Contents

Preface i

Mannings Guide to Interruption Insurance 1

Part 1: Why is Interruption Insurance so important? 3

Part 2: Do you need interruption insurance for your business or organisation? 8

Part 3: Understanding the basics of Interruption Insurance 11

Part 4: Setting the Correct Sum Insured 13

Part 5 Understanding the True Penalty for Being Under Insured 17

Part 6: How Long Should I Insure For? 21

Part 7: Extensions of Coverage 28

Part 8: Getting Expert Help 32

Part 9: Frequently Asked Questions and Conclusion 34

Conclusion 35
 To Helen and Chantelle
Without interruption, you are always in our hearts.

“Education is what you get from reading the small print;

Experience is what you get from not reading it.”

Anonymous.

Other titles by Allan Manning

Business Interruption Insurance & Claims: A Practical Guide
Understanding the ISR Policy: A Comprehensive Guide
It Will Never Happen to Me! The Strategic Management of Crises in Business
It May Happen to Me! The Essential Guide to General Insurance
Fidelity, Theft & Money Insurance & Claims
The Closure of the Bougainville Copper Mine: Anatomy of a Major Claim
What’s Insurance? – Mr Owl explains how it protects your stuff
Mannings Six Principles of General Insurance
Mannings Guide to Contract Reviews
 Preface

“No matter how busy you may think you are, you must find time for reading, or
surrender yourself to self-chosen ignorance.”
Confucius

Following the great success of Allan’s eBook,

“Mannings Guide to Contract Reviews” that has nearly
reached a thousand downloads, I mentioned to him
that the book’s tag line,: “the slim little book that could
save your business (and your home!)”, could equally
apply to a guide to Business Interruption insurance, to
which he readily agreed. We now present you with this
Business Interruption guide we have written together,
with the tag line: “Another slim little book that could
save your business (and your home!)”

But before we get to that, here is a little bit about me. I

attended my first major insured loss when I was 13
years of age on work experience with my father. The
business was a factory that had been ‘torched” by a disgruntled employee who had been
dismissed on justifiable grounds the day before. I arrived with my Dad and the worry and
stress that was written all over the owner’s face left a lasting impression on me. As I
watched the process of developing and exercising a business recovery plan that was
overseen by Allan and funded by a well prepared insurance program, this demonstrated
to me the value of Business Interruption insurance. In that case, the business was saved
despite the considerable damage.

I later joined my Dad in the insurance claims business soon after he started LMI Group
in 1999. Since then, it continues to amaze me how many businesses do not have
Business Interruption insurance or if they do, the percentage where cover turns out to be
inadequate. This can lead to business failure and, if there is a bank or other finance
institution in place, it could mean the foreclosure of a mortgage. This, of course, has life
changing consequences for the owners and their families, the staff and other
stakeholders in the business.

Realising that most business owners and managers are time poor, we have kept this
Guide as slim as we dare but at the same time ensuring that we cover the most important
i
areas in which Business Interruption insurance is needed and why so many businesses
are underinsured.

I would also like to note that a work like this does not just happen. First, I want to
acknowledge Allan for allowing me to work with him on this and in many ways, allowing
me to take the lead. We were also helped by a great number of people and I want to
express sincere thanks to many of our colleagues at the LMI Group who have offered
invaluable comments based on their years of experience. Special thanks to Elle Cody
and Paul Tilley who assisted with the proof reading. Allan and I also wish to record our
personal thanks to Gloria Lu for her layout and graphic design work in both the eBook
and printed versions of this Guide.

Valuable assistance was also provided by Victoria University and its College of Law and
Justice in particular. For their help, we are most grateful.

Lastly, a warning: a Guide such as this should never be solely relied upon for advice.
Matters differ according to their facts, while the law around insurance and the policies
themselves undergo constant change. You should always seek specialist advice on your
insurance needs from your insurance broker, Peter Brown & Associates and should you
ever suffer a disruption, obtain the services of a claims preparer such as LMI Group.

Furthermore, Allan and I would be pleased to receive feedback regarding the relevance,
ease of understanding and usefulness of the material contained in this Guide and any
suggestions for improvement. You may reply via email to
[email protected]. It is through such feedback that our Guides continue
to grow with each edition.

Steven Manning
Melbourne, 16 November 2013

ii
 Limitations & Disclaimers This text has been prepared as a guide, and is not
intended to be exhaustive. While the utmost care has been taken in the preparation
of the Guide, it should not be used or relied upon as a substitute for detailed advice
or as a basis for formulating a business decision. The summaries and references to
judicial decisions used in this Guide do not reflect the view or opinion of the author or
publisher as to the correctness or otherwise of any such judicial decision or
pronouncement of law.
The Guide is sold and distributed on the terms and understanding that the author and
publisher are not responsible for the results or outcomes or any actions taken on the
basis of reliance on the material in the Guide, nor for any error in or omission from the
Guide, and the author and publisher expressly disclaim all and any liability and
responsibility to any person including a purchaser or reader of the Guide in respect of
anything and the consequences thereof of whatsoever kind done or omitted to be
done by any such person in reliance upon the contents in full or in part of the Guide.
The above limitations and disclaimers extend not only to the text in this Guide, but
also to any related information provided in writing or verbally (for example, responses
to queries regarding the information in the Guide). If any provision of this section
headed ‘Limitations & Disclaimers’ is void, avoided, illegal or unenforceable, the
provision is to be read down (and applied as read down) to the extent necessary to
prevent it from being void, avoided, illegal or unenforceable. However, if that cannot
be done, the provision is to be severed and the rest of this section is to be given full
effect with any necessary modifications resulting from the severance of the provision.

© Mannings of Melbourne Pty Ltd 2002-2013

All Rights Reserved No part of this publication may be reproduced or transmitted in any
form or by any means, electronic or mechanical, including photocopy, scanning, recording,
or any other information storage system, without permission in writing from the publisher.
Requests for permission to reproduce content should be directed to
[email protected] or a letter of intent should be faxed to the Permissions
Department on +61 39835 9966.

© Commonwealth of Australia 2008

All legislation is reproduced by permission, but does not purport to be the official or
authorised version. It is subject to Commonwealth of Australia copyright. The Copyright
Act (1968) permits certain reproduction and publication of Commonwealth Legislation. In
particular, Section 182A of the Act enables a complete copy to be made by or on behalf
iii
of a particular person. For reproduction or publication beyond that permitted by the Act,
permission should be sought in writing from the Australian Government Printing Service.
Requests for assistance should be addressed to: Commonwealth Copyright
Administration, Attorney General’s Department, Robert Garran Offices, National Circuit,
Barton, ACT 2600 or posted at www.ag.gov.au/cca.

