) represented 42% of all CATASTROPHE LOSSES
claims by value. Source: Munich Re

INSURED LOSS TOTAL LOSS % INSURED

FIGURE TOP CAUSES OF GLOBAL PROPERTY LOSSES

3
2009-2013 (BY VALUE)
Source: AGCS KATRINA (2005) US$62.2 BILLION US$125 BILLION 49.8%

JAPAN (2011) US$40 BILLION US$210 BILLION 19.0%

THAILAND (2011) US$16 BILLION US$43 BILLION 37.2%

16%
SANDY (2012) US$30 BILLION US$65 BILLION 46.2%
28%

HAIYAN (2013) US$0.7 BILLION US$10.5 BILLION 6.7%

11%
EUROPEAN
US$3 BILLION US$15.2 BILLION 19.7%
FLOODS (2013)

11% INDIA (2014) US$0.5 BILLION US$7 BILLION 7.1%

20%

14% On average, 64% of total losses in the US are insured,

which is actually a large percentage compared to
other parts of the world (for example, in Europe, the
figure is only 16%; and, in Asia, less than 1%). There are
many reasons for such a shortfall, including conscious
FIRE EARTHQUAKE MACHINERY
BREAKDOWN decisions not to insure, or industry standard exclusions
EXCEPTIONAL FLOOD OTHER (such as nuclear). Emerging risks can also be to blame,
RAIN
for which no insurance has yet been sought (for example,
interruptions caused by natural catastrophe events that
affect the suppliers of suppliers hidden in the chain).

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SPOTLIGHT
OEH made a claim to insurers for the property damage and the BI losses.
TRENDS CLAUSE SWEEPS The insurers stated that the BI loss must be “in consequence of damage,”
AWAY RECOVERY however, and claimed OEH suffered loss “in consequence of the event.”
Under its policy, which included a “Trends” clause (similar to an “Experience
The case of Orient-Express Hotels Ltd (OEH) v Assicurazioni of the Business” clause in the US), OEH could only recover for any BI losses
Generali SpA (2010) continues to cause disquiet across the insurance it would have sustained “but for” the physical damage to the hotel. The
industry. It is the ongoing element of uncertainty as to how insurers will English High Court of Justice ruled that OEH should be treated as though it
view a loss given the legal precedent that means this issue remains a were an “undamaged hotel in an otherwise damaged city,” and so because
live topic for debate. OEH would have received fewer guests due to conditions in the city, OEH did
not receive any insurance recovery under the core coverage (some recovery
The Windsor Court Hotel in New Orleans, United States, owned by was achieved under a prevention of access clause). Some considered the
OEH, was damaged by hurricanes Rita and Katrina in 2005 and forced to outcome for OEH harsh, and the decision has led to questions about the BI
close, while the city of New Orleans itself was subject to evacuation orders. recovery an insured can expect in the event of a natural catastrophe event.

The United Nations continues to attempt to narrow RECOMMENDATIONS

the gap between insured and total losses through its
International Strategy for Disaster Reduction (UNISDR) Companies wishing to avoid the possibility of a reduced
and UN Resilient Cities campaign. Unfortunately, many recovery in similar circumstances should be advised
reasons for the shortfall come as a surprise, such as: to engage insurers and negotiate wordings appropriate
to their exposures. There are different strategies
ȫȫNo reinsurance (insufficient capital from local organizations can employ to address the “wide area
insurers to pay claims). damage” wordings issue, including a consideration of the
trends clause, denial of access/loss of attraction clauses,
ȫȫUnderinsurance (average applied to claims where
and potential policy endorsements, as follows:
values are under-declared).
ȫȫUnavailable insurance or restricted insurance ȫȫThe provision under the trends clause that the loss
(insufficient limits or wide area damage restrictions). must be adjusted “but for the damage” could be
amended to state “but for the event causing damage,”
ȫȫClaims disputes.
such that the concept of the wider area damage is
removed.
There is often a mismatch between the expectation
of BI policies and the reality of the contract in place. ȫȫIn addition, consideration of appropriate and
The expectation is for cover in the event of financial meaningful denial of access, loss of attraction, and
loss as a consequence of physical damage, but the reality contingent suppliers’ and customers’ extensions
is that cover is restricted by the fact that policies only may be considered. Working through loss scenarios,
compensate for insured perils at the insured premises. when combined with natural catastrophe modeling,
Wide area damage can then create further uncertainty can provide an insight into likely recovery times and
in BI due to the argument that losses are as a result of the real financial impact. Standard extensions are
an event (rather than damage at insured premises). unlikely to prove adequate.
Orient-Express Hotels Ltd v Assicurazioni Generali SpA
ȫȫEndorsements have also been drafted that seek to
(2010) highlights this issue more than any other, and is
avoid the possibility of the implementation of the “but
referred to above.
for” test; however, notwithstanding the intent of the
underwriter, the real test will come when the validity
An insured might find cover restricted to the prevention
of such endorsements is put to the test by a claims
of access limits, rather than full value, and, as such,
team backed with a contrary legal opinion.
it becomes necessary to distinguish between losses
flowing from:
Planning is therefore essential, and loss scenario
analysis (including insurers) is vital to understand how
ȫȫDamage to the insured property – covered under the
your PD/BI policy will react, and whether your limits are
core policy.
sufficient. If the unwanted answer from insurers comes
ȫȫCauses specified in the extensions – often covered but — that cover for wide area damage is not included — then
usually subject to sublimits. alternative risk transfer solutions, such as parametric
trigger policies, can be considered.
ȫȫThe underlying event – not covered at all.
 SUPPLY CHAIN
A typical business structure usually incorporates FIGURE SUPPLY CHAIN COVER AMONG MARSH CLIENTS*

