We have recently been appointed by a client who suffered a
damaged roof over last winter’s storms. They had prudently purchased business
interruption cover in good faith but due to a number of omissions they were
threatened with having no cover at all as they were so grossly underinsured.
Here is how the problem arrived.
Gross profit – setting the sum insured
Gross Profit is a familiar term used in both accounting and
insurance circles. There is a key difference however. Gross profit in insurance
includes the cost of production wages due to current employment law, in the
event of a fire you cannot simply terminate your staff you must either make
them redundant or continue to pay them. This common mistake made a 40%
difference to the sum insured alone. The
sum insured calculation on below the line purchases was also flawed resulting
in a further 10% error.
Period
The client had one or two large customers and so had purchased an 18 months indemnity period. However the sum insured was entered on the policy and brokers summary as a 12 month figure 33% too little.
The client had one or two large customers and so had purchased an 18 months indemnity period. However the sum insured was entered on the policy and brokers summary as a 12 month figure 33% too little.
Growth
The business was growing. Insurance policies typically give a 30% allowance for growth under the Declaration Linking provision. You would think that this would automatically give you adequate cover for any increase.
The business was growing. Insurance policies typically give a 30% allowance for growth under the Declaration Linking provision. You would think that this would automatically give you adequate cover for any increase.
However there is a condition to obtain this ‘free’ extension
– one which is frequently overlooked by brokers and insurers. You must provide
a declaration figure from your accountant providing last year’s true figures
and pay any adjustment premium due. This had not been done so allowance for
growth was excluded. If you do not do this routinely Castlemead would be happy
to undertake this for you
Additional Increased Cost of working
To get a gross profit claim paid you have to show that you
will lose the relating turnover. Additional Increased cost of working cover gives
you an allowable spend on increased costs irrespective of its effect on
turnover. It is an essential component of any programme. This client had the
opportunity to temporary roof the factory at a cost of £40,000 but their
insurer would not meet this cost.
In total the client had a claim for £250,000. They were
offered a payment of just £43,333.
| Claim | £250,000 | |
| Underinsurance | £125,000 | |
| Discount for 12 month sum insured | £83,333 | |
| Add temporary roof cost | £40,000 | |
| Amount not covered | £206,667 | |
| Uninsured amount | 83% | |
The broker and insurer are both household names. Fortunately
the client’s bank agreed an overdraft to cover the costs and the client
continues to trade.
Castlemead's advice:
- Use a professional broker who can calculate the likely gross profit loss for you and has experience of claims in this area.
- Review this calculation with your operational team and set an appropriate Additional Increased cost of working sum insured
- Get a completed declaration into your insurer annually
- Buy the right number of years for the business to recover – this could be 3 – 5 years in extremis.