December 19, 2005
Business people buy insurance because disasters happen. One of the most troubling losses suffered after a fire or other damage to commercial premises is the interruption of the business. Revenue will be disrupted, while expenses will continue. For this reason, business interruption insurance is a key part of most commercial insurance packages.
Difficulties arise however, because not all policies offer the same coverages. This is a good thing, because the needs of a business will vary, as well as the extent of the coverage which a business can afford.
We continually see cases, however, where businesses misjudged their needs and bought less insurance coverage than was required to address at least a substantial portion of the loss. This increases lawsuits. If the business cannot recover from the insurer, the broker is often sued. Under a classic case known as Fine’s Flowers , a broker is required to investigate the client’s needs and either obtain all necessary coverages, or clearly advise the client of the gaps in coverage. Although clients are generally expected to read their policies, these are often delivered late (sometimes after the fire), and may be written in technical language. A businessperson is not required to be an insurance expert. That is the broker’s job.
Among common problems in business interruption coverage, clients and brokers alike should regularly review:
- What losses are covered? (e.g., is there an exclusion for losses after a blackout?)
- Is the loss calculated on Gross Earnings or Lost Profits? Are increased expenses covered?
- The amount of coverage – in particular, what items are included in leasehold improvements if rented premises.
- The co-insurance clause, which requires that the property damage be fully insured, may apply also to business interruption coverage. If the coverage is too low, the recovery is reduced proportionately.
Does the limit of coverage really match the revenue? Is this a seasonal business? What if a loss occurs in peak season?
- Which ongoing expenses will be covered?
- Which wages will be covered? We recently saw a policy with very vague wording, which covered wages paid to “important employees” during reconstruction, but not “Ordinary Payroll”. “Important employees” was not defined.
- Will “wages” paid to commissioned or contract workers be covered, if the owner must pay them to retain their loyalty?
- What supporting documentation is required? (Backup, backup, off site backup)
- What Indemnity Period is offered? Does it match the lease?
- What “due diligence” is required? This is especially important in leased premises, where landlord delay may, in some forms, affect the insured’s recovery.
This lengthy list is still only a partial outline of what a diligent broker should cover in assessing the client’s risk and investigating insurance options.
If you are a business owner or manager and do not know the answers to these questions as they apply to your policy, perhaps it is time to sit down with your broker.