Business Interruption how many of your customers are properly protected?

By Curtis M. Pearsall, CPCU, AIAF, CPIA of Pearsall Associates Inc
 
While many of your commercial customers have Business Interruption coverage, the issue here is not whether they have the coverage, but whether they are “properly protected.” Each and every year, there are a significant number of Errors & Omissions claims arising from problems with Business Interruption. Many industry experts are projecting that there will be fair number of E&O claims involving Business Interruption developing as a result of Hurricane / Super Storm Sandy.
 
There are actually a multitude of potential issues including customers not having the coverage at all, not having the right type of coverage, not understanding the coverage they have or not having the right amount. How well do professional agents understand the need and the value for their customers to have Business Interruption coverage? There is no doubt this coverage has complexities to it and thus it is important that agents and agency staff understand the types and how they work.
 
Customers who don’t have the coverage
This coverage is designed to cover the loss of business income/profits if normal business operations are disrupted by a covered physical damage loss to property. How many of your commercial customers have this exposure? Probably most. The overwhelming majority have some type of business interruption exposure.  
 
An effective approach to handle this with your customers is to use an Exposure Analysis Checklist. The most popular are Producer Plus through Vertafore and Producer Online through Rough Notes. This tool will enable you, by SIC code, to get a firm handle on all the Business Interruption forms that might be applicable to your customer. Each of these forms is fully defined with extensive explanations regarding issues for you to consider.
 
If, after recommending Business Interruption coverage, your customer does not want it for whatever reason, secure in writing their declination of coverage. This documentation is invaluable should an E&O claim arise in this area.
 
Customers not having the right type of coverage
As you will note from the Exposure Analysis Checklists, there are many forms available and thus it is important to ask the customer various questions to better understand their exposure and which form and limit will achieve the desired result. Questions such as:
  • Can the business operate at a temporary location rather than suspend operations?
  • Could your client’s business be interrupted because of a loss at one of its suppliers?
  • Would the customer suffer a loss if one of their service providers – electrical, fuel, water, heat, refrigeration, communication, etc. – suffered a loss?
  • Is there a need for Extra Expense Insurance?
  • Are there any new state Ordinance or Law requirements or code upgrades that could delay the customer from getting back in business?
 
Customers not understanding the coverage they have
As mentioned previously, Exposure Analysis Checklists will provide complete definitions and issues to consider. In your insurance proposals, include the industry definition of that specific type of business interruption and any unique terms / phrases such as “waiting period” or “co-insurance”. Also look to include real life claim examples to help your clients / prospects understand the importance of this key coverage. Here is a sample:
 
 

BUSINESS INCOME INCLUDING EXTRA EXPENSE

This coverage is used to insure against loss of business income (including any continuing normal operating expenses) that you sustain due to the necessary suspension of your business operations. To be covered, the suspension must be caused by a direct physical loss of or damage to property at the premises described in your policy and for which a business income limit of insurance is shown. Under this form, extra expenses are included and rental values can be added as an option. An extended period of indemnity provision is also included to provide coverage after you resume operations until your business returns to normal levels of activities, up to the time period specified in the form.
 
It goes on to provide the following detailed information: ISO’s Business Income Including Extra Expense form (CP 00 30) requires the insured to choose between three coverage options; business income including rental value, business income excluding rental value and rental value only (extra expense coverage is included in all three) and so on. Including this type of information on your proposals will definitely help your customer understand the coverage.
 
You also want to provide, if applicable, explanations such as:
  • Co-insurance percentage – a frequent issue in E&O claims.
  • Waiting periods – These can be fairly common with different periods of duration. Any losses incurred during the period directly following an event will not be covered. Try securing coverage without a waiting period.
  • Specific clauses that could impact the settlement of a claim – including any exclusions/limitations/war clauses, etc.
 
Customers not having the right amount of coverage
In many cases, because the current coverage was based on a projection made last year – and especially with the changes in the economy – there may be, and probably are, circumstances where the coverage and limit from last year is no longer adequate. A projection of your client’s sales needs to be factored into the correct limit for the upcoming year. It is highly recommended that you work with the customer’s accountant to ensure calculation of the right coverage amount. Bottom line: Business Interruption is definitely not a coverage you want to renew “as is.”
 
Business Interruption is an extremely important coverage. Your customers must understand where property coverage ends and Business Interruption coverage begins. Take the necessary time to ensure your customers know the importance of Business Interruption, how it works and what coverage form best fits them. This education will go a long way toward selling more insurance while, at the same time, minimizing the possibility of an E&O claim being made against your agency.
 
For additional information, contact Curt at curtis@pearsallassociates.com or 315-768-1534
 

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