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Why are business interruption losses subject to negotiation?
Most business interruption losses are difficult to quantify due to uncertainty and financial flux and therefore subject to some kind of negotiated settlement.
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What TWO (2) types of losses are covered by business interruption policies?
- Loss from reduction in sales (turnover), and
- Loss resulting from an increase in costs, to avoid a reduction in sales
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What needs to be recreated in order to determine the financial conditions that would have existed if the loss had not occurred?
Determining the financial condition that would have existed requires recreating the conditions that would have existed during the period of loss and projecting the operating results that could be expected under those conditions.
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Name the TWO (2) standard forms for business interruption insurance.
- Profits Form
- Gross earnings form
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Define “gross profit” under the Profits form.
Gross Profit: Net profit before taxes and all insured standing charges.
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Define “standing charges” and “variable expenses” as described under the Profits form.
- Standing charges: expenses that would continue in the event of an interruption
- Variable expenses: Expenses that vary in direct proportion to sales (i.e. if a sale is lost, the variable expense is not incurred).
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What are FOUR (4) examples of standing charges?
- fixed and semi-variable charges such as:
- mortgage interest,
- rent,
- important salaries,
- depreciation of property,
- office expenses,
- property taxes etc.
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List THREE (3) categories of costs not permitted to be classified as insured standing charges
- Depreciation of stock;
- Bad debts;
- Wages and salaries other than salaries to permanent staff or important people. "Ordinary payroll"
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Define “increase in cost of working” as described in the Profits form.
The additional expenditure necessary to avoid or diminish the reduction in "turnover" during the indemnity period – subject to an economic test.
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What does the Measure of Recovery clause mean in the Gross Earning form?
jQuery112408166160845243351_1554746477498?Something to do with coinsurance???
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How are gross earnings calculated according to the definition used in the Gross Earning form?
- Total net sales + Other earnings of the business – less the cost of:
- Merchandise sold
- Materials and supplies consumed in supplying the sevices
- Services purchased from outsiders
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Define “Expenses to Reduce Loss” in the Gross Earning form.
- Such expenses necessary for reducing loss;
- to the limit that that such expenses exceed the amount saved
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Under the Gross Earning form, when will compensation for losses cease?
Such length of time as is required to rebuild, repair or replace such part of the property that was destroyed or damaged
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What is the chief difference between the terms and conditions of the Gross Earnings Manufacturing form and the Gross Earnings (non-manufacturing) form?
- The definition of gross earnings is based on the sales value of production (Manufacturing form) rather than that of sales (non-manufacturing sales).
- i.e. Finished stock is excluded from the indemnity agreement since it represents past production.
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List the TEN (1) steps to settlement of a business interruption claim
- 1) Understand the Coverage
- 2) Understand the Business
- 3) Identify the Cause of Damage and Expected Impact on Business
- 4) Help Insured to Recover Quickly from Damage
- 5) Estimate Required Reserve
- 6) Gather Financial Information and Records
- 7) Examine Business Outlook
- 8) Calculate the Loss
- 9) Examine Related Coverage
- 10) Settle the Claim
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Which members of the insured’s staff may be valuable sources of information for the adjuster acquiring an understanding of the insured’s business?
- General Manager,
- people from production,
- finance,
- marketing, and
- HR
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Why is an estimate of the period of time it would take to rebuild the business necessary even if the insured decides not to rebuild following a loss but has business interruption insurance?
The business interruption coverage will still respond subject to policy limitations. However, the deduction for savings in standing charges or non-continuing costs will be substantial
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What are THREE (3) possible names for recent historical operating statements?
- Profit and loss
- Statement of Operations
- Income statements
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List the financial information and records needed to evaluate a business interruption claim.
Recent historical operating statements, review internal statements, forecasts, sales records, productions records, equipment maintenance, payroll records, invoices for additional expenses
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What must be investigated when assessing the business environment in order to make a forecast necessary for calculating a business interruption claim?
Investigate the activities of competitors, regulatory bodies, suppliers, and customers
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Why should claims made under related coverages be reviewed?
To ensure that items are not claimed twice
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What would be covered by Extra Expense coverage?
- Expenses incurred that do not meet the economic test associated with the additional expense coverage in the policy.
- This may be purchased in order to protect reputation or keep regular customers
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Parkinson Products Ltd. Purchased a broad form commercial policy on their contents. They have endorsed business interruption coverage on their policy. They lease their premises. A fire causes damages at this location. The loss of business by Parkinson Products Ltd will be paid by...
...the tenant’s (Parkinson Products Ltd.) policy
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Even though a forensic accountant is often hired by the adjuster or the insured to gather supporting documentation for a BI claim, the adjuster should also personally review all but the following...
… appointment diaries of top producers
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Ordinary payroll expense is insured...
...under Gross Earnings only
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Under the Profits Form, Standing Charges are insured. All but one of these is recognized as Standing Charges...
...packaging
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Business Interruption Insurance...
...may be purchased by endorsement or stand alone policy
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EQ: Business interruption insurance is intended to...
...return the business to the same financial condition that existed prior to the loss
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EQ: Under the Profits form, wages and salaries other than salaries to permanent staff and wages to foremen and important employees whose services would not be dispensed with should the business be interfered with or interrupted, are known as...
...ordinary payroll
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EQ: In business interruption insurance, standing charges are...
...expenses that continue in the event of an interruption
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EQ: Expenses that vary in direct proportion to sales are...
...variable expenses
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Under business interruption insurance, the profits form includes a coinsurance requirement at...
...80%
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