Printed in Australia

iv
 Mannings Guide to Interruption Insurance

“Not all readers are leaders, but all leaders must be readers”
Harry S. Truman1
Introduction

Interruption Insurance, also known as Business Interruption Insurance or BI , is one of

the most important forms of insurance any business can have. We at LMI have compiled
a data base of risk, [LMI RiskCoach] for over 6,000 industries. Based on that research,
we created a Hazard Rating Index that looks at how important 11 classes of general
insurance are, based on frequency of losses and their severity. An analysis of this work
found that Interruption Insurance came in as the first, second or third most important type
of insurance in the vast majority of cases.

Figure 1: The LMI RiskCoach Hazard Rating Index Graph for a Clothing Retailer – RISC Code
4251 0030

Therefore, it is disappointing to us that at the time of writing, less than half of the
businesses in Australia and New Zealand have any form of Interruption Insurance. Of

From a hand-written manuscript found in Truman's desk after he died, Post-Presidential Papers.
The Post-Presidential Papers of Harry S. Truman consist of correspondence and other documents
created or compiled by Mr Truman from the end of his Presidency in 1953 until his death in 1972.


For the sake of completeness other names for this class insurance include: Consequential Loss,
Consequential Loss of Profits, Business Income Protection, Instant Profits Insurance, and Loss of
Profits Insurance There are no doubt other names where an insurer has sought to find a more
appropriate name that explains the important protection offered by this class of insurance.


RISC stands for Risk Coach Industry Classification. An 8 digit code based on the 2003 ANZSIC but
expanded to 8 numbers to provide sufficient granularity between industries within each category at
the 4 digit level.
1
those businesses that do, most do not review their Sum Insured each year. Therefore,
when a disruption does occur, they usually find that their coverage is no longer adequate
enough to fully protect them.

The purpose of this Guide is to:

explain why Business Interruption coverage is so important;
provide a simple Check List that will help you determine if you should consider
the coverage for your business;
explain what this class of insurance covers;
explain how to set the Sum Insured so that you are fully protected; and
to answer the most frequently asked questions we receive about Interruption
Insurance.

What is in a name?

Before we start, you will find that we refer to this class of

insurance coverage as Interruption Insurance which is
its modern name.

2
 Part 1: Why is Interruption Insurance so important?

“Whenever you look back and say "if [only]" you know you're in
trouble. There is no such thing as "if". The only thing that matters
is what really happened.”
D.J. MacHale4

The postie does not stop delivering bills

after the fire brigade leaves after a fire or
earthquake, or when a storm passes or
flood water subside. How long can your
business survive without revenue to pay
your on-going expenses? Protection
If you have Interruption Insurance, the
financial risk and associated stress is
taken away from the business, its owners/shareholders, managers and employees and
has been transferred to an insurer. There is, of course, a cost to this, known as the
insurance premium, but this is a very small price to pay for the peace of mind the
coverage affords.

What so many business owners do not appreciate until a loss occurs (by which time it
is often too late) is just how much they have invested in their business. For most business
owners it is their:

sole source of income – often for more than one person or several family
members;
major financial investment – many forgo their current lifestyle building an asset
for the future;
mortgage over their home - often with a personal guarantee;
superannuation or a major part of it; and
the purpose for getting out of bed in the morning – their role in the community.

Far too many times we have heard business owners say that if they suffered a major
loss they would simply retire. This is all well and good until they pay out their staff’s
entitlements, the bank loans and overdraft by which time they usually discover they have

2002, The Merchant of Death, Simon & Schuster, New York.

3
very little funds left to actually
retire. Their life’s work has literally
   
   

gone up in smoke and they have

nothing to show for it. THE MANUFACTURER

Understanding Risk The day after a massive fire destroyed a

factory, we were sitting with the owner and the
In simplest terms there are three firm’s accountant. As we were going through
types of risk. the coverage summary Allan asked: why is
there no Interruption Insurance in place? This
1. Third Party Risk was after finding that the building, contents and
stock were all well under insured. The answer
2. Business Risk; and we got was all too common. We thought it was
3. Personal Risk too expensive and “it would never happen to
me!”
Third Party Risk is, as most A week later, while alone with the accountant,
business owners know, the risk a a frustrated Allan asked: “if I could wave a
business and each owner owes to magic wand and send you back in time would
visitors, customers and the public you be prepared to pay 10 times as much to
in general. But it can be much have full insurance on the assets and business
more than this. interruption?” The answer was: “Without a
second’s hesitation”.
The moral of this case study and countless like
it is that no one considers the price of insurance
to be important after the event. It is then that
they realise that what really matters is the
coverage afforded by the policy, the financial
strength rating of the insurer and the claims
service of the insurer and their loss adjuster.

4
For Example

A business owner is asked to sign a lease that includes an Indemnity Clause,

which requires the tenant to reimburse the landlord for any injury or damage
caused to anyone, anywhere in the building complex. While most businesses
have Pubic Liability coverage for their own shop, factory or office, most Liability
policies will not cover injury or damage arising in common areas. This additional
Third Party Risk becomes a personal risk to the owners of the business.

A supply agreement for a major client of your business provides an Indemnity to

the customer, this contractual liability is unlikely to be covered by your standard
Public Liability policy. As soon as it is not covered, the Third Party Risk becomes
a personal risk to the owners of the business.

As these risks are real and not generally understood, we highly recommend you take a
look at the related companion guide to this eBook: Mannings Guide to Contract Review
which is available in both hard copy and as an eBook.

With Business Risk, if the assets of the business are not fully insured and if adequate
Interruption Insurance is not in place, the question arises: who is going to get what is
left? The bank and/or finance companies, or the owners of the business? In most cases
it is the bank and this means that there is a large personal loss (risk) to the owners of the
business. This is particularly so if there is a mortgage over the private home of the owners
of the business. I will go into more detail about this point later on in this Guide.

Personal Risk is the risk that putting their home and

other personal assets at risk.

