The Importance of Maximum Indemnity Period (Business Interruption Insurance)
It is vital clients insure their Business Interruption Maximum Indemnity period correctly. Here’s why – and how.
The purpose of a Business Interruption policy (BI) is to make sure that if there is a loss of turnover because of damage to physical property, there will be funds available to meet fixed costs, and a balance of money equal to the Net Profit which the business would have expected to earn had the insured incident not happened.
The last part of that sentence is important because BI is aimed at placing the business in the financial position it would have been in and not the position it was in at the time of the loss. For this to happen, the Maximum Indemnity Period (MIP) – the maximum number of months during which the BI policy can support the business – needs to be long enough.
Insurers have reported several recent cases where a 12-month MIP wasn’t long enough.
• A food manufacturer just about had machinery and buildings reinstated within the MIP but this left the business no time to recover its customer base.
• Planning Permission objections meant a pharmacy took 15 months to rebuild.
• The MIP for a food manufacturer with heavy seasonal trading and some specialist machinery with a long lead-time didn’t allow adequate time to build up stocks for the seasonal peak in trading.
• A printing and packaging manufacturer took more than 12 months to replace machinery and rebuild the premises.
• A main motor dealership wasn’t rebuilt within the MIP following a fire.
Many of the considerations businesses need to take into account for MIP are around the rebuilding of premises, replacement of machinery and stock, and recovery of customer base.
Factors to consider when setting the MIP:
For many businesses, the two most significant factors relate to premises and machinery.
1) Rebuilding period considerations:
• Construction materials.
• Design complexity.
• Local construction market.
• Authority controls / regulation and licence issues.
• Planning problems.
It’s a common misconception that Planning Permission will be ‘nodded through’ for a rebuild. At the very least, rebuilding will be subject to normal planning delays, and the process could be prolonged if the authority imposes special requirements. Planning Committees don’t usually meet more frequently than every three to four weeks and opposition from local residents can cause further delays.
2) Site-specific factors which influence the rebuilding period:
• Installed machinery.
• Congested location.
• Site access problems.
• Site pollution.
• Asbestos contamination.
• Listed status/heritage considerations.
3) Machinery replacement considerations:
• Has the machinery been modified especially for the insured?
• Is it made in the UK, Europe, the USA, the Far East?
• Does it require extended onsite installation and commissioning times?
• Is it specialist or standard machinery?
Time should also be allowed to install and run-in the machinery – sometimes it takes three months before a machine is running at full capacity.
Finally, it’s worth noting that if a full recovery to the financial position the business would have been is not made, then the final layer of profit that is missing is often that which is used to re-invest in the business. If this is not available and the investment cannot be made, the effects of this failure could impair the business results for many years to come.
If you’d like to know more about MIPs and BI Insurance, speak to Heartland (Midlands) Ltd. – Specialist Commercial Insurance Brokers.
Information collated by Heartland Midlands Ltd and sourced from Aviva Insurance.