a complex web of suppliers and customers that 4 Source: Marsh

often spans the globe. As a result, the landscape 100%

of risk changes dramatically; the variety of
potential events and interruptions faced is
80%
vast. Traditional PD/BI insurance policies were 77%

not developed to cope with such exposures,

and, as demonstrated below, do not offer the 60%

protection required in today’s market. But there

are alternative solutions available. 40%

33%
Business interruption and supply chain losses represent
the number one concern for businesses around the 20%
globe (including in the US, where 61% of participants
identified them as the top business risk in 2014). The
World Economic Forum’s Global Risks 2015 report 2% 1%
provides a view of the type of risks businesses face in the
0%

global arena, and maps those risks in terms of likelihood UNSPECIFIED

SUPPLIERS
SPECIFIED
SUPPLIERS
SECONDARY
SUPPLIERS
NON-DAMAGE
SUPPLY CHAIN
and impact. The top perceived risks have changed
dramatically from physical risks to non-damage
exposures such as cyber-attacks, infectious diseases, Our review (FIGURE 4) of Marsh clients suggests that
and interstate conflict. while most (77%) retain cover for unspecified suppliers,
materially less purchase tailored cover for specified
Supply chain risks account for around 50%-70% of all suppliers (33%), and that the number that consider either
insured property losses — as much as US$26 billion a secondary suppliers or bespoke non-damage supply
year according to the Allianz Risk Barometer 2014, chain policies is minimal (2% and 1%, respectively).
which surveyed more than 400 corporate insurance
experts from 33 countries. Traditional BI policies, Supply chain interruption can arise for a range of
however, provide only partial protection, at best, for reasons; however, traditional coverage at present is
losses arising out of supply chain failure. generally limited to that arising from physical damage at
a direct or primary supplier. This is sometimes further
In PD/BI policies, supply chain failure is generally restricted to FLEXA (fire, lightning, explosion, aircraft)
addressed through suppliers’ extension clauses, which perils. When combined with the restricted limits
provide an indemnity to the insured in the event of a loss provided by insurers for suppliers’ extension and the
of gross profit arising out of physical loss or damage at a increasing complex, international supply chains
direct (first tier) supplier’s premises. This is also referred relied on by many firms, the insurance industry
to as “contingent business interruption” or CBI, which currently has a solution that falls materially short
usually incorporates events at customer premises too. of being comprehensive.

* Results displayed illustrate the percentage of respondents that purchase each

individual type of cover.

