The Duties Of An Insurance Broker When Placing Business Interruption Insurance

What does your CFO/risk manager know about BI insurance? The English court clarifies the extent of an insurance broker's duties owed to a commercial client when placing Business Interruption insurance and confirms it is for the client to calculate the appropriate sum insured and indemnity period.

Business Interruption (BI) insurance is a form of insurance containing unique concepts which are not necessarily known by laymen or company finance officers. Unfortunately, the standard UK form BI policy does not always contain sufficient certainty to allow all parties to understand what information needs to be provided to insurers at placement or how the policy should respond.

Some of these unique issues were identified by The Insurance Institute of London (ILU) and Chartered Institute of Loss Adjusters (CILA) 2012 publication1. The publication addressed: (i) the different meaning of Gross Profit as defined in a UK form BI policy as compared to the meaning of gross profit used in everyday business, which often results in businesses being significantly under insured; (ii) the consequent effect of under-insurance on the amount an insured can recover under its BI policy; and (iii) the way indemnity periods are calculated.

In the recent decision in Eurokey Recycling2, the English Court addressed the issues of which insurance brokers (and by inference, CFOs and company risk managers) need to be aware when placing Business Interruption insurance for corporate clients.

The court noted the purpose of a BI policy is to maintain the turnover of the business during the indemnity period to enable it to resume trading at its anticipated pre-loss trading levels. However, where the policy is based on a gross profit basis, the insured will not necessarily recover its variable costs: "the experts agreed the simple and straightforward [approach] was simply to take turnover less purchases." In addition, when considering the length of the indemnity period it is future, not past, gross profits which are relevant, so a 24 month indemnity period is a more realistic period within which to get the business back to its pre-damage levels, but policyholders invariably take a shorter period to save on premium.

Whilst the legal principles underlying a broker's standard duties owed to its client were not argued3 the judge did note there were "several points arising out of the particular nature of business interruption cover on which [he] should state [his] views". The judge...

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