1. Business Interruption Insurance is Going to Save Your Company
Presented by:
Christopher Chiero, ARM, CFPS
Arthur J Gallagher
Risk Management Services, Inc.

2. Today we will look at… The Importance of Business
Interruption Insurance.
A policy and talk about how coverage applies.
How to accurately determine your limit.
What to watch for… Common Pitfalls
Mitigating the exposure.
Negotiating terms.
Take you through a loss scenario (case study).

3. A Wise Man Once Said…
“When it comes to Business Interruption, 50% of the policyholders out there are under-insured and the other 50% are over-insured. So you either do not have enough coverage or you are paying too much money for your policy.”
Why is that?

4. What is the intent of Business Interruption Insurance?
Business Interruption is a first party coverage that is part of your property policy. The purpose of “B.I.” is to indemnify the policyholder for their financial loss due to the incident triggering coverage.
Simply put, it is there to make a property loss as seamless to your income statement as possible.

5. Why is Business Interruption Insurance so important?
Protects your company from…
Lost Income
Loss of Market Share
Lost Strategic Alliances or Partnerships
Lost Time of Key Employees… or worse
Loss of Key Employees

6. The Recommended Approach
Protecting Net Income
The Recommended Approach
Purchase Business Interruption Insurance
Have a plan for what to do immediately after a loss.
Consider who you want on your claim team.

7. Getting Started with the Policy

8. Getting Started

9. What is being covered?
The Basics
Net Income
(Net Profit or Net Loss)
Necessary Continuing Expenses
Common Optional
BI Coverages
Extra Expense
Extended Period of Indemnity
Supply Chain
Contingent BI
(Dependent Property)
Ordinary Payroll
(Key Employees)
There are several other options to this coverage type. Talk to your broker or agent for details.

10. Some Examples of “Necessary Continuing Expenses”
Mortgage Payments
Rent
Property Taxes
Salaries
Equipment Leases
Insurance Premiums
Service Contracts (if no “out” clause)
Ordinary Payroll (optional)
Any expense that you cannot get out of despite the loss incident.

11. Not Examples of “Necessary Continuing Expenses”
Utilities Used in Production
Raw Materials
Advertising
Repairs & Maintenance
Supplies
Housekeeping/Janitorial

12. So just how is coverage triggered?
You must start with a “Covered Cause of Loss.”
At an insured location.
For an incident that occurred during the policy period.

13. So just how is coverage triggered?
What is a “Covered Cause of Loss?”
Fire
Flood
Wind/Hail
Earth Movement
Civil Authority
Ingress-Egress
Terrorism/TRIPRA
Vandalism
Sprinkler Leakage
And Others…

14. So just how is coverage triggered?
What is a “Covered Location?”
Listed on the Policy
Could include locations not directly operated by your company.
May include other dependent properties as well.
We will go over how you develop your coverage including some alternate locations as noted above.

15. A Few Key Terms
Period of Restoration

16. A Few Key Terms
Extended Period of Indemnity

17. Chronology of a Claim Income Period of Restoration Extended Period
Time of Loss
Period of Restoration
Extended Period
of Indemnity
Income

18. Common Pitfalls What we just covered… Now we should have a look at…
Did not purchase the proper Cause of Loss
Did not Purchase a sufficient Extended Period of Indemnity
Did not identify and purchase the appropriate limit.
Did not Pre-Plan the Loss Scenario which extended the loss beyond the coverage period
What we just covered…
Now we should have a look at…

19. What should the limit be?
Remember:
Limit too High = You paid too much premium
Limit too Low = You are underinsured and could be susceptible to a financial disaster

20. Proper Limits
The proper limit is different for each client and it will change every year. Your profit, your expenses, your projected revenues, etc.
One year of exposure is the benchmark. This includes every location, every subsidiary. That is how it is underwritten no matter what you put down as your limit.

21. How do you establish your limits?
BI Worksheet?
BI Analysis/Study?
Raw Income?
Lost Rent?
Estimated as a Percentage of Projected Income?

22. How do you establish your limits?
Many Companies simply apply a percentage of projected income?
This is not very effective and doesn’t give you any insight as to whether you have enough coverage.
Remember, the insurance company is not replacing your Gross Income. They are maintaining your Net Income.