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SPOTLIGHT
Insurers denied Millennium’s CBI claim on the basis that only the pipeline
LIMITATIONS OF THE owner, Alinta (and not the natural gas producer, Apache) was a direct
TRADITIONAL SUPPLIER’S supplier to Millennium, and that coverage did not extend to indirect
suppliers. Millennium, for its part, argued that although its contract was
EXTENSION CLAUSE with pipeline owner, Alinta, which delivered the natural gas, Apache was,
in fact, the provider and direct supplier of the gas. The trial court agreed
The case of Millennium Inorganic Chemicals Ltd v. National Fire with Millennium, concluding that “the physical relationship between the
Ins. Co. of Pittsburgh, PA and ACE American Ins. Co., 893 F. properties ... is as or more important than the legal relationship between
Supp. 2d 715 (D. Md. 2012), reversed, No. 13-1194, 2014 U.S. the properties’ owners.” It found that the term “direct,” as used in the
App. LEXIS 3096 (4th Cir. Feb 20, 2014) highlights the limitations policy, was ambiguous, and should be constructed in favour of Millennium
of the traditional supplier’s extension clause: by virtue of the contra preferentum doctrine meaning interpreted against
the drafter. However, the appellate court – comprised of a three-judge
Millennium’s Western Australia production facility was powered by panel with one judge dissenting – disagreed and held that “direct” clearly
natural gas delivered via pipeline, when an explosion at the plant of meant “without deviation or interruption from an intermediary,” such
natural gas producer, Apache, halted production and led to a general gas as pipeline owner Alinta. The appellate court’s decision left Millennium
crisis. Millennium’s supply of natural gas was curtailed (the Australian without coverage for its loss.
Government stepped in to prioritize the delivery of natural gas to essential
services), and Millennium had to shut down its production.

BUSINESS COMMENTARY RECOMMENDATIONS

This situation is recognized by Geoff Edwards, CEO at The insurance industry recognizes that the provision of
Bowers and Wilkins (B&W) – the British manufacturer suppliers’ extensions is, on its own, not a comprehensive
of high-end audio equipment that maintains a complex solution to the severity of supply chain risks faced
international supply chain, with manufacturing in the by a large number of organizations. More detailed
UK and China: information on supply chain risks is required before
informed decisions on the need for alternative risk
“We spent a considerable period of time mapping our supply transfer can be made.
chain. Once we became aware of the potential issue of
agents and secondary suppliers, using our broker, we were ȫȫUndertaking a thorough review of an organization’s
able to negotiate cover with insurers at no additional cost.” supply chain allows a clearer identification of
exposures faced. Typically, supply chain risk has
In an ideal world, Geoff says that a business interruption been treated as an operational risk, and the cost is
supply chain solution would perform as follows: swallowed in normal expenses. The quantification
of potential loss through scenario work results in
“We view business interruption as anything that can more informed decisions on whether the risk can still
impact on our ability to trade. We work closely with our be managed, and whether alternative risk transfer
suppliers and take care to manage our risks. We would solutions are value for money.
want protection against a catastrophic failure to supply
ȫȫOpportunities exist within traditional policies to
that extends throughout our supply chain.”
design wider cover that provides greater limits for
defined suppliers and extends cover to secondary
Finally, B&W once considered a bespoke supply
suppliers of suppliers.
chain policy with a non-delivery of product trigger.
However, B&W chose not to purchase cover due to: ȫȫThe insurance industry is able to deliver new supply
chain policies now and, as companies establish a
“The two key benefits were the wider policy cover including clearer picture of exposures, such products will
non-damage and the fact that cover was throughout the become more economically viable and will provide
supply chain. The challenge for us at the time was in the depth of cover demanded by buyers.
evaluating the cost benefit of a new product. As the market
matures, this is an area we will re-visit.”
 CLAIMS SETTLEMENT
PD/BI insurance exists primarily to provide This is primarily as a result of rapid growth in regions
an effective risk transfer mechanism for subject to higher natural catastrophe risks and a lag
in the purchase of correlating insurance, particularly
companies, and the value, or otherwise, of the business interruption. In India, for example, while
cover will inevitably be judged on its ability to economic growth has outstripped the “developed world”
over the past 20 years, the purchase of PD/BI insurance
respond in the event of a significant claim. It is by Indian property clients is around as little as 20%
widely acknowledged that the claims process, (compared to more than 90% in the United Kingdom
[Marsh figures]).
particularly with regard to PD/BI, can be
lengthy, complex, and highly scrutinized. This reality presents a challenge for claims professionals
managing larger losses in a greater diversity of scenarios
Today, organizations operate in an interconnected and, with the rise in claim numbers and values, has
global economy, and while the definition of what come an increasingly sophisticated and detailed
constitutes a successful claim will vary from event to claims process. The complexity of significant business
event and business to business, the importance of clear interruption claims can result in differences of opinion;
communications, clarity around coverage, and prompt however, while some do result in long-running disputes,
and predictable interim payments is universal. many can be resolved through the early identification of
concerns and clear communication between insurers’
The development of the global claims environment advisors and clients’ experts.
is well illustrated by the global loss data summarized
in FIGURE 5, based upon information for natural Expectations in relation to the length of time required
catastrophe and “man made” events collected to settle PD/BI claims must be managed. It should
annually by Swiss Re. be recognized that many PD/BI claims span a full
indemnity period (and sometimes beyond), therefore
While there is significant variance in annual values, a PD/BI claim may not be settled until the indemnity
annually adjusted totals continue to rise, yet the relative period expires.
rise in insurance recoveries is materially slower.