At the end of the day, by transferring as much of the

Third Party Risk, and as much of the Business Risk
as possible to an insurer, the Personal Risk of the
owners and other stake holders (e.g. employees,
directors, financiers, creditors etc.) of the business
is greatly reduced.

Of course, just buying any insurance does not necessarily help. This is where a
competent reliable insurance broker, Peter Brown & Associates, comes into their own.

5
The True Cost of Risk

One of the common mistakes made by

business owners and managers is to think of
insurance only as a cost. They falsely see
that insurance premiums are the Total Cost
of Risk. This is a false premise.

Insurance Premiums are the cost of

transferring risk from the owners of the
business to an insurance company.

In simplistic terms, the Total Cost of Risk is made up of:

insurance premiums;
commissions and fees;
costs of risk evaluation and analysis;
risk control (things like fire and security protection);
administration;


uninsured or self-insured losses due to under insurance or lack of cover ;

the application of policy deductibles; and
several other indirect costs that are outside the scope of this Guide.

A saving in premium is not a saving in the Cost of Risk, if the premium saving comes at
the expense of insurance coverage. The problem for many buyers of insurance is that
they do not fully appreciate the additional risk they are assuming through having
inadequate cover or not understanding the insurance coverage they are actually
purchasing. That is where your insurance broker is so important.

It is this risk that the authors see destroy businesses far too often and what prompted this Guide
and its sister.
6
The Most Important Contract

Insurance contracts are, in our opinion, some of

the most important contracts you will enter into.

How would you feel if your asset was damaged

or destroyed and you were in the position where
you still owed the debt, but no longer had use of
the asset? By having full insurance including
Interruption Insurance, not only is the value of
the asset protected, the loss of income caused
by the damage can also reimbursed.

For example: let us say the building or a key piece of equipment is damaged and the
cost of reinstatement is insured. While it is some comfort that the value of the asset is
covered, it is equally important that the income stream to the business derived from the
asset is also protected. Interruption Insurance will cover this loss of income. Additionally,
Business Interruption can, in certain circumstances, provide loss of income where the
machine is not directly damaged. Examples include protection for financial losses caused
by disruption to public utilities supply, restriction of access, and closure by public
authority caused by an insured event.

What happens to the business if a supplier or customer has a flood or fire, suffers storm
damage or the like and cannot operate? With the right Business Interruption insurance
in place your business is protected. Trade credit is another form of insurance that may
protect the business from financial ruin if a customer defaults.

What it all comes down to is this one simple question: do the business
owners/shareholders want to risk their investment, their life’s work and on-going financial
security? The mantra of all business owners should be to: “hope for the best but to plan
and insure for the worst.

“Business Interruption Insurance in

particular, should not be treated as a
business cost (and by the way you do get
a tax deduction for it so the tax man is
funding some of it) but as PROTECTION.

7
 Part 2: Do you need interruption insurance for your business or organisation?

“Simple Checklists help eliminate ‘stupid’ mistakes”

Atul Gawande6

The following is concise check list containing just 30 quick questions. The first 20
concentrate on business risks while the final 10 look at personal risk. Together they are
designed to assist you to work out whether you need Interruption Insurance. For
organisations that are not-for-profit making
businesses, read ‘organisation ‘for ‘business in
this checklist.

Mannings Checklist on Enterprises that Need Interruption Insurance©

Question Yes No
Business Risks
1 Business owns commercial property?
2 Business is a manufacturer?
3 Business is a wholesaler?
4 Business is a retailer?
5 Business relies on key stock which is not able to be immediately
replaced?
6 Business relies on items of plant and/or equipment which are not
able to be immediately replaced?
7 Business relies on key supplier which is not able to be
immediately replaced?
8 Business relies on key customer which is not able to be
immediately replaced?
9 Business would continue to be liable for ongoing costs such as
lease payments on building, vehicles, equipment, or the like even
if the business was not able to trade?
10 Business is financed by debt?
11 Business would lose revenue if it were unable to operate from the
existing building?

2009, The Checklist Manifesto, Metropolitan Books, Henry Holt & Co, New York.
8
12 Business could keep operating after a loss but with significant
increased costs?
13 It would be difficult to find alternative premises?
14 Staff are key to the business’s future success?
15 Business does not have a business continuity plan?
16 Business is seasonal and cannot afford to lose one peak
season?
17 Business relies on Utilities?
18 Business does not have sufficient cash reserves to finance a long
term disruption?
19 Business would be liable for contractual fines and penalties if it
were not able to supply or take delivery of stock?
20 Business is required to insure business interruption or loss of rent
under a lease or other contract?

Question Yes No
Personal Risks
21 My business is my sole or major source of income for me and/or
my family?

22 My business is my major or sole investment?

23 My business is a major part of my superannuation?
24 My home is mortgaged to finance my business?
25 I would not be able to obtain finance to fund a business recovery
plan in the event of a major disruption to my business?

26 My business provides/funds my car(s)?

27 I rely on my business to fund school / university fees?
28 My business is the reason I get up in the morning?
29 I would hate to have to start over from scratch with nothing?
30 I would hate to go back to working for a boss?

9
 If you have ticked “Yes” to any of the boxes then
our recommendation is that your business or
organisation, even a not for profit one, should be
protected by some form of Interruption Insurance.

Please discuss this further with your insurance

broker, Peter Brown & Associates who should be
able to recommend the right type and level of
cover to meet your needs.

10
 Part 3: Understanding the basics of Interruption Insurance

“Most of the fundamental ideas of science are essentially simple

and may, as a rule, be expressed in a language comprehensible
to everyone.”
Albert Einstein7
How does it work in practice?

If the business or organisation suffers a disruption caused by an insured peril, which

affects its cash flow and/or profitability, then Interruption Insurance steps in and protects
the organisation by continuing to pay the net profit, and all the on-going expenses. These
expenses include but are not limited to:
financing costs such as lease payments, hire purchase and mortgage
repayments;
pay-roll costs including on costs such as WorkCover, PAYE, payroll tax, and
superannuation;
rent and outgoings;
insurance – key man, income protection, life insurance; and all the types of
general insurance the business has;
Utilities such as gas, electricity, communications and water charges; and
all other expenses of the business that may continue during the period of
disruption.