23. How do you establish your limits?
BI Worksheet
Good Ballpark
Estimate
Accepted By Underwriters
Not necessarily
tailored for your
business
Has limitations
if your business
is growing consistently.

24. How do you establish your limits?
Complete a BI study with your broker or agent. OR
Hire a professional firm to evaluate it by considering the big picture.
This will give you the most accurate picture of your exposure and protect you from the extremes of being over-insured (pay too much premium) or being under-insured (which is potentially fatal for your business).

25. A few other items to keep in mind when developing your BI exposure
Interdependency between plants
Key Suppliers
Key Clients
Supply Chain Issues
Timeliness of Restoration (i.e. imported foods or hard to replace machinery)
I.T. Considerations (unique software applications that help maintain the flow of revenue)

26. Covered Locations
Includes all the locations where you do business (and should be scheduled in some way on your policy).
Can also include:
Your Suppliers’ locations
Your Key Clients’ locations
Magnet Property locations
Any location that you can establish a legitimate connection to your Net Income.

27. Here are a few other items you would like to have a look at.
BIG & Little…
Here are a few other items you would like to have a look at.
BIG: A High Limit for Claim Data Prep Expense and/or Professional Fees (Note: This does NOT include attorney’s fees)
This is your defense against, “Well, their guy says…”
Little: A Waiting Period as short as possible.
Waiting Period is the amount of time you have to be down before coverage is triggered.
Often times there is a straight up deductible as well.

28. Coverage Review Purchase “All-Risk” Coverage Triggers
Negotiate the Longest Extended Period of Indemnity you can justify
Make sure your Limits of coverage are sufficient.
Cover the key Locations whether they are yours or not.
Big Claim Data Prep Expense Limit
Short Waiting Period

29. Risk Management A word about business continuity planning
How to ensure that your coverage is not too short in duration or limit.

30. Business Continuity Planning
NFPA 1600 – Disaster Management & Business Continuity
FEMA - Emergency Management Guide for Business and Industry

31. Pre-Planning
How to get the most bang for the buck when negotiating your policy…
Show that you have put some thought
into the limit. This gives an underwriter
confidence that they are getting
adequate premium for the exposure.
Demonstrate that you have some
game plan for when a loss occurs.

32. What to do if you have a claim?
Who is on your team and what do they bring to the table?
Internally
Those who bought the policy and established the coverage limit.
Risk Manager
Finance Management
Operations Management
Externally
The Insurance Broker or Agent
A Forensic Accountant
Coverage Attorney/Counsel
Professional Expertise such as Engineer or Contractor

33. A Case Study

34. Case Study Manufacturer in the Midwest Fire in Main Production Plant
In addition to the damage to the building, two, similar production machines are damaged beyond repair. Machine #1 produces about 50% of the capacity of Machine #2.
Building Repairs take one month.
Production Machine #1 is up and running in 8 weeks (from date of loss).
Production Machine #2 is up and running in 12 weeks (from date of loss).

35. Recall from an earlier slide…
Time of Loss
Period of Restoration
Extended Period
of Indemnity
Income

36. Case Study
The Period of Restoration can be partially offset by initial repairs.
In fact, it is right in your policy. You have a responsibility to do whatever is reasonably possible to minimize the severity (dollar amount) of the claim.
The point of this case study is just to show you that the claim will have a lot of grey area!
This is another reason why you want the maximum number of days in the extended period of indemnity.

37. Case Study
By using overtime, Machine #1 carried most (but not all) of the production that would be done by Machine #2. So this minimized the overall dollar amount of the claim.
In the end, the Extended Period of Indemnity began when Machine #2 was
back up and running at potentially
full capacity.

38. Case Study The claim settlement In this case, a two-year trail of Net
Income was used to establish a fair
benchmark.
It was determined that the insured was back to full capacity and market share within 15 weeks total.
The client was issued payments for all lost profit and for the applicable expenses.
Important to note: By using Machine #1 to make up for lost production on Machine #2, the total dollar amount was reduced by an estimated 8% in the end.

39. Questions? You can always call or e-mail with a question…

40. About the Speaker… Christopher Chiero, CFPS, ARM 15 Years Loss Control
5 Years Underwriting
Member
NFPA
SFPE
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