Business interruption has become a touchy and even confusing topic for some of our clients, but it’s on us as brokers to ensure they properly understand the scope of its coverage.
Business interruption will continue to be an important coverage for clients, even if it has come under some fire during the pandemic due to some potential misunderstandings. We as brokers need to explain to clients what triggers a claim and what business interruption insurance actually provides clients. And we need to be prepared to deliver the bad news about its limitations.
BI has moved to the forefront for brokers and clients alike over the last number of months, and for good reason. We need to ensure our clients are properly protecting themselves, while also helping them understand how far it actually goes.
When it comes to business property, any physical loss or damage can lead to broader financial consequences than just the damage itself. Oftentimes, business owners rely on physical assets like buildings and machinery to operate their businesses and generate income. If a key piece of equipment is damaged, the financial consequences in terms of lost income can easily be worth 10 or 20 times as much as the equipment itself (and that is a conservative multiple).
The importance of BI coverage is undeniable. However, the question becomes: How much do your clients need?
Unfortunately, there is no one-size-fits-all solution. A couple of factors to consider include:
Amount of monthly income and expenses that will continue during an interruption (such as taxes, wages, mortgage/rent, and debt repayments)
Personal and corporate cash reserves available to self-finance a loss
Average period of interruption for your type of business
Common losses experienced by your type of business
Ability for you and your team to work remotely
Ability to minimize interruptions by renting an alternate location, renting equipment, etc.
Let’s look at an example of a smooth BI claim. An electrical fire started on the property of Bob’s Ice Cream Parlour. It happened during work hours the day before the Canada Day long weekend. Thanks to the quick action of staff, the fire was quickly controlled, and the only damage was to the commercial stand mixer.
A claim was filed and the outcome saw the insurer indemnify the client $750 to repair the stand mixer. But during the three days it took to repair the mixer, the store was not able to sell one of its most popular products resulting in $5,000 in lost income compared to similar periods in the past. As a result, the insurer also indemnified the business for the $5,000 in lost income it would have earned had the loss not occurred.
If only every situation was as simple. So, what happens when things do not run as smoothly? How do you advise your clients on the possibility they will be denied coverage? COVID-19 has been a perfect example of this.
The pandemic has had business owners coming out of the woodwork looking for some sort of recovery from the loss of income they have sustained. Businesses from restaurants to hotels are looking to certify class action lawsuits against insurers after having their pandemic-related business interruption claims denied by insurers.
However, these cries for help have unfortunately been met with some less than positive feedback. Both Intact and Travelers recently expressed their confidence that they wouldn’t have to pay out much, if any, in BI claims related to COVID-19.
So where does that leave us as brokers? When having to advise policyholders of any kind of bad news regarding claims, the best and most effective approach is to simply revert to policy mechanics.
It’s understood that for any policy to respond to a claim coverage, it must be triggered in some fashion. In a majority of cases, COVID-19 did not present business owners with any physical loss to property (building, equipment, etc.) accordingly business interruption coverage could simply not respond.
This, of course, is where the hang-up exists with clients. Their business has been interrupted, so what’s the difference? It still comes back to that physical loss to property. That’s on us to educate them when selling a policy.
As brokers, we must have a solid understanding of how to identify and analyze risk across a broad range of industry sectors and this of course includes knowing how coverages are triggered.
The difference between a good and a great broker is how one educates their clients. When a policyholder understands how insurance works, they become more receptive to the “bad news.”
When we can better educate our clients, then they’re better equipped to make informed choices. As we’ll be facing more and more questions about BI when we speak to our clients, it’s on us to ensure they fully understand policy limits.