The Basic Principle of Interruption Insurance

The fundamental principle behind most Interruption

Insurance policies, and non-life insurance in general
for that matter, is to put the Insured, as near as
money will allow in the same position as they would 

have enjoyed but for the loss or disruption . An

Interruption Insurance policy can only achieve this if
it maintains the net profit of the business and meets

Co-authored with Leopold Infeld (1898-1968)



This principle was confirmed in Castellain v Preston (1883) 11 QBD 380. To read more on this
principle see Manning A, 2010, Mannings Six Principles of General Insurance, Mannings of
Melbourne, Camberwell, Chapter 2.
11
the ongoing expenses of the business as well as any additional expenses that the
organisation incurs as a direct result of the disruption.

So that the business is not over-indemnified, most policies also allow the insurer to
deduct any savings in normal business expenses that cease or reduce as a result of the
disruption.

Accounting Gross Profit does not Equal Insurable Gross Profit

One of the problems with Interruption Insurance is that

the accounting terms such as Gross Profit and Gross
Income used in insurance policies do not necessarily
have the same meaning that accountants or business
people use. The important differences are not usually
taught at university and so clearly there is potential for
misunderstanding. Sadly this is a common mistake which is often not realised until a
claim is made, often with disastrous results for the policyholder.

The difference in definition between Accounting Gross Profit and Insurable Gross Profit
occurs most often in manufacturing risks, but it can occur in any industry. The cost
accountant is trying to determine the exact cost of goods sold. All the costs of
manufacture such as direct materials, direct labour, and factory overheads are captured
and deducted from sales turnover to arrive at Accounting Gross Profit.

When it comes to Insurable Gross Profit under an Interruption Policy, it is only those
expenses that vary in direct proportion to sales that ought to be deducted from turnover
to arrive at the Insurable Gross Profit. Any and all fixed or semi variable expense should
be insured, whether it be above or below the Accounting Gross Profit line. LMI
BIcalculator will help you get the right answer. Ask your broker, Peter Brown &
Associates for a link to the calculator for the policy you are insured under and the ‘smart
form’ calculator will do the rest.

12
 Part 4: Setting the Correct Sum Insured

“If you don't have time to do it right, when will you have time to do
it over?”
John Wooden9

There are many different types of Interruption Insurance coverage

available, which can require a different method of calculating the
Sum Insured. The one that is best for your business or organisation
will generally depend on your business/occupation. The 3 main
types of cover provided in broad terms are:

1) Gross Revenue Basis

The money paid or payable to the Insured for services rendered (and goods, if
any, sold) in the course of the Business at the Premises.

For businesses which have very few variable expenses and do not produce or
sell goods, the cover should be provided on a Gross Revenue Basis. This type
of cover is usually suitable for service industries and professional practices such
as doctors’ surgeries, solicitors and office based businesses.

The way to calculate the correct sum insured is to simply take the turnover for
the last financial year and add the expected growth in the revenue for the next
2 to 3 years. Refer to Part 6 on ‘How Long Should I Insure For?’. Factoring in
an adequate growth rate is important so that you can be paid at the correct
revenue level you are likely to have achieved in the future, rather than at a
historical rate that is no longer relevant.

2) Gross Rentals Basis

Usually applies to property owners or landlords and can be defined as:

‘The money paid or payable by Tenants in respect of rental of the premises and
for services rendered by you or on your behalf’.

          ! " # $ 

13
 3) Insurable Gross Profit - Difference Method

The policy formula for Gross Profit is defined as "The sum of Turnover and
Closing Stock, less the sum of Specified Working Expenses and Opening
Stock". This is suitable for all other business, including manufacturers; retailers;
trades people; hospitality; wholesalers; importers and distributors etc.

Insuring Loss of Rent (Gross Rentals)

As a landlord, you need to insure not only the net rent

that you receive, but also all the outgoings paid by the
tenants that would be payable by you, should they
suspend, terminate or default on the lease.

It should be noted that special care is required where the

Landlord and Tenant are related companies.

Furthermore, an insurer can meet two claims for the one group of companies when one
entity is a tenant and another is the landlord should the building become unlettable due
to an insured loss. To achieve this cover, both entities need to have rent insured.

The tenant, as one legal entity, needs to insure Loss of Rent so that in the event, the
tenant can rent an alternate accommodation while repairs to the damaged building are
undertaken. This can be achieved by not deducting rent as an Uninsured Working
Expense.

The landlord, however, also needs to insure the rent so that this legal entity continues to
receive the equivalent of rental income, as well as the monies needed to fund any
outgoings (rent, land tax and the like). These may continue even though the building is
damaged to the extent that it cannot be let. Rent, therefore, needs to be insured as a
separate item.

14
Insurable Gross Profit - Difference Method

The first thing to understand is that this is not difficult,

even if you do not like working with numbers. The
methodology is simple, especially if you utilise the ‘smart
form’ we have available, which we will provide further
information on at the end of this Part.

The Difference Method, used to calculate an

organisations’ Insurable Gross Profit for claims and setting the Sum Insured/Declared
Value, is carried out by starting with the turnover of a business/organisation then
deducting expenses that vary in direct proportion to turnover, regardless of the length
or severity of any disruption.

The Difference Method was introduced in the United

Kingdom in the late 1960’s. It is much easier and has
less chance for error than the original Additions
Method, where you started with Net Profit and then
added the expenses that you wanted to insure. For
these reasons, the Difference Method is used in most
parts of the world. We only mention this method as we
occasionally see a broker or insured calculate the Insurable Gross Profit using the
Additions Method on a Policy that only allows the Difference Method. The end result is a
disaster, as the Insured entity ends up with little or no pay-out!

Arguably the best way to do this (and reduce the risk of being underinsured) is to take
the turnover of the business; add the closing stock and then deduct the value of the
opening stock and purchases during the last financial year. This means that every other
expense of the business, other than purchases, are insured. The stock itself is insured
under your fire or property insurance policy.

Some policies allow other expenses of the business, which vary in direct proportion of
sales, to also be deducted. This could include packaging and freight outwards (where it
is a truly variable cost).

Once you have made the calculation using the figures obtained from the last financial
year’s accounting records, it is then necessary to make upwards adjustments to ensure
that you have enough coverage to allow for growth in the business over at least the next
2 years. Longer if the start of your Policy period is not close to the end of the financial
reporting period you have used for the turnover and Uninsured Working Expenses. For
15
example, if your business is growing by 10% per annum, you should add at least 21%10
to your Historic Insurable Gross Profit.

