Don't take business interruption coverage for granted

by Curtis M. Pearsall, CPCU, CPIA
Special Consultant to the Utica National E&O Program

When meeting with a prospect or current customer on a commercial account, it will no doubt include a discussion of Property, Liability, Workers Compensation, Auto and Umbrella coverages. These are probably the most traditional coverages upon which your customer is focused. Yet will there be discussion regarding Business Interruption? This is an extremely important coverage. Unfortunately, it also generates its share of E&O claims. Starting now, make sure the matter of Business Interruption is not taken for granted.

Based on the type of customer with which you are working, there is potential the account will be eligible to be written on a Businessowners package policy. A benefit of BOP policies is that they provide a form of Business Interruption coverage. Traditionally, the coverage responds if an emergency disrupts or destroys the business – and not only compensates for lost income and expenses incurred when a company is forced to vacate its premises due to disaster-related damage, but also covers operating expenses, such as payroll, which continue even when business activities have ceased. Sounds good and definitely provides some key coverage, but as we will discuss later in this article, there are gaps that must be considered.

Be alert to any co-insurance clauses pertaining to Business Interruption as some carriers include them. If a co-insurance clause applies, providing an example detailing the impact of being underinsured is valuable. It also provides strong E&O protection if there is a loss and the insured suffers a co-insurance penalty and alleges the concept of co-insurance was never explained. As you will note by the following E&O claim, when moving an account from one carrier to another (even though both were written on a  BOP), it is extremely important to identify any coverage differences and bring them to the customer’s attention.

In this case, the agent failed to duplicate coverage for a client. The client had a BOP policy with a $1,400,000 limit on Business Interruption with no co-insurance with Carrier A. On renewal, the agent switched the coverage to Carrier B. The policy was written with the same limits, but with a 100% co-insurance clause. The agent missed the change. A loss occurred, and the claimed shortfall was more than $800,000, due to the application of co-insurance. There was a suit between Carrier B and the client as to the coverage, and the agent was brought into the litigation. Carrier B mistakenly put an endorsement on the policy which in essence removed co-insurance, even though the declarations page showed 100% co-insurance. Utica was able to convince Carrier B to contribute a significant amount and the case was settled with Utica paying $135,000.

Ask and Explain
Another common area involving this coverage that seems to generate E&O claims is that while many clients may have Business Interruption coverage, oftentimes they do not have the right amount. Whether the account is new business or an existing customer, review each customer’s Business Interruption needs annually. To do this effectively involves asking key questions to determine the proper coverage(s) and limit.
 
Since the current coverage is typically based on a projection made the previous year, 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. Even though the economy has struggled, not all industries have been hit the same. You might actually find situations where your client projects sales to increase over the next year. This could be due to their introduction of a new program or their involvement in a new segment where they project a sales increase. Factor in these changes when determining the coverage and limit. Not updating the limit could leave your customer underinsured.

Many carriers provide a list of essential questions that will help determine what coverage should be proposed and at what limit. 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? There is coverage under the BOP Business Interruption form for this circumstance.

- If your client is a landlord, could they suffer a Business Interruption loss?

- Would the customer suffer a loss if one of their service providers – electrical, fuel, water, heat, refrigeration, communication, etc. – suffered a loss? There is coverage under the BOP Business Interruption form for this circumstance.

- 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?

As noted in the claim example, the issue of co-insurance is important. It is also essential to identify and explain the issues of:

- Waiting periods – these can be fairly common with different duration periods. 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.

A great tool to use to help you, your staff and your customers better understand each type of Business Interruption coverage is the various Exposure Analysis Checklists. If interested, contact your Utica Underwriter to secure information on obtaining these tools at significant discounts.  

Impress upon your customers the importance of good recordkeeping. This proper planning and attention to detail will be extremely beneficial and valuable to them in the event of a loss. It should provide them with a quicker and fairer settlement. A well-thought-out disaster plan should also be recommended.

To determine the appropriate limit for this coverage, work with the customer or their accountant. Virtually all carriers will provide a Business Interruption worksheet (some provide an automated version) if requested.

Does your agency look like it did a year ago? As your agency has changed, so have your customers’ businesses. Having the necessary dialogue on updating their Business Interruption coverage is the professional thing to do.

Business Interruption is an extremely important coverage. Make sure it is not taken for granted. Provide your customers with assistance in understanding how the coverage works and what type best fits them.