Chapter eight
Understanding business interruption claims

With any insurance policy, claims is where it counts and business interruption is no different. However, this is often where frustrations flare and complexities begin to emerge, fraying relations between insurers and insureds. Ensuring claims certainty in the event of a loss can be complex and require input from multiple stakeholders as well as external risk advisors and practitioners.

In the wake of a number of recent large losses following major fires and explosions, floods, storms and earthquakes where BI has been a major cause of loss in the last few years, it is clear to see why concerns surrounding BI policies are paramount. According to figures from Swiss Re Corporate Solutions, typically the BI proportion of a property claim will account for the majority of the loss and will commonly exceed USD 100 million – in some cases even reaching USD 1 billion.

Stress less
When it comes to making a claims, pitfalls often arise causing further stress at an already stressful time. Avoiding common claims pitfalls begins with understanding what you are buying.

It starts with not understanding the cover, because like everybody else, big industrials never bother to read the policy. But that’s the biggest problem, not understanding the policy, and then not understanding the volume of information that is usually requested these days by forensic accountants who are put on these claims.

The production of non-disclosure agreements is normally upfront, which serves to polarise a bit. Often then, the suspicion that creeps in and the whole claims process begins to disintegrate. Ultimately, all this stems from not really understanding the cover. Oftentimes, the cover is never properly explained, or never properly grasped, until somebody has a loss and goes through it.

Other common complaints are that the difficulties clients encounter with producing the amount of information that was required or complying with the requests for documentation.

It begins with trust
Getting the best from a business interruption policy from coverage to claim starts with trust; an area clients often struggle with.

There is often a suspicion on the part of clients at the point of underwriting which can be unhelpful when it comes time to make a claim. When a lot of so-called sensitive information is requested, the insured tends to clam up, or want to clam up. That’s when things start to go wrong.

Unfortunately, the fact is that if clients don’t produce information, they can very easily make mistakes, go off in the wrong direction, do things that may void their policy when it is time to make a claim. My advice is to trust your underwriter and give them all the information they require.

Providing the information is one thing, but having the information to hand is another issue altogether and one area that insureds often fail to understand.

You need to understand your business inside out to begin with. You need to know what your revenue flows are, and how they can be impacted by different scenarios, and not just by the obvious ones such as fire, explosions, and earthquake, but all the other extensions that are given in policies like lack of access because of damage somewhere else, or civil commotion issues.

You have to imagine every scenario that could have an impact on their business, and then define what the coverage should be for their specific business. It takes a lot of homework on their part in order to optimise the product for them, and that often doesn’t happen. Many people either buy too much or too little, but that goes on quite often in the insurance world.

One of the other common misconceptions about business interruption coverage is just how much is covered and how flexible the basic policy can be. Sometimes, clients don’t realise just how wide the cover is and how beneficial it is. If clients do open up and there is transparency in the discussions early on during the underwriting process, it tends to produce a much better result and keep most people happy when it comes time to make a claim.

How you can avoid business interruption claims challenges

Throughout the Business Interruption Masterclass sessions that Swiss Re Corporate Solutions has held across Asia Pacific, many PARIMA members stated that BI claims have often resulted in challenges and delays in settlement.

One key reason for this, was that cover did not function in the way they expected for claims. However difficulty in evidencing the claim and lack of cover due to the Maximum Indemnity Period (MIP) running out were also cited.

BI claims can be rather complicated and being time element based they naturally can’t be settled immediately. Understanding the basis of cover and its intentions is key to knowing what reasonable proofs are required. Constant open dialogue and transparency facilitate prompt settlements and provide an avenue for advance payments to assist with the rehabilitation exercise.

Provided below are some things that policy holders can do to avoid claims challenges. The list is not exhaustive but hopefully provides some ideas.

• Read the policy!

• Before inception take time to read through the policy with your broker and insurer to gain a better understanding of what will be covered and how the BI policy will respond to different scenarios. This should also include information about how claims are to be reported, communication protocols and what information will be required by your insurer.

• Create a comprehensive Business Continuity Plan (BCP) that covers initial disaster recovery, reinstatement and claims settlement.

• Conduct pre-loss scenario planning so that the challenges of managing BI claims can be appreciated by internal stakeholders and management teams.

• Understand your insurer’s ‘Claims Commitment’ and what upfront, interim payments are available. Swiss Re Corporate Solutions’ Claims Commitment provides 50% upfront property payments as well as timelines on claims response and settlement. For more information please visit https://corporatesolutions.swissre.com/services/claims/

• Undertake pre-loss preparation and ensure that finance teams and operational teams are fully aware of the claims reporting protocols and fully understand the type of information that insurers will request and why. This should also include establishing clear processes and internal controls, agreeing loss quantification methods and communication lines with brokers, insurers and loss adjusters.

In addition, consider using a forensic accountant to prepare your BI claim. Many insurance policies provide cover by endorsement for the costs of using a forensic accountant. Beware however that this does not usually cover the “advocacy” or claim negotiation side of claims preparation.

Importantly, proper scenario planning and Business Continuity Planning may reveal the key issues that could arise when resolving a claim. This will help ensure that the process of resolving the claim does not cause further delay at a time when speed is of the essence. It will also allow management teams to focus on ensuring the business fully recovers following a loss rather than worrying about claims resolution.

So what do you do to ensure that your claim will have the best chance of success?

Information and data disclosures
It goes without saying that the provision of complete and accurate information on BI exposures to carriers is of the upmost importance. It will help your cause when your carrier is considering your claim if it has a complete understanding of how your business comes together, and what are the internal and external interdependencies. You need to have knowledge of the main revenue and cost drivers. The last thing you want your carrier to say when the claim is submitted is “I did not know about that”. The message is, don’t just give your carriers the numbers, give them the full story about the business as well. It is important that this gets into the underwriter file.

 Timely notice
Your broker and carrier need to be advised of any circumstance that could give rise to a claim as quickly as possible.

Claim preparation
Consider using the services of a forensic accountant to prepare, or at least format, your claim. Talk to your broker as they can assist you in this regard.

Accounting systems and records
Work with in-house accounting to ensure that separate general ledger accounts are opened up to capture relevant costs. Create separate files particularly for non-cash-flow information.

Record retention
Make sure you retain copies of all relevant records, these could include business plans (past and current); budgets and any forecasts (past, current and future); financial statements; tax returns; supplier contracts; wage and payroll information (including, where necessary, a description of what people do, if it is not otherwise clear); and specific accounting records with receipts for any additional costs incurred. It is also a good idea to add additional information to any records or documents, if the rationale for its incurrence is not clear.

Photos, photos, photos…
You can never take enough photographs. For example, receive an emergency stock of supplies, photograph it. If you create a new flyer to be sent to customers, photograph it.

Polish your claim with a comprehensive narrative
Put yourself in the shoes of the carrier’s claims manager. Attempt to figure out what questions they will ask and the concerns that they may have, then answer them in a comprehensive narrative attached to the claim. For example, if you are relying on future period budget amounts to underpin revenue numbers in your claim, indicate how accurate your budgeting process has been in the past. Perhaps even go so far as to describe the quality assurance and vetting regime you put your budgeting process through to improve its reliability.