Special Interest Group:

Business Interuption

A claim event which impacts the normal operation of a business needs to be handled promptly and intelligently. The CILA Business Interruption SIG committee comprises seasoned loss adjusters who are skilled in finding appropriate solutions to such business interruption claims. The group encourages industry debate on issues associated with business interruption policies and supports the Continuing Professional Development (CPD) of CILA members by delivering thought provoking and informative sessions at our conference each year.

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SIG Committee

Chairman

Damian Glynn - vrs Vericlaim

Members

  • Terri Adams - Cunningham Lindsey UK
  • Neil Greaves - Marsh
  • Ann Hewlett - Arthur J Gallagher
  • John Holland - Crawford & Company
  • Steven Nock - Crawford & Company
  • Heather Parkinson - Parkinson Consulting Ltd
  • Richard Popple - Crawford & Company
  • Harry Roberts - Camford Sutton Associates
  • John Thompson - Hilton Thompson Ltd
  • Ian Wallace - Certo
  • Gerald Williams - FitzGerald Consulting Ltd

Latest Updates

On 7th June 2017 members and non-members joined the CILA Business Interruption SIG for a one day conference which focussed on the Enterprise Act and business interruption policy wordings. The event was kindly hosted by Clyde & Co and we give particular thanks to Toby Knight of Clyde & Co who provided a legal perspective on the Enterprise Act. Representing the CILA Business Interruption SIG, Damian Glynn and Harry Roberts led the technical talks and were supported by Steven Nock who introduced the morning and afternoon sessions.

Delegates were able to discuss issues in two panel debates during the day and our thanks to Gerald Williams for chairing a very interesting discussion on the potential impact of the Enterprise Act. The panels included representatives from insurers, brokers and law firms and we are grateful for their time and willingness to share and debate viewpoints.

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“An excellent conference the format of which prompted much interesting debate from the floor.”

“The presentations were very informative and quite technical at times, but the engaging manner of the presenters made for an excellent day.”

On 24th May 2017 the Insurance Institute of London (IIL) and the London Business Interruption Association (LBIA) hosted a joint lecture entitled “Gross Profit – are we all still getting it wrong?”. The speakers were Damian Glynn, Chair of the CILA Business Interruption SIG, and Steven Nock, Council representative for the CILA Business Interruption SIG.

If you are a member of the Chartered Insurance Institute (CII) you can access a podcast recording of the lecture via the IIL website: http://www.iilondon.co.uk/home/cpd-events/lectures/2017/may/gross-profit-are-we-still-all-getting-it-wrong/

Alternatively, you can view a copy of the presentation material here: 

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The speakers refer to a survey which was conducted by the Risk Management Society (RIMS) and this can be accessed by logging on to the RIMS website: https://www.rims.org/RiskKnowledge/RiskKnowledgeMain.aspx

The last time that we conducted a survey into the adequacy of BI covers was 2012. The results of that survey, along with the previous two surveys, were summarized in the 2012 ‘Challenges Highlighted by Claims Experience’ report.

The level of under declaration that shows is concerning.

So, high time that we conducted an update survey, which we will run from 15 November 2016, through to the end of the year. Please find the time to not only complete this via the link below, but also encourage others to do so – the perception of loss adjusters, insurers, brokers, policyholders, accountants, loss assessors, consultants, are all needed as well as adjusters.

We will run a seminar in London next spring to unveil the results (and elsewhere if there is demand), as well as updating the website.

https://www.surveymonkey.co.uk/r/NYKGNNH

The Insurance Act: BI peccadilloes

Building on the previous Insurance Act overview, this session focussed on specific aspects of the Act particularly affecting Business Interruption losses. This included the scope of Fair Presentations, (BI) breaches thereof, application of proportionate reduction; the potential for delay and uncertainty may undermine loss mitigation.

Speakers:
Damian Glynn, Director, Head of Financial Risks, Vrs Vericlaim
Tony Dempster, Partner, Herbert Smith Freehills LLP

CILA Conference 2016 - The Insurance Act - BI Peccadilloes

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Christchurch Earthquakes – Orient Express, Residual BI and Other Issues

The earthquake that hit Christchurch over five years ago was, from an insurance perspective, the largest disaster of its kind. Such a significant event was bound to test existing thinking on how BI policies respond to wide area damage and related issues, yet few if any principles have been publicly tested despite the magnitude of the sums involved. It is estimated that it could be another decade before the city is fully rebuilt and recovered. Peter Faire, an experienced local loss adjuster and BI specialist, will examine what legacy this event may yet provide in terms of insurance principles and practice.