The easiest way to do the calculation

is to speak with your insurance broker,
Peter Brown & Associates, and ask
them to send you a link to the ‘smart
form’ calculator on LMI BIcalculator for the Interruption Insurance Policy that you have
in place, or which they are recommending. We have designed the form to be a simple
step by step process where each step is explained and you are guided as to how long
you should insure for and to consider the optional covers available. The service is
completely free, but only available through your insurance broker, Peter Brown &
Associates, as there are so many calculators, one for each policy and they need to link
you to the correct one.

The good news is there are no calculations for you to do, you do not need a calculator
and the process is completed in a maximum of 6 simple steps.

 %

16
 Part 5 Understanding the True Penalty for Being Under Insured

Together we have been handling insurance

claims for over 50 years at the time of writing this
Guide. We both believe that the most common
reasons businesses fail after an insurable loss
are either being uninsured or being underinsured
- particularly when it comes to Interruption
Insurance. It is for this reason we collaborated to
write this Guide.

Many business owners believe that they can pick any sum insured and they will not be
penalised in any way unless their loss exceeds the sum insured. This is simply not
correct.

Even with a partial loss, if you are under insured, under most insurance policies covering
the assets or an interruption, you will be bearing part of the loss yourself.

It is important in the extreme that you understand this, as

being under insured can mean business failure or, at best,
financial stress. The reality is that Business Interruption
policies have one of the worst, if not the very highest,
incidence of underinsurance of all the classes of general
insurance. It is estimated that over 70% of Business
Interruption policies have some form of underinsurance. This estimate is conservative in
our opinion.

With many policies there is a 20% tolerance built in, however with some policies in the
market there is no tolerance at all for being under insured on Business Interruption cover.

17
To show the impact of underinsurance, we include the following example. The formula
on a policy with 80% co-insurance/average is:

Amount payable Sum Insured Loss

= ( x ) - Policy Excess
by Insurer 80% of Value at Risk Amount

Amount borne by = Gross Loss - Insurer’s Pay-out + Policy Excess

Insured

If you selected $1,000,000 as the Sum Insured under your Interruption Insurance Policy,
but the value at risk (that is what you should have insured for to be fully protected) was
say $2,000,000 with a business interruption loss of $250,000, the claim would be
adjusted as follows.

CLAIM CALCULATION - INSURER

$1,000,000
Formula with claim figures: x $250,000
80% of $2,000,000

$1,000,000
i.e. x $250,000
$1,600,000
i.e. 62.5% x $250,000

Amount payable by = $147,059 less any policy excess

insurer

CLAIM CALCULATION - INSURED

Formula with claim figures: $250,000 - $147,059 + Policy Excess

Amount borne by (YOU) = $102,941 plus any Policy Excess

the Insured

18
When you consider the premium saving, even on a Sum Insured of $1,000,000, would
be somewhere in the region of $1,250 (depending on the occupation of the business),
the loss of over 82 times ($102,941 ÷ 1,250) that figure on this moderate loss, shows the
complete folly of risking    
   '

underinsurance. You only need to

have a moderate loss anytime in the
next 82 years to be much worse off. THE PRINTER
At the request of an insurance broker,
It would be understandable if the Allan visited a second generation
business had the uninsured portion of
& &
business and set up a comprehensive
their insurance $102,941 available in insurance program that included full
funds to meet the uninsured portion of Interruption insurance with a 2 year
the loss and were happy to fund the Indemnity Period so that the business
shortfall. Unfortunately, the harsh would be fully protected once the
reality is that most businesses cannot Founder’s son took over.
afford to sustain such a financial loss,
without ultimately affecting the bottom The son ran into some difficulties with the
line and/or stopping the business from business and brought in a business
achieving its strategic objectives. In far adviser, who only looked at insurance as
too many cases it leads to business a cost. The business adviser subsequently
failure. halved the sum insured for Interruption
Insurance and reduced the Indemnity
Any business that is not fully insured Period for the sake of a few thousand
for business interruption is risking the dollars on a business that was turning over
very survival of your business. When many millions of dollars.
you consider that one in 500 During a storm, the Insured’s roof lifted,
businesses suffer a loss every year, a allowing water to leak into the main switch
prudent business person would never board, which in turn caused a short circuit
risk it. culminating in a massive fire.

Under insuring the Insurable Gross The business failed within a month of the
Profit is just one form of under fire, solely due to under insuring the
insurance. Others, include not having Interruption insurance. A lifetime’s work
a sufficient Indemnity Period, which we for the father was lost in an effort to
will look at next. theoretically save money’. Insurance
should not be considered a cost, but rather
PROTECTION.

 

19
In summary, Business Interruption Insurance is not a first loss cover. If you under-declare
your Sum Insured (in some policies the Declared Value) then you are deemed to be your
&

own insurer for the proportion of any loss no matter how small or large .

In reality, the cost of insurance is not high, particularly when you consider the level of
protection it can bring in the event of even a short disruption. The premium is tax
deductible and unless your business has significant cash resources and/or you have the
ability and are prepared to fund the recovery program yourself, you need to be fully
insured.

If you own a smart phone and would like to down load an App or
use a website that is smart phone compatible and allows you do
an under insurance calculation to see how much being under
insured would affect you or your clients, please go to
http://www.lmigroup.com/content.aspx?catId=199. There is no
charge for this.

 

20
 Part 6: How Long Should I Insure For?

“Time is money.”
Benjamin Franklin13

Setting the Indemnity Period

The Indemnity Period is the maximum period that you can

claim from your insurer for a disruption to your business. The
clock starts ticking the moment the damage that gives rise to
the disruption occurs. It is typically shown in weeks or
months on the Policy Schedule.

The most common period selected is 12 months, but this often proves inadequate
following a major loss or a loss arising from a natural disaster such as bush fires, cyclone,
earthquake, major hail storm or flood.
   
   *

The important point to bear

in mind is the period chosen
should not just be for the LESSONS FROM CHRISTCHURCH
period that you, or the Following the second major earthquake, many
building you operate from, buildings in and around Christchurch were damaged.
takes to repair nor how long
it would take to replace your As there were insufficient undamaged buildings for
contents. It needs to be businesses to utilise and a shortage of trades people,
based on the entire length combined with delays in granting approval to repair,
of time that your business many businesses continued to operate from their
could be affected by the damaged building.
disruption. For example, if
you were to lose clients due In many instances, it was not until well after the
to your inability to trade or Indemnity Period that they were finally ordered to
supply your goods or vacate the building so that repairs could be
services, how long would it completed. Far too often this meant that the
take to replace them and Indemnity Period had run out and the financial loss,
get your business back to due to the disruption to the business during the repair
where it would have been period, had to be met by the business owners.
but for the disruption.