FIGURE GLOBAL TOTAL AND INSURED CATASTROPHE-RELATED LOSSES TOTAL LOSSES LINEAR TOTAL LOSSES

5
(1990-2014)
INSURED LOSSES LINEAR INSURED LOSSES
Source: Swiss Re

400

350

300

250

200

150

100
US$ BILLION

50

0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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FIGURE TIME TAKEN FOR NEW ZEALAND, FEB 22, 2011

6
CLAIMS TO BE SETTLED CHILE, FEB 27, 2010
Source: Marsh JAPAN, MAR 11, 2011
75%

0 REMAIN
OPEN 327 REMAIN
800 OPEN

75%

600

0 REMAIN
400 75% OPEN

200
VOLUME

0 60 120 180 240 300 360 420 480 540 600 660 690 720 780 840 900 960 1020 1080

NUMBER OF DAYS

Settlement timelines will inevitably vary by country relation to supporting a claim for PD/BI. No one has
and by the type of event due to differing circumstances. a crystal ball, so the calculation of expected sales will
As displayed in FIGURE 6, the majority of claims always remain subjective, but a clear protocol, clear
submitted after the Chilean earthquake on February 27, communication lines, a pre-agreed methodology, and a
2010, were closed within 12 months, and 18 months good understanding of exposures will help everyone’s
after the earthquake on March 11, 2011, in Japan. understanding of the PD/BI risk faced and will help the
However, New Zealand continued to experience seismic process run more smoothly. A proactive approach is
activity following the February 22, 2011 earthquake, and, always preferred to a reactive post-loss panic.
as such, property damage was more difficult to assess.
In addition, the scale of the event in New Zealand was
larger than the country’s loss adjusting, engineering, and
BUSINESS COMMENTARY
insurance industries were equipped to deal with, delaying
We spoke to Stephen MacPherson at Kelda Water in
the settlement of a significant percentage of claims.
Aberdeen, Scotland, who provided insight into the claims
process following a major loss. Stephen emphasized the
Overall, the global insurance industry’s response to
importance of communications when managing the
catastrophic events is to be commended, with the most
process, commenting:
experienced claims teams traveling to support their
local resources and providing real client service in what
“I learned that the process was very straightforward, as
can be the most challenging of conditions. Disputes do,
long as I was making sure that all stakeholders were being
however, remain a reason for settlement delays. The
kept informed with updates and the opportunity to review
Financial Times (July 20, 2014) reported on Mactavish’s
and comment on plans. Treating everyone as a team really
evidence to the Law Commission and HM treasury,
worked well.”
which suggested that “45% of businesses strategically
significant insurance claims are disputed by the insurer”
Stephen also provided the following advice to
– a statistic that does not reflect well on our industry.
organizations that have not suffered a loss such as his:
It is essential to do as much pre-loss preparation as
“My advice would be to embrace the process, keep as much
possible to avoid any surprises post-loss. All parties
detailed evidence as possible, and keep all stakeholders
should be clear on loss exposures, loss quantification
regularly updated.”
and methodologies, and what will be required in
SPOTLIGHT
plus fixed costs to establish insurance gross profit), and further
LES DOMMAGES MATERIELS? provided that “due consideration shall be given to the experience of the
business before the date of damage or destruction and to the probable
The case of Manpower, Inc. v. Insurance Co. of Pennsylvania, 732 experience thereafter had no loss occurred.” The aspect of the opinion
F.3d 796 (7th Cir. 2013) illustrates the extent to which insureds and that troubled the court was the expert’s use of a growth rate of 7.76% to
insurers are likely to have differing opinions of a loss suffered. project total revenues, which the court viewed as not “representative of
RM’s historical performance” because RM had experienced a negative
Right Management (RM), the French subsidiary of US staffing company
average annual growth rate for a span of years and a more modest
Manpower, was a tenant in a mixed historical/modern office structure.
3% growth rate for a recent 18-month period. It also faulted the expert
In 2006, a collapse badly damaged the building’s garage and courtyard.
for taking into account management’s statements that RM’s recent
RM’s private office space was undamaged, but the Parisian Department
acquisition by Manpower had brought new policies and personnel
of Public Safety prohibited occupation of the entire building and
that sparked growth, and that management expected growth would
continuously extended that prohibition. RM simply had to relocate its
continue. The appellate court found those criticisms of the expert too
business without ever having regained access to its offices.
harsh, however, and reinstated Manpower’s expert. The appellate court
In the US lawsuit between Manpower and the insurer on the master noted that although the expert’s opinion was “not bulletproof,” it was
difference in conditions policy, Manpower had difficulty in proving its sufficiently reliable to be presented at trial, where the insurer’s counsel
BI loss. The arguments and conclusion are instructive for policyholders could cross-examine the expert and seek to undermine his opinion in
who will need to supply evidence in support of their claimed BI losses and front of the jury.
the brokers and claims advocates who advise them. At one stage of the
The “experience of the business” consideration in calculating a BI loss
case, the court granted a motion by the insurer to exclude the testimony
has been the subject of debate and differing approaches, and will likely
of Manpower’s expert witness on BI. The court found that the expert had
continue to evolve. For now, it is something to keep in mind for potential
not used reliable methods in calculating the BI loss and, without that
discussion with underwriters, particularly if there are new and/or fast-
testimony, Manpower could not prove its claim.
growing operations.
The policy defined the loss as “net profit lost because of the BI” adjusted
for continuing expenses (the gross earnings policy form uses net profit