Speaker:
Peter Faire, Director, Fawcett Faire Limited

CILA Conference 2016 - Christchurch Earthquakes - Orient Express, Residual BI & Other Issues

 

Summary of Key Points

The original purpose of Declaration based Business Interruption Policies was to avoid Policyholders losing out due to underinsurance resulting from high rates of inflation. Policyholders could over insure and if, when they made a (second) Declaration at the end of the year this was proved to be the case, Insurers would refund that proportion of the premium.

Unfortunately, Declarations are generally not being made, as Declared amounts are often substantially low.

The Declaration Linked basis was introduced with the idea that at the outset of the Insurance year the Policyholder would estimate the Gross Profit for the Policy Period and make an intial Declaration to the Insurer. At the end of the Period, a second Declaration should be made confirming what the actual Gross profit was, and thereby the premium that should have been paid. The balance is then paid or a return premium made.

In return the Policyholder was given a limit to the amount that could be claimed at 133.33% of the Declared amount, with no proportionate reduction (average) clause attaching to the policy. Harry Roberts view was that in his experience it was incredibly rare for the uplifted sum insured to be insufficient.

Damian Glynn went on to explain that 60% of BI policies were written on a Gross Profit Basis, 25% on a Gross Revenue basis and the remaining 15% on an Increase Cost of Working basis. Of the policies underwritten on a Declaration Linked basis, 43% were under declared, by an average amount of 50%.

This presents two issues:

Firstly, Insurers are receiving insufficient premium ; secondly, the result of the process is inequitable. This was exampled by the fact that a business that made an accurate Declaration would pay the full premium but a firm that under declared would still receive the same benefits of full cover without the application of proportionate reduction, but would not have paid the full premium. This means the underinsured businesses are subsidising the fully insured businesses.

Damian went on to provide a list of reasons why Gross Profit may be under declared as follows:

1. Failure to multiply the annual figure to match the Maximum Indemnity Period
2. Miscalculation of Gross Profit (Insurance definition may be misleading)
3. Misunderstanding the declaration form
4. Business calculating their “Estimated Maximum Loss” and using this figure
5. Simply paying what could be afforded
6. Deliberately under declaring, knowing there is a 133.33% uplift

For the Loss Adjuster there are two other factors to take account of. Firstly, the basis of the declaration varies from policy to policy and therefore the Loss Adjuster should check the precise wording in place. Secondly, there is a danger that, if the adequacy of the Declaration is not considered at the outset, when dealing with a combined material damage (MD) losses and BI loss, the Adjuster may recommend payments under the MD section, potentially estopping Insurers from taking action if it is later found that the BI element was under declared. Estopple was not discussed in detail.

Damian discussed the causes of under declarations and explained his view that perhaps Insurers could choose how to deal with the under declaration issue dependent upon what Damian describe as the “gravity” of the act leading to the under declaration. On the above list 1, Failure to multiply the annual figure to match the Maximum Indemnity Period could be seen as a low gravity unintentional act whereas 5, “Deliberately under declare knowing there is a 133.33% uplift” could be seen as most severe and perhaps more severe action taken. This section of the presentation focused on the causes of under declaration. Damien stated that very often a compromise was reached, depending on the cause

The issue as to how or whether Insurers could take punitive action was discussed by Jonathan Hall, a Partner with Clausen Miller solicitors who noted that the cause of an Under Declaration may not be relevant from a legal perspective.

Jonathan Hall explained the position concerning an under declaration and this rested on whether this was a statement of expectation or belief or a statement of fact.

For a representation to be a misrepresentation there must be:

(1) a positive statement made by the insured to the insurer;
(2) which was untrue;
(3) was material; and
(4) induced the insurer to give the cover for the premium that it did,either on the terms offered, or at all (Section 20 Marine Insurance Act 1906 (‘MIA 1906’), Pan Atlantic Ins Co Ltd v Pine Top Ins Co Ltd [1995] 1 AC 501 (‘Pan Atlantic’) and Assicurazioni Generali v ARIG [2002] EWCA Civ 1642 (‘Arig’).