( )

1748, Advice to a Young Tradesmen Written by an Old One, The New-Printing-Office, Philadelphia.
21
Whether it be 18 months, 2 years or 5 years, this is what you should insure for.
If you are a landlord then the issue again is not how long it would take to rebuild, but how
long it would take to re-let the premises with tenants paying the same level of rent they
would have but for the damage.

If you are a tenant, one important thing to consider is that under many lease agreements,
the tenant is bound by the lease to maintain and start paying the rent as soon as the
building is fit for habitation again. There are often provisions that the landlord must fulfil,
such as repairs being started within three months of the damage and completed within a
specified time period, which could be anything from 6 months up to 24 months. Clearly,
there is no use having a short indemnity period if

a) you have to incur the costs of moving back into the finished building after the
indemnity period has expired or;

b) you have to pay the lease out because you have to move into another
building, which required you signing another long term lease just to save your
business and/or your brand reputation.

Other things to consider when determining how long to select for the Indemnity Period
are:

Acceptance of the Property Claim

How long will it take the insurance company to accept your claim in respect of the loss
of assets? In the case of a fire claim, this entails a thorough investigation into the cause
and if it is a major loss, this process typically takes between 6 and 13 weeks.

Management of the Claim

Getting the claim accepted is just part of the

process. How proactive the loss adjuster;
consultants; engineers; builders and the claims
department themselves are in progressing the claim
and making important progress payments etc.
needs to be considered. Business owners ought to
give this much more consideration when they take
out insurance than they tend to. Good quality insurers actively work to assist their clients,
whereas others move the Insured from "customer" to "cost centre" the moment the claim
happens. Having a longer Indemnity Period can act as a second form of insurance as,
22
realising that delays are really going to hurt them, it can force otherwise slow
insurers/loss adjusters to keep things moving.

Using a firm specialising in Claims Preparation, such as LMI Group, will assist in
mitigating the disruption to your business by assisting in having the claim accepted,
quantifying the loss and generally guiding you through the insurance maze. To learn
more on this, visit the LMI Group website or email [email protected].

Alternative Premises

Let us assume you cannot occupy the building you usually do. There has been a fire, or
perhaps an outbreak of disease. What alternative premises are available to you? We find
in many areas, such as shopping centres, retail shopping strips and country towns that
there is a shortage of alternative accommodation available. This is particularly relevant
in cases where your business has particular needs. Approval from the Health Department
for food handling and particular requirements for electricity, gas, lifting, delivery and
storage facilities are just a few examples.

The Connection of Services

The connection or reconnection of electricity, gas, and or telecommunications, to the

Insured’s original premises, or to the premises where the Insured had to relocate, either
temporarily or permanently, can be problematic and time consuming, particularly in
newer areas.

Removal of Debris

How long do you think it will take, allowing for the Environmental Protection Authority and
Work Safe rules and regulations to clear the damaged property ready for replacement?
Additionally, where there is asbestos present or dangerous residue after a fire, this will
tend to increase the cost of removing the debris (this is a Fire or Property Damage
& +

Policy/Section issue, not an Interruption Policy one ) but it can also slow down the
process.

Another point to consider is, in the case of a landlord, just how many of the tenants are
insured adequately, if at all. Under insurance or, worse still, no insurance can certainly

 

23
delay the rebuilding process, particularly if the tenants abandon their lease and or debris
to the landlord.

Local Authority Requirements

The time frame to obtain council

permission to rebuild to current standards,
which sometimes requires a new planning
permit, can take several months. This is
why most commercial leases now allow the
landlord a minimum of 3 months in which if
they start repairs, and complete the repairs
within a stated time period the lease cannot be terminated. Please check your own lease
as part of your risk assessment process.

Environmental Issues

This is certainly becoming an issue in more and more cases and should be carefully
considered when setting the Indemnity Period. Examples that we have confronted
include: finding underground storage tanks that the Insured did not know existed before
the damage to the building; and, objections that a high hazard process is no longer
allowed at the Insured’s location.

Tender Phase

There is the tender phase of obtaining quotations for the

reinstatement of the building, machinery and plant etc. It
takes time to prepare an adequate Scope of Works and
then evaluate the tenders that are received.

From our experience, Insurers are increasingly less

inclined to go down the ‘cost plus’ methodology today.
This can be frustrating as this method has proved to be so much quicker in the past. It is
faster as the builder can immediately commence the work with all the costs being audited
as part of the verification process, with the overhead and profit margin agreed in
advance. While we cannot see why this method is not used where appropriate, it must
be understood that the process is predominantly controlled by the Insurer, their loss
adjuster and their builder.

24
In any event, the tender    
   ,

phase does add

considerable time to the
process and needs to be THE MECHANIC
factored in to the Indemnity Allan visited a mechanical workshop specialising in
Period. the servicing of generators at the request of a broker,
who could not convince the owner not reduce his
Lead Times on Indemnity Period to 6 months. Allan fared no better,
Replacement Equipment even though he recommended that rather than being
reduced, it should be extended to at least 18 months.
If your business relies on
A few months later there was a fire that damaged the
product or machinery that is
building as well as all the customers’ generators that
imported or not readily
were at the workshop being serviced.
available, then you need to
factor this into your The damage was such that the Insured was able to
calculations. Typically, the repair the customer’s generators. So, for the duration
more complex and of the 6 month Indemnity Period there was no
expensive the machinery, Business Interruption loss payable, as there was no
the longer the lead time. drop in sales.
At around the 6 month mark, all this work was
completed but no new work was coming in. This was
caused by 2 factors. The clients who had their
machines damaged by the fire were upset with the
Insured, as they blamed him for the damage and the
disruption to their business caused by the extended
repair period for their generator(s). The other regular
clients of the Insured were upset because he was
unable to do their work while he was madly fixing the
Fit Out, Testing, and machines that were damaged by the fire.
Commissioning Consequently, the disgruntled clients sought out
better service elsewhere.
It is one thing to rebuild a Ultimately, the broker had been proved correct. If the
building, but then it has to be Insured’s Indemnity Period had not been reduced
fitted out. Partitions may and was instead extended, as Allan had suggested,
have to be built, telephone this would have resulted in a very different post-loss
cables laid, computer outcome.
networks installed, the list
goes on. For some risks this

25
can mean many weeks of work. Similarly, any new equipment needs to be installed,
tested and commissioned. What reasonable time is required for your business?

