Don’t let a ‘business interruption’ bring your company down

01 February 2012, London Business Matters

Replacing lost revenue after a fire, flood or other insured loss is a lifeline

By Roger Flaxman

A BOARD’S failure to heed experienced advice about the consequence of a ‘business interruption’ sent its company into liquidation almost two years after a serious fire.

The stock and premises of the 25 year-old printers were 90 per cent destroyed. The insurance failed to meet its immediate needs and after a desperate struggle for survival the £5 million turnover company was put into receivership.

Just after the fire took place the directors had discovered the company’s insurances weren’t up to the task expected of them. They included Business Interruption Insurance (BII) and this, in particular, was the root of the company’s downfall.

Don’t be that company

If a management board is serious about wanting good protection it must start by properly assessing the levels of risk. This is often in the ‘too difficult’ box for management and so it is not done. It is easy to over[-]complicate the assessment of risk, likely losses, their costs and outcomes and that often leads to management giving up and just trusting to luck, but essentially businesses have only four elements:

  • customers or clients
  • people – employees and outsource contractors
  • financial resources and reserves (especially cash)
  • infrastructure – premises, machinery and plant, tools, fixtures, fittings, stock and raw materials, computer systems and all the other properties and contents that form the essential infrastructure of the business.

To assess costs and outcomes of a business interruption take each of these in turn and identify the ‘can’t do withouts’ in each heading. Then consider how the dependencies of one upon another may affect the business operation and flow.

This is not a five-minute job and preferably is done with the help of an experienced insurance but if it is carried out efficiently and with experienced advice, once every three to five years, with an annual review for significant changes, it will create a good benchmark.

The woes of the company affected by the fire were not caused solely by inadequate insurance protection. The discipline of assessing the reality of the unintended consequences of a business interruption event is as important as buying the insurance protection for those parts of the interruption for which insurance is available. Some interruption consequences are not insurable. Only by carrying out a periodic reality check does a management board have any warning of the consequences they might one day face.

After the event – getting paid by insurers

Insurance companies in today’s highly competitive insurance industry go to great lengths to establish whether or not they are legally obliged to pay a claim in any given situation.

They employ loss adjusters, forensic accountants and lawyers amongst other professionals, to meticulously scrutinise the causes of the loss and damage and this can include looking at company management documentation to see how the company was run, managed and directed. They are seeking to ascertain if there has been any failure to disclose material information (which can entitle them to voidthe policy in its entirety) or any breach of terms and conditions which will allow them to escape liability for the claim.

All this can take a very long time and can be very stressful for the insured. Investigations can run on for months or years and be complicated by unfamiliar legal and insurance language. Insurance companies recognise that if the business cannot continue to trade without its insurance coverage then there may no longer be a claim to be paid out once the company has disappeared.

The moment there is any doubt as to whether the insurers will pay quickly and in full is the moment to seek independent expert advice.

This can be obtained from some insurance brokers, loss assessors or independent insurance claims advocates. These are insurance professionals who are familiar with insurance market custom practice and precedent. If the claim is delayed for purely legal reasons then solicitors can be an appropriate source of advice but very often the delay in paying claims concerns insurance market practice and commercial issues.

There is much benefit in trying to resolve disputes about insurance coverage through negotiation and commercial dispute resolution means before resorting to litigation.

Tips on Business Interruption Insurance cover

  • Never assume your business cannot suffer an unexpected event
  • Do not assume insurance will protect you and pay for everything that happens – it rarely does
  • A business interruption usually turns out to be more costly and reputationally damaging than is contemplated round a boardroom table – don’t underestimate the cost of the consequences
  • Get expert help in assessing your business interruption damage potential and review it at three-year intervals
  • If insurers start to quibble about paying a claim take early advice from insurance professionals
  • Don’t enter into litigation before you have expert insurance professional opinion on the likelihood of success and the cost of losing.

Roger Flaxman is managing director of Flaxman Partners, insurance claim advocates

Keeping the business afloat

Business Interruption Insurance (BII) replaces lost revenue when a business cannot trade following a fire, flood or other serious (insured) loss. It is an essential lifeline for any business – without it the overheads and wages cannot be paid.

BII consists, broadly, of the sum insured required to keep the business afloat while recovering from the event and the period of indemnity, the time that it will take to achieve a return to operational breakeven, usually a period of between eighteen and twenty-four months, but in special circumstances up to thirty-six months.