Keep your head above water

Indemnity period clauses generally allow businesses 12 months to get back to normal should disaster strike. However, companies are increasingly finding a year is not always long enough and calls are being made to revise this standard, explains Olivier C Laurent

Former US secretary of Defense Donald Rumsfeld once said: "As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns - the ones we don't know we don't know."

While he was referring specifically to the war on terror, the same could be said for business interruption threats. Phil Southall, forensic consulting director at Far Consulting, agrees: "The majority of businesses are prepared for the majority of incidents. However, it would be very difficult to foresee all situations and take precaution."

And this is where the maximum indemnity period clause in a business interruption insurance policy comes in. In a recent interview with Post, three prominent loss assessors questioned the way UK insurers accept or reject liability and the effect this has on clients' business interruption indemnity periods.

Does the maximum indemnity period clause need to be rethought? Or will policyholders continue to be in the middle of a boxing match between loss assessors, loss adjusters and insurers?

Choosing the right deal

When it comes to choosing the right commercial insurance policy, brokers and insurers are quick to point to the need for business interruption cover. If a company were to suffer in an accident, a fire or a terrorist attack, getting back to business could take months, generating huge profit losses. With the indemnity period clause, companies have a chance to recover these losses and get their businesses back on track.

However, it doesn't always work this way, loss assessors warn. Nicholas Balcombe, chairman and chief operating officer of the Balcombe Group, says: "Most policyholders currently choose to have a 12-month indemnity period. They do not consider the worst case scenario."

Jonathan Samuelson, business interruption director at Harris Claims Group, adds: "The problem is that 12 months are not sufficient. If you take incidents such as the floods in Carlisle, because the whole town was under water, there were not enough builders and contractors to do all the work at the same time.

"Consequently, repairs for some policyholders did not start until months later, and to get their businesses back to normal was impossible within the 12-month indemnity period."

Some insurers agree and Martin Singleton, technical manager for property at Norwich Union, says: "The most common problem that becomes apparent is that the indemnity period is not long enough. The pattern over the past year or so is that 12 months is not enough time to get back to business. Many businesses rely on just a handful of suppliers and customers. If your business is down, these people will go look elsewhere. How long will it then take to win them back?

"Moreover, it now takes more time to rebuild a business. For example, with new legislation such as the carbon-neutral rules, getting approval from the planning commission is more difficult. The local community can get involved and drag out the whole process."

Therefore, Peter Thompson, managing director of loss assessor Thompson and Bryan, believes: "We need longer indemnity periods. As a matter of fact, we are increasingly seeing policyholders with a three-year indemnity period."

However, there can be an issue convincing business owners to pay higher premiums for this cover when they blindly believe their business will recover swiftly.

Gerald Williams, director of Fitzgerald Consulting, says: "A good broker gets really involved with their clients and explains what the risks are. But the final decision will always rest in the hands of the policyholder."

"The broker has the opportunity to work out what is a reasonable indemnity period," adds Kevin Pallett, managing director of Fusion Insurance. "The broker should take the time to question his client. He should ask the right questions and tell his clients how long it could take for his business to get back to normal."

Mr Singleton agrees: "We are starting to see a few brokers encouraging their clients to take on a 24-month indemnity period. But it's not general. Some policyholders are convinced they will be back in business in no-time."

However, Mr Balcombe explains that the issue is that insureds do not understand how premiums work: "Most insured do not realise that if you take a two-year indemnity period, it does not mean that your premium will double. But brokers don't push it enough."

And Mr Thompson, and other loss assessors, accuse the insurers of "eating into" the indemnity period by delaying a decision of liability. He says: "Even with a longer indemnity period, you will still have the same issues if an insurer takes time."

Mr Balcombe adds: "In the US, insurance companies have to, by law, accept or reject liability within 28 to 30 days after the day you submitted a claim. It is not the case here. I've got cases that take three to six months for the insurer to accept liability. During that time, the policyholder's company goes bust."

Rule of law

While insurers do not deny that they can take a long time to accept liability, they do not think it is a general rule. Graham Annand, major loss manager at Zurich, says: "There are very few instances when an insurer takes three months to decide on liability. In such rare cases, the delays are caused by insufficient information from the policyholder.

"The information we needed to make a decision may not be forthcoming. Without saying that insurers are always perfect, it's still in the insurer's interest to arrive at a decision as quickly as possible. It also allows the policyholder to get back on their feet as soon as possible."