RECOMMENDATIONS
Consideration of both the risks at placement and the
potential challenges of claims can mitigate the actual
impact and reduce the potential for disputes
impacting recovery.

ȫȫReflective of recommendations made by the Chartered

Institute of Loss Adjusters (CILA), insurers are
increasingly willing to provide a pre-loss commitment
to early and substantial interim payments.
ȫȫProduction-based settlement (output alternative)
can be an effective mechanism for multinational
manufacturers concerned with calculating a loss at
a single plant that could be overwhelmed by wider
corporate results.
ȫȫPre-loss business interruption reviews with in-depth
scenario planning can not only ensure that sums
insured and MIPs are accurate, but also provide a
template for settlement in the event of an actual claim.
ȫȫA claims preparation clause within a policy will enable
buyers to, with the help of experts, ensure that a claim
is robust. The fees paid for such a service can then
form part of the claim against insurers.

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CONCLUSION
PD/BI insurance has demonstrated its SUPPLY CHAIN
importance by way of its longevity, but modern
In many ways, the industry response to increasingly
policies continue to adopt a structure that complex supply chain exposures has been commendable,
would have been familiar to underwriters in the with the development of non-damage policies and a
small number of carriers providing cover for all, not
middle of the last century. It is, however, time just primary, suppliers. Full supply chain cover should,
for the insurance industry to acknowledge the however, be the rule, not the exception, and providing
non-damage options within the policy framework (at
shortcomings of BI cover and build a better increased premium) provides an easier option than
solution for buyers. choosing a new policy.

VALUES CLAIMS
Getting the values right is critical for all parties, and, Finally, claims — the assertion in a 2014 AIRMIC
while taking the time to calculate correct declarations (the UK association for risk and insurance management
is recommended, we are perhaps at a point where an professionals) publication*, that “large claims are being
alternative approach should be considered. Businesses contested far more than previously” should be a cause
are obliged to submit detailed annual accounts to of real concern. Pre-loss claims scenario reviews will
legislative authorities, and an alternative underwriting always be useful and agreed methodologies will help.
approach based on published values would avoid many of The claims promises being offered in respect of early
the errors encountered. interim payments are welcomed; however, the universal
applications of claims preparation clauses ensures
that all policyholders can access professional claims
INDEMNITY PERIOD preparation resources, and that claims are presented in
a manner that allows for efficient and timely settlement.
Indemnity periods can only be accurately set with
detailed pre-loss work, and, while the open-ended US
This report is our contribution to the debate as we seek
earnings approach should be commended, the limited
to improve existing solutions and reshape the industry
post-reconstruction recovery periods are less than
to address insurance buyers’ evolving needs. We have
ideal. Two changes might be considered: firstly, the
outlined improvements that we believe can and should
option to commence the calculation at either the date
be made; however, as we progress, the opportunity for
of the physical loss or damage, or at the time when the
a fundamental restructuring of BI policies is becoming
business begins to suffer a loss of revenue; and, secondly,
clearer and the option of a single business interruption
the provision of an unlimited MIP underwritten on the
policy that responds to a range of primary covers may
basis of two years’ exposure. This will enable insurers
prove the overarching solution required.
to be confident of maintaining premium levels, and
will ease insurance buyers’ concerns with regard to
underestimating exposure.