The Time to Relocate back into Your Premises

If your business has temporarily relocated after say a fire, you will need to return to your
original premises. This can be a time consuming, costly and disruptive period.

Winning Back Customers

This is a major point that most, or many people overlook. Even

when all your property is reinstated you are entitled to continue
to claim under a quality Interruption Policy until your turnover
and expense rate has returned to normal. As anyone who has
tried it knows, it is hard to turn around lost customers.

Add More for Catastrophe Situations

If your business is located in an area where a catastrophe such

as bushfires, flood, hail storms, cyclones or earthquakes occur,
then, at minimum, increase your Indemnity Period by at least
25% to 33%. In our experience we know that, in the vast majority
of cases, the reestablishment process will take longer after a
large catastrophe.

Following Victoria’s “Black Saturday” Bushfires and Christchurch’s earthquakes, a

minimum of three (3) years was necessary for many SME businesses to be fully
protected.

Final Points to Consider

We find that the vast majority of business owners underestimate how long it will take to
recover from a major disruption. Regardless of the type of insurance, when determining
the level of Indemnity Period required, the estimated time it will take to win back your
customers should be carefully considered and added to whatever time you estimate it
will take to reinstate the assets that were lost or destroyed.

As a bare minimum, we recommend that you establish an Indemnity Period of 12 months.

The saving in premium for a shorter period is minimal and simply not worth the risk. For
example, should you elect to insure with, say, a 3 month Indemnity Period, you do not
26
set your Sum Insured or Declared Value at 25% of the 12 month figure. You still have to
set the Sum Insured for 12 months.

The reason for this is the frequency of short disruptions compared to longer ones. For
instance, 75% of all business interruption losses have a period of disruption of less than
3 months. An Insurer is not going to allow their customers to pay 25% of the premium,
but still pick up 75% of all claims. We are not suggesting you should insure for a short
period as it is still possible that a major loss will cause disruption for a much longer period.
What Insurers require is for Indemnity Periods of less than 12 months, that the Insured
declare, and pay premium on, 12 months Gross Rentals or Insurable Gross Profit. They
do provide you a modest discount in return, typically around 10% for a reduction of 6
months of the Indemnity Period.

When you want more than a 12 months Indemnity Period, you have to extrapolate the
12 months figure so that the Sum Insured or Declared Value represents the amount for
the entire period.

Again, we cannot stress enough that you should take a longer Indemnity Period if you
feel that 12 months is even the slightest bit “skinny”. Twelve months may sound a long
time, but from our experience, it goes far too fast and many a business has not completed
their recovery within this time.

Finally, selecting too short an Indemnity Period is yet

another form of underinsurance. It creates financial
hardship, which can lead to business failure.

With an adequate Indemnity Period, your Insurer will

continue to fund your business until it has returned to
the position it would have enjoyed but for the loss. This
will certainly improve the chances of your business
and you personally being a survivor.

27
 Part 7: Extensions of Coverage

“Please Sir, can I have some more”

Oliver Twist15

Depending on the Policy selected by you (with the advice and assistance your insurance
broker, Peter Brown & Associates), there are different extensions of coverage to the
standard Business Interruption policy available. Two that are considered very important
are:

Additional Increase in Cost of Working

This cover allows the business to claim the

increased costs that maintain the business or
service, but which do not necessarily reduce or
avoid a Loss of Turnover during the Indemnity
Period. For example, say a business needed to
employ additional accounting staff to ensure debt collection is maintained at the normal
rate, then this would now be covered under the Policy.

Further, the Additional Increase in Cost of Working cover is not subject to the standard
policy’s Economic Limit Test. This can be a great advantage, particularly if the
expenditure ensures the retention of customers well after the expiration of the Indemnity
Period. The costs, however, must be reasonable and incurred in consequence of the
damage.

An example of this would be a business that had a machine destroyed that was only
available from overseas and the property insurer would only sea-freight a replacement
machine. To reduce the impact on the business, the business owner pays extra to air-
freight the replacement machine and this cover would pay the extra charge incurred.

From experience we find this to be a very valuable

cover. It allows an insured to make quicker decisions
as they do not have to justify expenditure before
incurring it. If it is prudent and reasonable then it should
be covered by the Policy.




Dickens, Charles, 1837, Oliver Twist, Richard Bentley, London

28
One final benefit is that the Additional Increased Cost of Working is a first loss limit which
means that any claim under this section is not subject to any adjustment for
underinsurance. However, it is important that the cover is adequate to allow the
businessperson to take all reasonable steps to protect their business during the period
of the crisis.

Besides air freighting, Additional Increased Cost of Working has been used to fund:

Additional rent for temporary premises

Outsourcing of manufacture to a competitor or contract manufacturer
An advertising campaign to win back lost or disgruntled customers
The hire of temporary plant and/or equipment
Overtime payment to staff
The temporary employment of additional staff

This is just a short list that immediately comes to mind. It is really an invaluable cover
that every business should have.

For a small business, you should consider $50,000 and more for larger businesses. As
you complete your Business Continuity Management Plan, you should consider
preparing a budget for your business recovery and then use this figure, with a minimum
20% contingency factor as your Sub-Limit for Additional Increase in Cost of Working.

If you wish to develop a Business Continuity Management Plan consider using LMI
ContinuityCoach as an inexpensive way and yet be fully compliant with Risk
Management Standards.

Claims Preparation Services

Insurance is one of the most complex

products and for a business owner their focus
after an event should be on getting their
business back to normal as quickly as
possible.

The insurance company will engage a loss adjuster who is there to protect the insurance
company’s interest and it is therefore comforting to know that there are insurance claims
experts, (that can utilise their experience gained from handling thousands of claims in

29
the past), are available to you, the Insured, to ensure you understand and receive all
your rights and benefits.

The best thing is that this invaluable service to you is insured by the Policy if the additional
cover is selected. For a small business, we recommend $25,000 over and above any
basic cover that may be provided. For larger, more complex businesses this figure should
be increased.