A representation will be interpreted objectively by a tribunal: that is, what would the prudent insurer have understood the representation to mean? In doing this the tribunal will look to the context in which the representation was made. Highlands Insurance Co. v Continental Insurance Co. [1987] 1 Lloyd’s Rep 109.

Section 20 MIA 1906 makes a distinction between statements of expectation or belief and statements of fact.

If an under declaration is a statement of fact (a statement about the past or present but not the future), the remedy is policy avoidance, irrespective of whether the untrue statement was made innocently, negligently or fraudulently (Section 20(4) MIA 1906, Pan Atlantic and Arig).

But if an under Declaration is a statement of expectation or belief, the insurer will not be able to avoid the contract, unless the statement was not made in good faith; that is it was made dishonestly (Section 20(5) MIA 1906, Economides v Commercial Union Assurance Co plc [1997] 3 All ER 635 and Rendall v Combined Insurance Company of America [2005] EWHC 678 (Comm) (‘Rendall’)). Statements of expectation or belief include estimates (Rendall).

If the Declaration is dishonest, either section 20 (4) or (5), or both, could apply. The question is whether section 20 (4) applies if the declaration is innocent or negligent.

In summary, the seminar covered the central issues of Declaration based BI policies, the possible inequities of under Declarations and the options available to Insurers to penalise those who under Declare and the basis in law upon which these remedies exist.

BI & Property SIG Seminar - The Waste Sector - Recycling the lessons from claims - Presentations

This morning seminar led by the CILA Business Interruption and Property SIGs considered a variety of issues and problem areas that have presented themselves in waste sector claims.

Presentations

This note is an update to the information on the Riot Damages Act published on the BI SIG page last year.

The government has now published its response to the feedback it received during last year's consultation period on the future of Riot damages recovery. At the same time a draft bill has been issued which is intended to form the basis of new legislation. Full details can be found at: https://www.gov.uk/government/consultations/reform-of-the-riot-damages-a...

The CILA Executive Director was asked to provide evidence to the Kingham enquiry on the way the riot losses were handled. Being involved in the negotiations concerning a new Act was most important to the Institute's members.

It is important to note that the draft bill may be subject to some alteration as it eventually passes through the legislative process, but several key features are of note:

• During the consultation period the industry lobbied against the Home Office’s proposal which would have prevented organisations with a turnover exceeding £2million from claiming compensation. The draft legislation instead introduces a £1 million per claim limit. Further information about the response from the ABI can be viewed at:https://www.abi.org.uk/Insurance-and-savings/Topics-and-issues/Riots
• Claims for damage to motor vehicles on the public highway will only be covered if the vehicle is not insured for riot damage. For vehicles that are so insured, insurers will only be able to recover compensation if the vehicle is part of the insured's stock in trade.
• Damage caused as a result of rioting in certain types of secure facilities (including prisons and immigration centres) is expressly excluded
• The definition of "riot" is modernised and accords with the definition in section 1 of the Public Order Act.
• Claims for damage to permanent or semi-permanent structures (such as caravans or houseboats) are covered.
• Subject to further regulation, expenses incurred by claimants in bringing claims (such as loss adjusters' fees) are recoverable.
• Subject to further regulation, the amount of compensation payable may be reduced to reflect the costs of administering the scheme (equivalent to an excess).
• Compensation will generally be paid on a "new for old" basis, although this will vary depending on the nature of the goods damaged.

Finally, and as expected, the draft bill explicitly excludes consequential losses. The issue of consequential loss recoverability under current legislation is of course a key aspect of the ongoing case of Mitsui Sumitomo Insurance Co (Europe) Ltd, Royal and Sun Alliance Insurance plc and others v The Mayor’s Office for Policing and Crime. As previously stated whilst the eventual result of the Supreme Court appeal in that matter will only impact losses from 2011, the outcome will of course apply to future Riot events until new legislation is passed. Currently there is no timetable for that legislation to be enacted which means that the result may take on added significance. That case is likely to be heard by the Supreme Court in Quarter 4 2015 and CILA will of course provide a further update once the decision is known.

 

Business Interruption SIG in association with:

 

  • BRE

  • FI UK