WIDE AREA DAMAGE

The impact of a punitive application of the “but for”
rule remains a threat to buyers in a wide area damage
scenario that does not reflect well on the industry.
We echo the comments in the 2012 CILA report that
“the market needs to develop a wording that is in line
with its intentions and that goes further to meet
policyholders’ requirements and expectations.”
* The Efficacy of Business Insurance: Guidance for buyers on achieving greater
coverage, contract and claims certainty, London, July 2014.
 DEFINITIONS
Average If the sum insured is “subject to average” and that sum is less
than the value of the subject matter of the insurance, then
any claim that is agreed under the policy will be reduced
proportionately to reflect the underinsurance.

Declaration- At the start of each policy year the policyholder submits

linked policy an estimate of the gross profit that it is anticipated will be
generated during the financial year most close to the
period of insurance. The premium at the start of the policy
year will be charged on the basis of the estimated figure
and will be subject to adjustment up or down at the end
of the year. Insurers’ liability is (normally) the estimated
gross profit plus a one-third uplift (133.3%) that is
available in the event that the estimate was too low.
There is no underinsurance average clause on
declaration-linked policies.

Maximum foreseeable The worst loss that is likely to occur because of a

loss (MFL) single event.

Normal loss The likely loss as a result of a single event, taking into
expectancy (NLE) consideration that existing protection and prevention
measures function as expected.

Additional increased A policy extension that allows recovery of reasonable

cost of working additional expenditure to avoid or diminish any further
(AICW) reduction in turnover following a loss, even if the amount
payable exceeds the savings made.

Gross revenue cover Cover for gross revenue (or turnover), as opposed to gross
profits.

Prevention of access A policy extension that provides for a loss of profits as a

result of the prevention of access to the premises.

Parametric trigger A type of insurance that does not indemnify the pure
policy loss, but agrees to make a payment upon the occurrence
of a triggering event.

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ABOUT MARSH’S BUSINESS INTERRUPTION

CENTER OF EXCELLENCE
The Business Interruption Center of Excellence is a global Marsh project that strives to position
Marsh as the advisor of choice in relation to business interruption (BI) risk. Our council of
international thought leaders and our global colleague network are working to broaden the
understanding of BI risk for all stakeholders, to develop wordings and policies better suited
to policyholder needs, and to create solutions that we believe will reshape the industry’s
approach to BI.

ABOUT MARSH
Marsh is a global leader in insurance broking and risk management. Marsh helps clients
succeed by defining, designing, and delivering innovative industry-specific solutions that
help them effectively manage risk. Marsh’s approximately 27,000 colleagues work together
to serve clients in more than 130 countries. Marsh is a wholly owned subsidiary of
Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering
clients advice and solutions in the areas of risk, strategy, and people. With 57,000 colleagues
worldwide and annual revenue exceeding US$13 billion, Marsh & McLennan Companies is
also the parent company of Guy Carpenter, a global leader in providing risk and reinsurance
intermediary services; Mercer, a global leader in talent, health, retirement, and investment
consulting; and Oliver Wyman, a global leader in management consulting. Follow Marsh on
Twitter @MarshGlobal, or on LinkedIn, Facebook and YouTube.
Notes

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Notes
For more information, please contact:

CAROLINE WOOLLEY DAVID LANFRANCHI

EMEA Risk and Property Practice Leader Project Manager
Business Interruption Center Business Interruption
of Excellence Global Leader Center of Excellence
+44 (0) 20 7357 2777 +44 (0) 20 7357 3181
[email protected] [email protected]

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TOGETHER WITH GUY CARPENTER, MERCER, AND OLIVER WYMAN.

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information is not intended to be taken as advice with respect to any individual
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Statements concerning legal, tax or accounting matters should be understood to be

general observations based solely on our experience as insurance brokers and risk
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