The LMI Group have a specialist Claims Service Division that employs experts in
insurance, forensic accountants, lawyers and engineers to assist you through a claim
minimising stress and speeding up the recovery process. Having this coverage means
you can engage LMI and the costs will be covered by the Interruption Insurance Policy.

To obtain our specialist assistance in the event that you have a claim, please phone one
of the phone numbers listed below or, alternatively, you can email your nearest office
using [email protected]

( Australia:
1300 LMI GROUP
(1300 5644 7687)
( New Zealand:
0800 001 964

Recently we had the independent brand survey company, Brand Matters, survey
insurance brokers around Australia as to what they thought of our claims service. The
results speak for themselves, with 49% of brokers giving a 7 out 7 ranking.
The main reasons given for appointing LMI to a claim were:

30
Other Optional Covers

There are a raft of other covers that may need to be added to the base coverage, but on
the other hand, the risks may automatically be included in the Policy depending on the
wording you have. Covers to discuss with your broker, Peter Brown & Associates, should
include, among others: public utilities cover; prevention of access; suppliers and
customers premises; murder & suicide and any others that they identify during their risk
review.

31
 Part 8: Getting Expert Help

“When a person really desires something,

all the universe conspires to help that person to realize his dream.” & -

Paulo Coelho

As we have explained many times throughout this

Guide, getting advice is highly recommended.
This comes in three separate and important forms
when it comes to business interruption insurance.

First, your insurance broker, Peter Brown &

Associates. They should be regarded as a trusted
adviser. We believe they are as important to you and your business as your lawyer and
accountant. Ideally, everything you tell your lawyer and accountant should be told to your
insurance broker, Peter Brown & Associates before you commit.

Secondly, if you would like to read more on this topic, please visit the BIcalculator
website. Here you will find over 200 pages of information in bite size chunks under
heading such as:

History of BI insurance
Why it is so important
The types of BI
insurance
It will never happen to
me!
Who should have
Business Interruption
insurance?
Case Study
The cover explained
What happens if I
underinsure

 

2011, Aleph, Harper Collins, New York.

32
 How long do I need to insure for
How should wages be insured?
Should I insure every expense
How a claim is calculated
What is the difference between Increase Cost and Additional Increase in
Cost of Working?
How should I insure for loss of rent?
Business Continuity Planning
Glossary of terms
Want to learn more
Accounting Gross Profit does not equal insurable Gross Profit

Note: to gain access to the Cover Calculator section, you do need to speak with your
insurance broker, Peter Brown & Associates who will send you a link to the ‘smart
form’ calculator for the particular Policy that they feel offers you the most appropriate
protection for your business.

Finally, the experts at LMI Group. Not all accountants are highly experienced in general
insurance, particularly Interruption Insurance. LMI Group has both pre and post loss
expertise in business interruption and all other classes of general insurance including
experts in calculating the correct sum insured, tailoring the policy wording, insurance
claims and specialist forensic accounting and legal divisions.

Contact can be made via email [email protected].

33
 Part 9: Frequently Asked Questions and Conclusion

“Don't make assumptions. Find the courage to ask questions and

to express what you really want. With just this one agreement,
you can completely transform your life.
Miguel Angel Ruiz17
Frequently asked questions

Question 1:
What types of disruptions are not covered by Business Interruption
Insurance?

Steve Answers: Disruptions that are inherent in doing business.

Examples of these risks include losses due to labour strikes, a
customer going out of business, road works, and changes in
government policy or legislation.

Question 2:
Is Business Interruption caused by flood covered?

Allan Answers: You do need to have the peril of flood insured under your fire/property
insurance policy for disruption from flood to be covered. This is important to understand
as it may not be your premises that is flooded, but your customers or suppliers. Their
inability to trade could disrupt your business and without flood coverage your Business
Interruption Policy will not respond.

Question 3:
Can I protect against disruption caused by overseas Customers and Suppliers?

Steve Answers: Under most standard Business Interruption policies this is not covered
automatically. It can be elected as an extension of coverage but as with any Business
Interruption cover, the disruption must be caused by an insured event such as fire. Full
coverage may not be available for very high risk perils, such as a hurricane in Taiwan or
an earthquake in Japan. Your broker, Peter Brown & Associates can provide advice of
what is available and where.




The Four Agreements: A Practical Guide to Personal Wisdom, (A Toltec Wisdom Book),
Amber-Allen Publishing, New York
34
Conclusion

The take away points about Business Interruption Insurance that

this Guide has covered are:

Interruption Insurance is one of the most important

classes of general insurance and yet less than half of
all businesses have the protection the coverage
provides;
There are different types of coverage depending on the type of occupation;
Some risks may be able to be insured, but others are uninsurable;
How to set the Sum Insured / Declared Value to ensure your organisation is
fully insured;
The penalty for being underinsured or uninsured could be the end of your
business, not only creating a business risk, but a personal risk for the directors
and staff of the organisation;
Your insurance broker, Peter Brown & Associates is trained to provide trusted
advice on Interruption Insurance and other classes of general insurance to
protect your business;
Insurance Premiums are not the total cost of risk, premiums are the price of
transferring risk to an insurer; and
Should a claim occur, get expert help in preparing your claim and get that advice
early.

We end with our own business mantra which we quoted earlier: Hope for the best, but
plan and insure for the worst! We have seen too many businesses fail simply relying on
hope alone. We sincerely trust that this Guide helps you in your business and allows you
to keep your hopes and dreams alive.

Additional reading

Manning A, BUSINESS INTERRUPTION INSURANCE &

CLAIMS - A Practical Guide to Business Interruption Insurance
for Business Managers, Insurance Brokers and Advisers,
Underwriters, Claims Officers, Loss Adjusters and Risk
Managers, 5th Edition, Mannings of Melbourne, Camberwell.
Order at
http://www.lmigroup.com/content.aspx?artId=62&catId=26.

35
 Details of the full range LMI Group’s consultative services
and eServices are available via the website

www.LMIGroup.com

Your FEEDBACK is appreciated…

Any comments or suggestions for improvement to this Guide

are most welcome and we invite you to contact the publisher.

Email [email protected]
Postal PO Box 2103, Camberwell, Victoria, 3124, Australia
Telephone +61 3 9835 9990
Facsimile +61 3 9885 6996

How to Order

This publication and others may be ordered online at

www.LMIGroup.com/Publications
or an order form downloaded from the website.

36