Mr Pallett adds: "Of course the decision on liability has to be made very quickly, it is in our own interests. The more we wait, the greater the loss of profit will be. But if there is a delay, we would still work closely with our clients to solve the problems."

David Way, executive director for energy at broker Lockton, points out: " At least 99.5% of the claims are settled without any dispute. Most insurers are quick, because they know that the longer they take to admit liability, the higher the claim will be. I've been involved in a lot of claims. I particularly remember when a pencil factory burnt down to the ground a few years back. The loss adjuster was on site while the factory was still burning. The next day, they had already found another factory to work in."

While Andrew Dear, director of technical services at AMG, also agrees that delays only affect a minority of cases, he lays the blame on the policyholders: "In the 1% of cases when liability is not accepted swiftly, there are reasons behind it. Maybe the insurer is suspecting foul play, or there are issues with the policy cover or breach of contract.

"Loss assessors know that when there is a delay there is an issue. It's when the insurer is not happy about the situation or when it believes it's fraudulent. The assessors know that. And sometimes we can't tell them the reasons behind the delays because they are required to tell their clients about it, which could infringe on ongoing investigations. The loss assessors just select when to be naive."

But, loss assessors are sticking to their guns and asking for a change. They want the government to force insurers to agree to a deadline to accept or deny liability, such as the one that exists in the US.

Mr Balcombe says: "The majority of the time delays are not caused by a serious police investigation or anything else of the sort. Most of the time, it is just that the insurers choose adjusters and other experts that are taking a long time to come back with their findings. A lot of the forensic accountants are too busy with too much work."

Impossible deadline

Insurers, on the other hand, do not believe a deadline will be workable. Mr Pallett says: "I would not have any problem with a deadline to admit liability, but why just on business interruption? Why not have this deadline for all kind of losses? However, if it is a complicated claim that won't be practical."

Mr Southall continues: "To put a deadline on insurers to accept liability would help in principle, but in some cases it could be difficult to put into practice. For example, if you take a suspected arson, the insurer would need time to obtain the needed expert evidence and police reports."

Mr Dear goes one step further: "If the Financial Services Authority imposed a deadline for insurers to accept liability, it could work against policyholders. It could force insurers to make a quick decision to protect their interests. They could turn down a legitimate claim."

Loss assessors are also suggesting an alternative solution to the problem could be changing the start date of the indemnity period. Mr Thompson says the indemnity period could run from the date of admission of liability: "If there's no liability issue, I've got no problem with it. But sometimes it takes time for insurers to admit liability. If it takes two or three months, the indemnity period should kick in at the date of acceptance of liability. It will have the effect to push the insurer to go as quickly as possible."

But not everyone agrees. Mr Williams says: "What Peter Thompson suggests is impractical. The purpose of the policy is to compensate a policyholder during the period business is obstructed. The financial consequences are much greater just after the incident. The insured would be left exposed during that time and would not be able to recover losses. The suggestion is completely unworkable."

Mr Dear adds: "It's an intriguing comment. It could be a potential option, but the insured has to act like he's not insured, meaning that he has to start getting his business back on track from the date of the incident. If this rule was implemented, it would encourage them not to do anything until liability is accepted, and further delay their businesses' abilities to get back on track. I cannot agree with that."

With an obvious lack of consensus, there is agreement on only one thing: policyholders need to be better informed and better prepared for business interruption.

Focus on price

Mr Pallett says: "Too often, the customers tend to focus on the price of a policy. But, not all insurers are the same, and you should be looking at the track record when it comes to the time needed to admit liability. How the insurer deals with a claim is critical."

Andrew Miller, risk control manager at Allianz Cornhill, adds: "We need to educate the clients on the right indemnity period. Business continuity planning is not a one-size-fits-all deal. Everything depends on the customer and the companies the customer relies on. Each policy has to be looked at closely. A 12-month period may have been the norm before, but now we are moving to 18."

As Mr Rumsfeld said, it is hard to predict the unpredictable. However, loss assessors, insurers and brokers agree that policyholders must be ready to face their worst nightmares. Mr Pallett says: "Policyholders need to have BC plans so they can see how quickly it would take them to recover. It's a safety net."

And Mr Singleton warns: "Of all businesses that did not have business continuity plans, 18 months later 80% of them went into liquidation."

Harry Roberts, president of the Chartered Institute of Loss Adjusters, concludes: "In the 24 years I've been involved in the business, the majority of firms had no BC plans. However, the businesses that had these plans were the companies with good corporate governance and reacted better to business interruption events. Is it the BC plans or a well-managed organisation that saves a business in the end?"

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