Improvements needed in property damage/business interruption policies, Marsh says

There are five core areas in property damage/business interruption policies where improvements are required, said a Feb. 26 report from Marsh LLC. 

According to the report, Business Interruption Insurance Efficacy: Five Key Issues, improvements are required in indemnity periods, insured values, wide area damage scenarios, supply chain and claims settlement.

Regarding wide area damage, the report said that the devastation caused by natural catastrophe events remains the worst loss scenario facing many businesses. “No one is safe from natural catastrophe events, but the situation is intensified due to the uncertainty around cover provided by traditional policies,” the report noted.

For example, an insured might find cover restricted to the prevention of access limits, rather than full value, and, as such, it becomes necessary to distinguish between losses flowing from: damage to the insured property (covered under the core policy); causes specified in the extensions (often covered but usually subject to sublimits); and the underlying event – not covered at all.

“Companies wishing to avoid the possibility of a reduced recovery in similar circumstances should be advised to engage insurers and negotiate wordings appropriate to their exposures,” the report said. “There are different strategies organizations can employ to address the ‘wide area damage’ wordings issue, including a consideration of the trends clause, denial of access/loss of attraction clauses, and potential policy endorsements.”

The report added that there is often a mismatch between the expectation of business interruption policies and the reality of the contract in place. “The expectation is for cover in the event of financial loss as a consequence of physical damage, but the reality is that cover is restricted by the fact that policies only compensate for insured perils at the insured premises. Wide area damage can then create further uncertainty in BI due to the argument that losses are as a result of an event (rather than damage at insured premises).”

The report also noted that:

• The provision under the trends clause that the loss must be adjusted “but for the damage” could be amended to state “but for the event causing damage,” such that the concept of the wider area damage is removed”;
• “Gross profit utilized in corporate accounts does not equate to the insurance gross profit calculation required by the policy”; and

The statistics provided suggest that inaccurate value declarations are a significant issue, both for business purchasers (who are exposed to potential underinsurance penalties) and insurers (who do not receive a full understanding and premium for the risk that they are insuring).