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Business Interruption – The right Maximum Indemnity Period is essential

Published: 29/06/12

The purpose of a Business Interruption policy (BI) is to make sure that if there is a loss of turnover due to damage of 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.

One insurer has reported several recent examples 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.
Factors to consider when setting the MIP
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.
For many businesses, the two most significant factors relate to premises and machinery.
Rebuilding period considerations
• Construction materials.
• Size.
• Design complexity.
• Height.
• 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.
Site-specific factors which influence the rebuilding period
• Installed machinery.
• Congested location.
• Site access problems.
• Site pollution.
• Asbestos contamination.
• Listed status/heritage considerations.
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 prior the financial position is not achieved, then that final layer of profit which is often used to re-invest in the business is not there. If this is unavailable and investments not made, then the effects of this failure could impair the business results for many years to come.
If you need more information on business interruption cover or would like us to check the maximum indemnity period of your policy, then please contact Tony Cracroft in our commercial team on 0845 3711 452 or email tonycracroft@flintinsurance.co.uk .


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